Comments
Description
Transcript
P a g e 1
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 Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next Dear Member, It is so difficult to establish common international standards in different languages. Although the risk-based capital requirements in India are assessed as compliant with the minimum Basel capital standards, we have some linguistic clarity issues… According to the (Regulatory Consistency Assessment Programme) assessment: “The team identified an overarching issue regarding the use of the word “may” in India’s regulatory documents for implementing binding minimum requirements. The team considers linguistic clarity of overarching importance, and would recommend the Indian authorities to use the word “must” in line with _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |2 international practice. More generally, authorities should seek to ensure that local regulatory documents can be unambiguously understood even in an international context, in particular where these apply to internationally active banks. The issue has been listed for further reflection by the Basel Committee. As implementation of Basel standards progresses, increased attention to linguistic clarity seems imperative for a consistent and harmonised transposition of Basel standards across the member jurisdiction.” Interesting! According to Abraham Lincoln, important principles may, and must, be inflexible. Our friends in India must use the word “must” instead of “may”. Must is not a bad word. According to Hans Christian Andersen: “Just living is not enough... one must have sunshine, freedom, and a little flower.” Read more at Number 10 below. Welcome to the Top 10 list. Best Regards, George Lekatis President of the IARCP General Manager, Compliance LLC 1200 G Street NW Suite 800, Washington DC 20005, USA Tel: (202) 449-9750 Email: [email protected] Web: www.risk-compliance-association.com HQ: 1220 N. Market Street Suite 804, Wilmington DE 19801, USA Tel: (302) 342-8828 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |3 Commission welcomes agreement on improving transparency of certain financial transactions in the shadow banking sector The European Commission welcomes the political agreement on the proposal for a regulation on reporting and transparency of securities financing transactions (known as SFTR). The agreement follows negotiations between the Commission, the European Parliament and the Council of the EU to find common ground on the regulation. NIST announces the release of Special Publication 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations Special Publication 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations has been approved as final. The protection of Controlled Unclassified Information (CUI) while residing in nonfederal information systems and organizations is of paramount importance to federal agencies and can directly impact the ability of the federal government to successfully carry out its designated missions and business operations. Net Stable Funding Ratio disclosure standards The disclosure requirements for the Net Stable Funding Ratio ("NSFR") have been developed to improve the transparency of regulatory funding requirements _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |4 Presentation of the Swiss National Bank's Financial Stability Report Introductory remarks by Mr Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank, at the Media News Conference of the Swiss National Bank, Berne “As my colleague Thomas Jordan has explained, global economic growth in the first quarter of 2015 was below expectations. However, over the last 12 months, we have seen an improvement in international economic and financial conditions, although substantial risks remain.” Hearing at the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Mr Mario Draghi, President of the European Central Bank, before the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels “Today, I would like to share with you the ECB's assessment of the current economic and monetary conditions in the euro area.” New priorities for banking reform Speech by Christopher Woolard, Director of Strategy & Competition, FCA, delivered at the Warwick Business School Westminster Forum Good morning, I’m delighted to be here, even if the title of my session is a bit of a misnomer. I’ll explain why. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |5 Comments on financial market developments Introductory remarks by Mr Fritz Zurbrügg, Member of the Governing Board of the Swiss National Bank, at the media news conference of the Swiss National Bank, Berne “Since the beginning of the year, monetary policy has continued to be an important pacesetter on the financial markets. This applies first and foremost to Switzerland, where events, especially on the foreign exchange and interest rate markets, were shaped by the discontinuation of the minimum exchange rate and the lowering of the negative interest rate on 15 January.” NIST Workshop Considers Ways to Improve Tattoo Recognition An international group of experts from industry, academia and government gathered at the National Institute of Standards and Technology (NIST) to discuss challenges and potential approaches to automated tattoo recognition, which could assist law enforcement in the identification of criminals and victims. One in five American adults sport a tattoo, and among the criminal population, that number is much higher. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |6 EIOPA modifies the methodology for calculating the relevant risk-free interest rate term structures for Solvency II Since February 2015 EIOPA publishes on a monthly basis relevant risk-free interest rate term structures that are based on the Solvency II Directive. The methodology for deriving those term structures is set out in a technical documentation published on EIOPA's website. EIOPA has decided to slightly modify the methodology for calculating the term structures. The modification relates to the daily fixing times of the swap rates, overnight indexed swap rates and government bond rates that the calculation is based on. Basel III implementation assessments of India and South Africa published by Basel Committee The Basel Committee on Banking Supervision published reports assessing the implementation of the Basel risk-based capital framework and the Liquidity Coverage Ratio (LCR) for India and South Africa. These form part of a series of reports on Basel Committee members' implementation of Basel standards under the Committee's Regulatory Consistency Assessment Programme (RCAP). A key component of the RCAP is to assess the consistency and completeness of a jurisdiction's adopted standards and the significance of any deviations from the regulatory framework. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |7 Commission welcomes agreement on improving transparency of certain financial transactions in the shadow banking sector The European Commission welcomes today's political agreement on the proposal for a regulation on reporting and transparency of securities financing transactions (known as SFTR). The agreement follows negotiations between the Commission, the European Parliament and the Council of the EU to find common ground on the regulation. The proposed regulation aims to increase the transparency of certain transactions in the shadow banking sector to avoid that banks circumvent other rules by moving those activities to the shadow banking sector. Today's agreement will significantly improve the transparency of securities financing transactions and help identify their risks and their magnitude. Securities financing transactions (SFTs) allow market participants to access secured funding, i.e. to use their assets to secure financing for their activities. This involves the temporary exchange of assets as a guarantee for a funding transaction (e.g. the lending or borrowing of securities, repurchase or reverse repurchase transactions, buy-sell back or sell-buy back transactions, or margin lending transactions). "Today's agreement is an important step forward in bringing transparency in securities financing markets," said Jonathan Hill, EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union. "These activities are important for the financing of the economy and the right kind of oversight will make it easier to monitor and assess the risks involved." The formal adoption of the proposal is expected later this year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |8 Background: Securities financing transactions were identified as a source of systemic risk for the stability of the financial system in the Commission’s Communication on Shadow Banking in 2013 (IP/13/812), and therefore would need to be better monitored. The lack of transparency in these SFTs markets makes it difficult to identify property rights (who owns what?), monitor risk concentration and identify counterparties (who is exposed to who?). The proposal on the Securities Financing Transactions Regulation that was adopted in January 2014 alongside the proposal for the structural reform of the EU banking sector seeks to address these issues (IP/14/85 and MEMO/14/63). The proposal contains three measures to improve the transparency of securities financing transactions (SFTs). First, all SFTs, except those concluded with central banks, will be reported to central databases known as trade repositories. Second, information on the use of SFTs by investment funds will be disclosed to investors in the regular reports and pre-investment documents of funds. Finally, minimum transparency conditions will need to be met on reuse of collateral, such as disclosure of the risks and the need to grant prior consent. In August 2013, the Financial Stability Board adopted recommendations to address the risks inherent to securities lending and repurchase agreements. The proposed regulation is in line with these recommendations. Note: Proposal on transparency of securities financing transactions On 29 January 2014, the European Commission adopted a proposal for a regulation to stop the biggest banks from engaging in proprietary trading and to give supervisors the power to require those banks to separate other risky trading activities from their deposit-taking business. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |9 To prevent banks from attempting to circumvent these rules by shifting parts of their activities to the less-regulated shadow banking sector, the Commission adopted a proposal for a regulation aimed at increasing transparency of certain transactions outside the regulated banking sector. This proposal provides a set of measures aiming to enhance regulators’ and investors’ understanding of securities financing transactions (STFs). These transactions have been a source of contagion, leverage and procyclicality during the financial crisis and they have been identified in the Commission’s Communication on Shadow Banking as needing better monitoring. What are securities financing transactions? What are they used for? Securities financing transactions (SFTs) include a variety of secured transactions that have similar economic effects such as lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions and buy-sell back or sell-buy back transactions. The main SFTs are securities lending and repos. Securities lending is primarily driven by market demand for specific securities and is used, for instance, for short selling or settlement purposes. In this type of transaction, the lending counterparty lends securities for a fee against a guarantee in the form of financial instruments or cash given by their clients or counterparties. Repos/reverse repos are generally motivated by the need to borrow or lend cash in a secure way. This practice consists of selling/buying financial instruments against cash, while agreeing in advance to buy/sell back the financial instruments at a predetermined price on a specific future date. What is shadow banking? Shadow banking can be defined as a system of credit intermediation that involves entities and activities outside the regular banking system. Shadow banks are not regulated like banks, though their operations are like those of banks, as they: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 10 - Take in funds similar to deposits; - Lend over long periods and take in deposits that are available immediately (known as maturity and/or liquidity transformation); - Take on the risk of the borrower not being able to repay; and - Use borrowed money, directly or indirectly, to buy other assets. They may include ad hoc entities such as securitisation vehicles or conduits, money market funds, investment funds that provide credit or are leveraged, such as certain hedge funds or private equity funds and financial entities that provide credit or credit guarantees, which are not regulated like banks or certain insurance or reinsurance undertakings that issue or guarantee credit products. Shadow banking also includes activities, in particular securitisation, securities lending and repurchase transactions, which constitute an important source of finance for financial entities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 11 NIST announces the release of Special Publication 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations Special Publication 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations has been approved as final. The protection of Controlled Unclassified Information (CUI) while residing in nonfederal information systems and organizations is of paramount importance to federal agencies and can directly impact the ability of the federal government to successfully carry out its designated missions and business operations. This publication provides federal agencies with recommended requirements for protecting the confidentiality of CUI: (i) when the CUI is resident in nonfederal information systems and organizations; (ii) when the information systems where the CUI resides are not used or operated by contractors of federal agencies or other organizations on behalf of those agencies; and (iii) where there are no specific safeguarding requirements for protecting the confidentiality of CUI prescribed by the authorizing law, regulation, or governmentwide policy for the CUI category or subcategory listed in the CUI Registry. The requirements apply to all components of nonfederal information systems and organizations that process, store, or transmit CUI, or provide security protection for such components. The CUI requirements are intended for use by federal agencies in contractual vehicles or other agreements established between those agencies and nonfederal organizations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 12 Introduction Today more than at any time in history, the federal government is relying on external service providers to help carry out a wide range of federal missions and business functions using state-of-the-practice information systems. Many federal contractors, for example, routinely process, store, and transmit sensitive federal information in their information systems to support the delivery of essential products and services to federal agencies (e.g., providing credit card and other financial services; providing Web and electronic mail services; conducting background investigations for security clearances; processing healthcare data; providing cloud services; and developing communications, satellite, and weapons systems). Additionally, federal information is frequently provided to or shared with entities such as State and local governments, colleges and universities, and independent research organizations. The protection of sensitive federal information while residing in nonfederal information systems and organizations is of paramount importance to federal agencies and can directly impact the ability of the federal government to successfully carry out its designated missions and business operations, including those missions and functions related to the critical infrastructure. The protection of unclassified federal information in nonfederal information systems and organizations is dependent on the federal government providing a disciplined and structured process for identifying the different types of information that are routinely used by federal agencies. On November 4, 2010, the President signed Executive Order 13556, Controlled Unclassified Information. The Executive Order established a government wide Controlled Unclassified Information (CUI) Program to standardize the way the executive branch handles unclassified information that requires protection and designated the National Archives and Records Administration (NARA) as the Executive Agent to implement that program. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 13 Only information that requires safeguarding or dissemination controls pursuant to federal law, regulation, or governmentwide policy may be designated as CUI. The CUI Program is designed to address several deficiencies in managing and protecting unclassified information to include inconsistent markings, inadequate safeguarding, and needless restrictions, both by standardizing procedures and by providing common definitions through a CUI Registry. The CUI Registry is the online repository for information, guidance, policy, and requirements on handling CUI, including issuances by the CUI Executive Agent. Among other information, the CUI Registry identifies approved CUI categories and subcategories, provides general descriptions for each, identifies the basis for controls, and sets out procedures for the use of CUI, including but not limited to marking, safeguarding, transporting, disseminating, reusing, and disposing of the information. Executive Order 13556 also required that the CUI Program emphasize openness, transparency, and uniformity of government wide practices, and that the implementation of the program take place in a manner consistent with applicable policies established by the Office of Management and Budget (OMB) and federal standards and guidelines issued by the National Institute of Standards and Technology (NIST). The federal CUI regulation, developed by the CUI Executive Agent, provides guidance to federal agencies on the designation, safeguarding, dissemination, marking, decontrolling, and disposition of CUI, establishes self-inspection and oversight requirements, and delineates other facets of the program. To read the paper: http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-171.pd f _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 14 Net Stable Funding Ratio disclosure standards The disclosure requirements for the Net Stable Funding Ratio ("NSFR") have been developed to improve the transparency of regulatory funding requirements, reinforce the Principles for sound liquidity risk management and supervision, strengthen market discipline, and reduce uncertainty in the markets as the NSFR standard is implemented. Similar to the LCR disclosure framework, and to promote the consistency and usability of disclosures related to the NSFR, internationally active banks in all Basel Committee member jurisdictions will be required to publish their NSFRs according to a common template. This NSFR disclosure template includes the major categories of sources and uses of stable funding. In parallel with the implementation of the NSFR standard, supervisors will give effect to these disclosure requirements, and banks will be required to comply with them from the date of the first reporting period after 1 January 2018. Net Stable Funding Ratio disclosure standards Introduction 1. The fundamental role of banks in financial intermediation makes them inherently vulnerable to liquidity risk, of both an institution-specific and market nature. Financial market developments have increased the complexity of liquidity risk and its management. During the early “liquidity phase” of the financial crisis that began in 2007, many banks – despite meeting the capital requirements then in effect – experienced difficulties because they did not prudently manage their liquidity. The difficulties experienced by some banks arose from failures to observe the basic principles of liquidity risk measurement and management. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 15 2. In 2008, the Basel Committee on Banking Supervision responded by publishing Principles for Sound Liquidity Risk Management and Supervision (the “Sound Principles”), which provide detailed guidance on the risk management and supervision of funding liquidity risk. The Committee has further strengthened its liquidity framework by developing two minimum standards for funding liquidity. These standards aim to achieve two separate but complementary objectives. The first objective is to promote the short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets (HQLA) to survive a significant stress scenario lasting for 30 days. To this end, the Committee published Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools. The second objective is to reduce funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. To achieve this objective, the Committee published Basel III: The Net Stable Funding Ratio. The NSFR will become a minimum standard by 1 January 2018. This ratio should be equal to at least 100% on an ongoing basis. These standards are an essential component of the set of reforms introduced by Basel III and together will increase banks’ resilience to liquidity shocks, promote a more stable funding profile and enhance overall liquidity risk management. 3. This disclosure framework is focused on disclosure requirements for the Net Stable Funding Ratio (NSFR). Similar to the LCR disclosure framework, this requirement will improve the transparency of regulatory funding requirements, reinforce the Sound Principles, enhance market discipline, and reduce uncertainty in the markets as the NSFR is implemented. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 16 4. It is important that banks adopt a common public disclosure framework to help market participants consistently assess banks’ funding risk. To promote the consistency and usability of disclosures related to the NSFR, and to enhance market discipline, the Committee has agreed that internationally active banks across member jurisdictions will be required to publish their NSFRs according to a common template. There are, however, some challenges associated with disclosure of funding positions under certain circumstances, including the potential for undesirable dynamics during stress. The Committee has carefully considered this trade-off in formulating the disclosure framework contained in this document. 5. The disclosure requirements are organised as follows. Section 1 presents requirements on the scope of application, implementation date, and the frequency and location of reporting. The disclosure requirements for the NSFR are set out in Section 2 and include a common template that banks must use to report their NSFR results and selected details of the NSFR components. 6. The Committee recognises that the NSFR is only one measure of a bank’s funding risk and that other information, both quantitative and qualitative, is essential for market participants to gain a broader picture of a bank’s funding risk and management. Section 3 of the LCR disclosure framework provides additional guidance on other information that banks may choose to disclose in order to facilitate understanding and awareness of their internal funding liquidity risk measurement and management. Section 1: Scope of application, implementation date and frequency and location of reporting 7. The disclosure requirements set out in this document are applicable to all internationally active banks on a consolidated basis but may be used for other banks and on any subset of entities of internationally active banks to ensure greater consistency and a level playing field between domestic and cross-border banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 17 8. Supervisors will give effect to the disclosure requirements set out in this standard by no later than 1 January 2018. Banks will be required to comply with these disclosure requirements from the date of the first reporting period after 1 January 2018. 9. Banks must publish this disclosure with the same frequency as, and concurrently with, the publication of their financial statements (ie typically quarterly or semi-annually), irrespective of whether the financial statements are audited. 10. Banks must either include the disclosures required by this document in their published financial reports or, at a minimum, provide a direct and prominent link to the completed disclosure on their websites or in publicly available regulatory reports. Banks must also make available on their websites, or through publicly available regulatory reports, an archive (for a suitable retention period as determined by the relevant supervisors) of all templates relating to prior reporting periods. Irrespective of the location of the disclosure, the minimum disclosure requirements must be in the format required by this document (ie according to the requirements in Section 2). Section 2: Disclosure requirements 11. The disclosure of quantitative information about the NSFR should follow the common template developed by the Committee. Annex 1 presents an explanation of the common template’s design. The NSFR information must be calculated on a consolidated basis and presented in a single currency 12. Data must be presented as quarter-end observations. For banks reporting on a semi-annual basis, the NSFR must be reported for each of the two preceding quarters. For banks reporting on an annual basis, the NSFR must be reported for the preceding four quarters. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 18 13. Both unweighted and weighted values of the NSFR components must be disclosed unless otherwise indicated. Weighted values are calculated as the values after ASF or RSF factors are applied. See Annex 2 for more details. 14. NSFR common disclosure template: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 19 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 20 15. In addition to the common template, banks should provide a sufficient qualitative discussion around the NSFR to facilitate an understanding of the results and the accompanying data. For example, where significant to the NSFR, banks could discuss: (a) the drivers of their NSFR results and the reasons for intra-period changes as well as the changes over time (eg changes in strategies, funding structure, circumstances etc); and (b) the composition of the bank’s interdependent assets and liabilities (as defined in paragraph 45 of the NSFR document) and to what extent these transactions are interrelated. Annex 1 Explanation of the NSFR common disclosure template _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 21 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 22 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 23 Annex 2 Instructions for completion of the NSFR common disclosure template • Rows in the template are set and compulsory for all banks. Annex 1 provides a table that sets out an explanation of each line of the common template, with references to the relevant paragraph(s) of the Basel III NSFR rules text. Key points to note about the common template are: - Each dark grey row introduces a section of the NSFR template. - Each light grey row represents a broad subcomponent category of the NSFR in the relevant section. - Each unshaded row represents a subcomponent within the major categories under ASF and RSF items. - The relevant subcomponents to be included in the calculation of each row are specified in Annex 1. - No data should be entered for the cross-hatched cells. • Figures entered in the template should be the quarter-end observations of individual line items. • Figures entered for each RSF line item should include both unencumbered and encumbered amounts. • Figures entered in unweighted columns are to be assigned on the basis of residual maturity and in accordance with paragraphs 18 and 29 of the NSFR rules text. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 24 Presentation of the Swiss National Bank's Financial Stability Report Introductory remarks by Mr Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank, at the Media News Conference of the Swiss National Bank, Berne As my colleague Thomas Jordan has explained, global economic growth in the first quarter of 2015 was below expectations. However, over the last 12 months, we have seen an improvement in international economic and financial conditions, although substantial risks remain. The domestic environment has become more challenging due to the strong appreciation of the Swiss franc that followed the discontinuation of the minimum exchange rate in January 2015. Against this background, I would like to examine the situation at Swiss banks from a financial stability perspective, looking first at the big banks and then moving on to a discussion of domestically focused banks. A more detailed assessment of the situation can be found in the latest Financial Stability Report published today. Big banks Further improving resilience Over the past year, the Swiss big banks have continued to improve their capital situation, albeit at a slower pace than the year before. They already meet most of the requirements which will apply from 2019. While acknowledging the progress made, the SNB recommends that the big banks do not lose momentum in their efforts to improve their resilience. This is particularly warranted with regard to the leverage ratio. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 25 Resilience needs to be further improved for three reasons: First, the big banks' loss potential relative to their capitalisation continues to be substantial. Second, while the Swiss big banks' risk-weighted capital ratios are above the average for large globally active banks, the same cannot yet be said for their leverage ratios. Third, it can be expected that regulatory developments at both international and national level will result in increased capital requirements. The Swiss big banks should prepare for these developments. RWA problem identified, but not yet resolved In the capital regulation of banks, risk-weighted assets (RWA) play a key role. As mentioned in previous Financial Stability Reports, both markets' and authorities' confidence in RWA calculated using banks' internal models has steadily declined. A number of studies have shown that, in some instances, model-based RWA do not properly reflect a bank's economic risks . As a consequence, capital ratios calculated using model-based RWA may overstate the true level of resilience. To address this problem, regulatory initiatives have been launched at international and national level. At international level, the Basel Committee on Banking Supervision is fundamentally revising the standardised approach. The Committee is also examining the introduction of a floor for internally modelled RWA based on this revised standardised approach. One important objective of the floor would be to ensure that capital requirements based on banks' internal models do not fall below a prudent level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 26 At national level, FINMA - together with the big banks and with the support of the SNB - has conducted a comparison between RWA calculated using the model-based and standardised approaches. The results of this comparison, in addition to the measures already taken by FINMA and those expected at the international level, will be taken into account by a working group led by the Federal Department of Finance. This working group will draw up proposals and the associated legal adjustments for implementing the recommendations in the Federal Council's 'too big to fail' evaluation report. Alongside these regulatory initiatives, the SNB still considers it necessary that the big banks increase transparency with regard to RWA. FINMA has now called on these banks to disclose the differences between calculations using the model-based and standardised approaches. Such enhanced transparency is necessary to restore the credibility of model-based RWA and to strengthen market discipline. The SNB continues to hold the view that risk-weighted capital requirements - including a floor for model-based RWA - and leverage ratio requirements should complement each other. Risk-weighted requirements should guide economic decisions at the margin, while the leverage ratio should serve as a backstop. Yet, until the measures to resolve the RWA problem take effect, it is prudent to give a greater weighting to the leverage ratio when assessing the big banks' resilience. Indeed, analysts increasingly pay attention to the leverage ratio when assessing and comparing banks. Domestically focused commercial banks Increased mortgage exposure, capital situation stable I would now like to turn to the domestically focused commercial banks. In 2014, these banks further increased their exposure to the Swiss mortgage and residential real estate markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 27 While the share of new loans with high loan-to-income ratios - a measure of affordability risk - remained persistently high, mortgage lending growth and the share of new mortgage loans with a high loan-to-value ratio decreased. Hence, the increase in exposure was lower than in previous years. With respect to bank capitalisation, the situation remained largely unchanged in 2014. First, the domestically focused commercial banks' leverage ratios remained stable at high levels by historical standards. Second, these banks' risk-weighted capital ratios increased slightly and are significantly above regulatory minimum requirements overall. Furthermore, stress test results suggest that most domestically focused banks should be able to absorb estimated losses without seeing their capitalisation fall below the regulatory minimum. Nevertheless, under the most relevant adverse scenarios for these banks, the losses would deplete a large proportion of their surplus capital. Experience in Switzerland in the 1990s, as in other countries, suggests that this would lead to a general weakening of the banking sector and significantly affect banks' ability to lend, with negative and lasting repercussions for the real economy. The stress test results highlight the importance of banks holding significant capital surpluses relative to the regulatory minimum requirements. The activation of the countercyclical capital buffer in 2013 and its increase in 2014 has made a significant contribution in this respect. Risk of renewed increase in imbalances on mortgage and real estate markets Overall, imbalances on the mortgage and residential real estate markets have remained broadly unchanged since the last Financial Stability Report. From a financial stability perspective, this is a positive development. However, it is still too early to give the all-clear. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 28 On the one hand, imbalances remain at a high level and have not yet started to decline. On the other hand, the further decline of capital and money market interest rates observed since January 2015 carries the risk of a renewed increase in imbalances on the Swiss mortgage and residential real estate markets over the medium term. First, compared to alternative assets, investments in real estate appear to have become more attractive for banks, commercial investors and households. In the residential investment property segment in particular, additional demand from investors searching for yield might push prices up further. Second, the unprecedented interest rate environment creates additional incentives for banks to incur higher interest rate and credit risks. They might be tempted to increase both maturity transformation and lending to compensate for the additional pressure on margins and to stabilise short-term profitability. Such strategies would further increase banks' exposure to large interest rate shocks and to a correction on the mortgage and real estate markets. Given these risks to financial stability, banks and authorities should remain alert and, if necessary, take measures to contain such risks. In particular, should momentum on the mortgage and residential real estate markets pick up again, additional measures might become necessary. In this regard, particular attention should be paid to the investment property segment. This segment is more likely to be materially affected by the additional demand from investors searching for yield in the current environment. Furthermore, the measures taken so far have predominantly addressed the segment of owner-occupied residential real estate. For its part, the SNB will continue to monitor developments on the mortgage and real estate markets closely, and will reassess the need for an adjustment to the countercyclical capital buffer on a regular basis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 29 Hearing at the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Mr Mario Draghi, President of the European Central Bank, before the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels Mr Chairman, Honourable members of the Committee on Economic and Monetary Affairs, Ladies and gentlemen, I am happy to be back to this committee for my regular hearing. Today, I would like to share with you the ECB's assessment of the current economic and monetary conditions in the euro area. I will then touch on the subject chosen for our exchange of views, namely the risks and side-effects of our asset purchase programme. Finally, I will say a few words about the current situation in Greece. Economic outlook and monetary policy The latest economic indicators and survey data broadly confirm our assessment that the economic recovery is proceeding at a moderate pace. While growth has been mainly supported by private consumption in recent quarters, we now see encouraging signs that also private investment is picking up, which underlies our expectation that the economic recovery should broaden. This will be supported in particular by our monetary policy measures, which are working their way through to the real economy, by the comparatively low price of oil, and by improvements in external price competitiveness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 30 This is also reflected in the latest Eurosystem staff projections: we project economic growth to increase from 1.5% of GDP in 2015 to 1.9% in 2016 and to 2.0% in 2017. After some months with negative or zero rates, inflation in May has increased modestly, standing at 0.3% in year-on-year terms, as the negative contributions from energy prices are fading. We expect inflation to remain low in the months ahead before rising stepwise around the turn of the year. Thereafter, inflation is expected to gradually converge toward levels closer to but still below 2%. In the Eurosystem staff projections of June, inflation is projected to increase from 0.3% in 2015 to 1.5% in 2016 and 1.8% in 2017. Over the last quarter, money and credit dynamics have strengthened overall. The growth of broad money in April stood at 5.3%, and in part reflects the expansion of bond purchases by the Eurosystem. While improving further, loan growth to the private sector, standing at 0.8% in April, has lagged somewhat the pace at which monetary trends have been firming. It remains moderate - atypically so, after such a prolonged phase of credit compression - and uneven across the euro area economies with new loans to enterprises particularly weak. Overall, we remain prudently confident that all economic and monetary conditions are in place to support a gradual reflation of the euro area economy, with a sustained return of inflation rates to levels below, but close to, 2%. This assessment is based on the full implementation of all our monetary policy measures. We need to keep a steady monetary policy course and firmly implement those measures, including our expanded asset purchase programme. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 31 It is our clear intention to purchase private and public sector securities of EUR 60 billion per month on average until the end of September 2016 and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. Over recent weeks, financial markets have registered a measurable trend reversal in prices and a surge in volatility, with the fixed-income market the epicentre of the correction. Let me make two observations in this respect. First, a period of higher volatility is a phenomenon that is frequently observed not long after the start of a large quantitative programme, when short-term rates are pressed against their lower bound. Price discovery is gradual and complex in a world in which central banks intervene in long-dated securities and markets re-appraise prospects for the macro-economy in exceptionally uncertain conditions. Second, and notwithstanding these developments, financial market conditions remain accommodative and supportive of the economic recovery in the euro area. For example, given the amount of accommodation that was introduced even before our expanded asset purchase programme commenced in March, bank lending rates - a key indicator of financing conditions in the euro area - are still trending down. Since the announcement of the expanded APP, the composite bank lending rates for euro area NFCs declined by 13 basis points to 2.30% in April (and compared with 2.79% in June 2014). Bank lending rates on loans to households for house purchase declined by 25 basis points to 2.25% in April (and compared with 2.87% in June 2014). In addition, most measures of cross-country dispersion show tangible declines for NFCs. As interest rates on outstanding loans are re-set, and new credit contracts embodying more favourable terms for borrowers replace old ones, financial accommodation reaches a growing number of consumers and investors. This incremental process has not yet run its course. It is still on-going. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 32 This being said, in the process of price adjustment, the term structure of the money market interest rates has come under intense upward pressure. The expected policy rate path implied by money market quotes has shifted up and steepened noticeably as a consequence. The very short end of the curve - because of expanding surpluses of liquidity - has remained well-anchored around levels that are broadly in line with our forward guidance over those horizons. We are closely monitoring conditions to detect signs of an unwarranted tightening of our stance, to which we would need to react. Risks and side-effects of APP Engaging in a large-scale asset purchase programme is not without risks and side effects. Let me focus here on the financial risks of our own balance sheet, on financial stability implications for the euro area, and on effects on income distribution. We monitor very closely the risks for the Eurosystem's balance sheet associated with our asset purchase programmes and we manage those risks to keep them at levels that do not threaten our capacity to fulfil our policy mandate to maintain price stability. In particular, we manage credit risk by exclusively purchasing assets of sufficient credit quality, by defining an asset allocation and a limit framework that ensures some degree of diversification, and by applying severe due diligence and monitoring processes. With regard to PSPP, we also decided that the purchases of government bonds conducted by the Eurosystem NCBs will not be risk-shared within the Eurosystem. This does not hamper the effectiveness of the purchase programme and the singleness of our monetary policy. The Governing Council has full control over all the design features of the programme. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 33 The specific risk-sharing agreement takes into account the unique institutional structure of the euro area, in which a common currency and a single monetary policy coexist alongside 19 national fiscal policies. As regards possible financial stability risks, we assess these risks as rather contained for now. Looking in particular at housing markets in the euro area, we don't see any signs of general overvaluation. Important indicators for increasing financial imbalances are real estate prices and credit growth, but so far we have witnessed low growth rates of both. For instance, the annual growth rate of prices for houses and apartments in the euro area increased on average by 0.8% in the last quarter of 2014. The annual growth rate of loans for house purchases stood at 0.1% in April 2015. Nevertheless, we monitor developments closely. If needed, macro-prudential policy tools should be used to safeguard financial stability. Finally, large-scale asset purchases - as any other monetary policy measure - have distributional consequences. In the short run, the current combination of low interest rates, forward guidance and asset purchases is conducive to a change in asset prices and to wealth gains for investors holding a wide spectrum of assets. But this mechanism of asset price changes lies at the heart of monetary policy transmission and is set in motion every time a central bank activates its instruments of monetary policy, whether conventional or unconventional, in the pursuit of its objective. Interest rate changes always alter the attractiveness of saving relative to consumption and can influence the debt burden of borrowers. Likewise, the current accommodative monetary policy stance eases financing conditions throughout the economy, boosting consumption and investment and, ultimately, inflation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 34 This is an absolute precondition for interest rates to return to more normal levels consistent with sustainable growth and price stability. By reducing the cyclical component of unemployment, it also contributes to reducing a major source of inequality, particularly amongst the young and lower-income groups. In the end, all citizens across the euro area will benefit most from an environment of stable prices, macroeconomic stability, economic growth and job creation in the longer run. The current situation in Greece Finally, let me say a few words on the situation in Greece and the ECB's role. As is the case for any member country of the euro area, the ECB, in the context of the euro system, fulfils its mandate as central bank toward Greece. Furthermore, the SSM Regulation you adopted together with the Council in 2013 made the ECB the supervisor of the Greek banking system through direct and indirect supervision. And in the two-pack, Parliament and Council have asked the Commission to liaise with the ECB when negotiating the conditionality attached to the adjustment programmes and when reviewing their implementation. When it comes to monetary policy and supervisory action, the ECB will continue to take its decisions in full independence and in accordance with our legal framework. This rules-based approach is what is required from us. This is what we have been following and will continue to follow. In this context, the Eurosystem has provided support to allow Greek banks to continue financing the economy. Currently, the central bank liquidity extended to Greek banks amounts to around EUR 118 billion, more than double the amount at end 2014. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 35 The current liquidity support represents around 66% of Greece's GDP, the highest level as a share of GDP of any euro area country. Last week, the Governing Council decided not to object to a further increase in the ELA ceiling, by EUR 2.3 billion to EUR to 83 billion. Liquidity will continue to be extended as long as Greek banks are solvent and have sufficient collateral. However, in a situation where the Greek government does not have market access, this liquidity can not be used to circumvent the prohibition of monetary financing, as laid out in Art. 123 of the Treaty on the Functioning of the European Union. This, together with supervisory considerations, explains why there is a ceiling on the Greek T-bills held by the Greek banking sector. For the Governing Council to reconsider the T-Bills ceiling, there should be a credible perspective for a successful conclusion of the current review and subsequent implementation which would imply the disbursement of programme funds by euro area Member States. This would also significantly improve the outlook for future market access by the Greek government. It should be absolutely clear that the decision on whether to conclude the review of the current programme and disburse further financial support to Greece lies entirely with the Eurogroup, so ultimately with euro area Member States. Hence this is a political decision that will have to be taken by elected policymakers, not by central bankers. In the meantime, we will continue to provide our advice on the adjustment programmes. It is within this context, that we need a strong and comprehensive agreement with Greece, and we need this very soon. By strong and comprehensive I mean an agreement that produces growth, that has social fairness, but that is also fiscally sustainable, ensures competitiveness, and addresses the remaining sources of financial instability. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 36 I can assure you that the ECB is doing all it can to facilitate a successful outcome. Such a strong and credible agreement with Greece is needed, not only in the interest of Greece, but also of the euro area as a whole. While all actors will now need to go the extra mile, the ball lies squarely in the camp of the Greek government to take the necessary steps. Conclusion The situation in Greece reminds us again that the Economic and Monetary Union is an unfinished construction as long as we do not have all tools in place to ensure that all euro area members are economically, fiscally and financially sufficiently resilient. To complete the Economic and Monetary Union, we need a quantum leap towards a stronger, more efficient institutional architecture. As you know, my colleagues and I are currently working on a report that will aim at showing a roadmap for this. We are in the final stages of this process, and I hope you understand that also out of respect for my colleagues, I will not be able to tell you more than what I have already said repeatedly: That we will need to put our institutional framework on a much stronger footing; that we need, as I just said, a quantum leap. I am now looking forward to our discussion. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 37 New priorities for banking reform Speech by Christopher Woolard, Director of Strategy & Competition, FCA, delivered at the Warwick Business School Westminster Forum Good morning, I’m delighted to be here, even if the title of my session is a bit of a misnomer. I’ll explain why. This morning, we have already heard a pretty extensive unpacking of the reforms that occurred as a result of international, European and UK policy makers responding to the financial crisis. From a regulator’s point of view it is less a case of new priorities rather more a case of making a reality of the new reforms and ensuring we have a long-term sustainable model for regulation. So today I want to spend some time looking at the FCA’s continuing priorities for the year, reflect on the pace of change in the financial sector and look at the how competition agenda is becoming increasingly important for us as a regulator. Priorities In our business plan this year we have particularly highlighted we will continue to focus on accountability and making a reality of the new senior manager’s regime. We will continue to focus on culture within firms, and as Martin Wheatley said last month there is an obvious commercial imperative for firms to address culture. From our point of view, it would be hard to underestimate the impact of FX coming on the heels of LIBOR. Of some of the conversations between traders that we have seen in evidence. The Governor’s speech last week was pretty clear that it would be a mistake for us or our colleagues at the Bank of England and PRA to fool ourselves the job is done in terms of prudential risks or conduct. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 38 If we want fair markets that operate well in the interests of those who rely on them – their consumers – whether that is in the wholesale space, retail banking, insurance or pensions, then we will have to give those issues continued and consistent attention. However, it is also pretty clear we are entering a different phase of regulation where the need for the significant legislative programme we have seen may have passed. A phase where we need to both remain alert to problems, but also adapt to make markets work well in a rapidly changing world. Pace of change A phase where we need to be just as worried about the things that could be in the interest of consumers that may not happen as well as preventing negative risks. The pace of some of the challenges are quite hard to conceptualise, but given this is London Technology Week, a good example is those of you with the latest smartphone in your pocket are carrying around more computing power than most supercomputers offered 20 years ago. Applepay launched in the US a year ago and now accounts for $2 of every $3 spent on contactless payments. Other challenges are more easy to understand the speed of change, but no less challenging – within 20 years we will have moved from having the sixth youngest population in Europe to the twenty-third oldest. So the challenge is how do we keep pace with and adjust to the implications of these changes? What role should regulation play in ensuring we have markets to serve consumers in different circumstances? The FCA’s new strategy In December last year, the FCA published a short document setting out our future strategy. We described this as a more market-based form of regulation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 39 An evolution, not a revolution – supervision and enforcement against individuals and specific firms still underpin our ability to act and maintain confidence in the financial system. There are also a number of important actions we need to take including better use of intelligence. And we also talked about greater use of our competition mandate. I want to spend the next few minutes talking to you about how that competition lens will shape our forward work. Competition I should say up front that when we talk about competition we are often asked how we decide which objective to pursue as if competition was opposed to market integrity or consumer interests. We tend not to see the world that way – there are many overlaps and synergies. We believe the protection of consumers and market integrity are served by competition. Of course, there can be difficult balancing acts to perform. Crowdfunding is a good example – where we have set the balance between fostering a new source of competition to some traditional forms of lending or investment against a relatively light regulatory and consumer protection regime. I should also underline we are not interested in competition for its own sake - consumer benefit is what drives us - including to businesses in the wider economy. In looking at investment banking, we have made clear that outcomes for smaller firms is one of the key issues we are looking at. It is a massive simplification, but it is reasonably fair to characterise traditional regulation as tending to be relatively static whereas competition can be a way to deliver resilient yet dynamic markets. We want to use our competition work to help us strike the right balance between static rules and adapting with the grain of markets to get good long-term, sustainable consumer outcomes. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 40 To look at markets that may not be working well for consumers, but also look for solutions that set the conditions for the market to work better. One small example of that is a piece of work we have recently submitted to the CMA’s study into retail banking. In an attempt to tackle high overdraft charges the industry agreed to a regulation whereby annual statements of overdraft interest were sent to bank customers. Our research has shown that this remedy – whilst well intentioned – basically has no effect. Yet consumers who have a combination of internet banking and text alerts reduce their overdraft charges by up to 24%. That has been a market-led development by some firms - how do we harness that across the sector? It is easy faced with examples like this to say disclosure doesn’t work. We don't agree with those who say complexity of financial services means consumers will never drive effective competition. That is a counsel of despair, but what our behavioural work is showing time and time again that it is a case of the right information at the right time that prompts really effective engagement. For example, we already know we can increase switching by getting right the timing of warnings about your cash savings deal running out. At the moment we are trialing with a number of pensions firms how we can get consumers to understand their options better and shop around for the best deals as a result of improving so-called ‘wake-up packs’. On the supply side of the market, we are often asked if the competition objective means that FCA is becoming a price regulator? The answer to is mostly no, but not entirely. Price regulation is not the first tool we look to, but where demand side is too weak to provide effective discipline it must be considered. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 41 In our work on the cash savings market we are mandating a number of changes designed to encourage transparency and greater switching. But we have also capped the price of pay-day lending, albeit under a direct legislative requirement to do so. And no consideration of competition would be complete without noting of course there are the new CA98 powers, where we have been put on an equal footing with the CMA and other competition authorities. Not every competition problem breaches the law, but we are ready to bring to bear the FCA's enforcement expertise to take firm action. Innovation Finally, having a competition mandate also means looking hard at potential barriers to entry and competition. Are there things we do as a regulator that inhibit competition? Are there rules that favour incumbents? Are there missing markets we need to meet future demands? So we have already looked at the barriers to entry created by our system for banking licenses, resulting in 14 new banks being licensed in the last two years and 20 more applications in the pipeline when there had only been two in the previous decade. It is also critically important that we foster disruptive innovation in the interests of consumers. We launched Project Innovate seven months ago to encourage innovation in financial markets, both from small new entrants and from established firms. Innovate has assisted 91 firms so far. In line with our commitment to innovation, I wanted to close by highlighting the call for input we have launched today on the potential regulatory barriers to innovation in mobile and digital services. This is an area of the market where we are on the brink of the potential for fundamental change - with real positives to be gained and new risks too. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 42 We want UK consumers to benefit from the most innovative market in Europe in which to do mobile and digital financial business. So we are asking everyone interested in digital and mobile solutions for financial services to give us their views so we can shape the future environment, in the UK and play a full role in influencing the shape of European regulation. Conclusion So in summary, the course for reform is set – we need to stay that course, for example to ensure accountability becomes a reality for all staff in the banking sector. To continue to pursue wrong-doing where it occurs. And we need to look forward too. As we do so we will be using the lens of market-based regulation to lead us to more of the answers and seeking to use our competition tools to find long-term solutions. Thank you. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 43 Comments on financial market developments Introductory remarks by Mr Fritz Zurbrügg, Member of the Governing Board of the Swiss National Bank, at the media news conference of the Swiss National Bank, Berne I will begin with a review of the situation on the financial markets. I will then talk about the implementation of negative interest and its impact on the Swiss money and capital markets. Situation on financial markets Since the beginning of the year, monetary policy has continued to be an important pacesetter on the financial markets. This applies first and foremost to Switzerland, where events, especially on the foreign exchange and interest rate markets, were shaped by the discontinuation of the minimum exchange rate and the lowering of the negative interest rate on 15 January. The Swiss stock market experienced a price correction, but losses were rapidly recouped. At present, the SMI is at roughly the same level as the start of the year. Thus Swiss shares benefited from a generally favourable mood among investors. Since the beginning of 2015, all the major share indices have recorded gains - albeit to varying degrees. On international bond markets, exceptional price movements have been recorded over the past few months, as shown in chart 1. Until mid-April, the government bonds of a number of countries with high credit ratings traded at historically low, or even - in some cases - negative yields. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 44 With both this development and the introduction of negative interest, yields on Confederation bonds declined over the entire spectrum of maturities. However, since mid-April, the government bond markets have suffered substantial losses, with yields on ten-year German government bonds, for instance, rising within a very short period from about 0.1% to, most recently, 0.8%. In Switzerland the increase in interest rates was significantly smaller. Yields on ten-year bonds are currently around 0.1%, compared with -0.2% in mid-April. Since the beginning of the year, numerous central banks have adopted more expansionary monetary policy stances. They include, in particular, the European Central Bank, which in January announced an asset purchase programme in excess of market expectations as regards both the amount and duration. In the US, by contrast, monetary policy continues to point in the opposite direction. Thus, most market participants expect that the US Federal Reserve will initiate a reversal in interest rates before the end of the year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 45 For over a year, this monetary policy divergence has been a major factor behind the depreciation of the euro against the US dollar. As chart 2 shows, since mid-2014, the European currency has declined some 18% in value and has also weakened on a trade-weighted basis, by around 9%. The trade-weighted US dollar, by contrast, has gained approximately 15% in this period. Another important issue on financial markets has been the increased uncertainty due to the unresolved debt problem in Greece. Despite the fact that risk attitudes, as such, are positive, demand for safe investments and thus for the Swiss franc has remained particularly strong. Consequently, recent movements in the Swiss franc have been influenced not only by the divergence between the dollar and euro regions, but also by persistent safe haven flows. The discontinuation of the minimum exchange rate led to a very substantial but short-lived appreciation in the Swiss franc. The extent of this appreciation is shown in chart 3. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 46 The extreme movements in the exchange rate were accompanied by a sharp increase in volatility on the Swiss franc foreign exchange market. Since then, Swiss franc volatility has declined, although it remains high in a long-term comparison with the period prior to the financial crisis. At the same time, bid-ask spreads, i.e. differences between the best purchasing and selling offers, widened substantially following the end of the minimum exchange rate. These, too, have declined in the past few months, although the bid-ask spreads remain relatively large. In trade-weighted terms, the Swiss franc is no longer at the extreme levels that prevailed immediately after the discontinuation of the minimum exchange rate. However, it is still some 12% above the level at the beginning of the year. Thus, the Swiss franc is still substantially overvalued. Implementation and impact of negative interest Exactly six months ago, on 18 December 2014, the Swiss National Bank (SNB) decided to impose negative interest on sight deposit account balances at the SNB for the first time, setting the rate at -0.25%. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 47 When it discontinued the minimum exchange rate, it lowered the rate once again by 0.5 percentage points, to -0.75%. By imposing negative interest on sight deposits, the SNB intends to move the three-month Libor into negative territory and significantly reduce interest rates in the money and capital markets. The lower interest rate makes it much less attractive to hold Swiss francs compared to other currencies. This should lead to a weakening in the Swiss franc over time. How the negative interest rate is applied I would like to take a moment to remind you how our negative interest rate is applied. It is imposed on all sight deposit account balances of banks and other financial market participants held at the SNB exceeding a given exemption threshold. For domestic banks, the exemption threshold is 20 times the statutory minimum reserve requirement. For non-banks and foreign-domiciled banks (which are not subject to the minimum reserve requirement), a fixed exemption threshold of at least CHF 10 million has been set. The cumulative exemption thresholds come to about CHF 300 billion. This means that, with current sight deposits amounting to some CHF 455 billion, approximately CHF 155 billion are subject to negative interest. To date, the interest due on this amount has totalled around CHF 100 million per month. The exemption thresholds take account of the very high level of liquidity in the banking system, which is due to the SNB's past interventions on the foreign exchange market. The exemptions are calculated to ensure that they remain virtually unchanged over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 48 This means that the interest burden increases as soon as the SNB feeds more liquidity into the system - in particular in the event of further foreign exchange interventions. Consequently, the SNB's readiness to remain active in the foreign exchange market and the negative interest rate are two mutually reinforcing measures. By imposing negative interest on sight deposits that exceed a given exemption threshold, we set incentives for the entire financial system to give preference to investments in foreign currencies over those in Swiss francs, thereby limiting new inflows into the Swiss currency. Since the exceptional demand for Swiss francs is not only foreign but also domestic, there is no economic argument for differentiating by origin of investor. What is more, we have reduced to a minimum the number of exceptions from the obligation to pay negative interest. Impact of negative interest Six months after the announcement of negative interest, we can see that the measure is having the desired effect on the money and capital markets. The money market is working well, even with negative interest. Money market interest rates have reacted rapidly, and the three-month Libor has settled in the middle of the range we targeted. This shows that marginal costs - the costs of an additional unit of Swiss franc liquidity - are relevant for transmission on the interbank market. Although trading activity on the money market remains lower than before the financial crisis, it has revived somewhat. For instance, turnover on the secured money market, in particular on the Swiss franc repo market, has risen since the introduction of negative interest. As intended, negative interest has been transmitted from the money market to the capital market. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 49 The lower interest rates for all maturities have widened the traditional interest rate differential against other countries again somewhat. Previously, they had narrowed substantially. On the money and capital markets, the interest rate differential is now greater than it was without negative interest, in particular for short-term interest rates. Chart 4 shows the path of interest rates for three-month loans on the Swiss franc and euro money markets, together with the differential. The greater interest rate differential helps to ensure that Swiss franc investments are less attractive than investments in euros and other currencies. Moreover, the rise in the interest rate differential has increased the cost of hedging foreign currency positions on the forward exchange market, which is an additional factor dampening Swiss franc demand. Although the interest rate differential has risen, it is still considerably below the long-term average, particularly since interest rates abroad decreased more substantially during the financial crisis than those in Switzerland. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 50 This can be seen in chart 5, which shows the example of interest rate differentials between Germany and Switzerland for three-month, two-year, five-year and ten-year maturities. While interest rates on the money and capital markets declined as a result of negative interest, mortgage rates did not decrease to the same extent. Indeed, for mortgages with longer terms, rates are slightly higher than they were at the beginning of the year. The main reason for this divergence is that a major part of bank refinancing costs consists of interest paid on savings deposits, which has not fallen below zero as did interest rates on the money market. Because interest on savings deposits is significantly higher than the money market interest rate, bank interest margins came under pressure after they had hedged the interest rate risk associated with their mortgage business, and some mortgage rates were increased. Fears that negative interest might contribute to a significant decline in mortgage rates and, in turn, to stronger growth in mortgage lending have so far proved unfounded. For investors, by contrast, the current low interest rate environment means that the challenges have increased. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 51 It is even more difficult for them to find yield-bearing investments. I should emphasise, however, that this investment predicament is an international phenomenon and not limited to the Swiss franc alone. Conclusion I will now come to my concluding remarks. Initial experience has shown that the interest rate instrument is also effective in negative territory. As intended, negative interest on sight deposits at the SNB was rapidly transmitted to all segments of the money and capital markets. In the current situation, negative interest fulfils a very important monetary policy purpose: to help correct the overvaluation of the Swiss franc over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 52 NIST Workshop Considers Ways to Improve Tattoo Recognition An international group of experts from industry, academia and government gathered at the National Institute of Standards and Technology (NIST) to discuss challenges and potential approaches to automated tattoo recognition, which could assist law enforcement in the identification of criminals and victims. One in five American adults sport a tattoo, and among the criminal population, that number is much higher. And while tattoos can be used to assist identification of people who may have committed a crime, they also are potentially valuable in supporting identification of victims of mass casualties such as tsunamis and earthquakes. Participants at NIST's Tattoo Recognition Technology Challenge Workshop heard the results of a preliminary trial of existing tattoo recognition software. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 53 NIST challenged industry and academia to take initial steps into automated image-based tattoo matching technology at the request of the FBI Biometric Center of Excellence (BCOE). The current method of cataloging tattoo images for sharing relies on a keyword based process. But the increasing variety of tattoo designs requires multiple keywords, and examiner subjectivity can lead to the same tattoo being labeled differently depending on the examiner. All of the participating organizations used the same BCOE-provided dataset of thousands of images from government databases. NIST provided five use cases and asked the participants to report their performance on finding: - visually similar or related tattoos from different subjects; - different instances of the same tattoo image from the same subject over time; - a small region of interest that is contained in a larger image; - visually similar or related tattoos using different types of images such as sketches, scanned print, computer graphics, or natural images; and - whether an image contains a tattoo or not. NIST computer scientist Mei Ngan organized the challenge and found that "the state-of-the-art algorithms fared quite well in detecting tattoos, finding different instances of the same tattoo from the same subject over time, and finding a small part of a tattoo within a larger tattoo." Two areas that could use further research, she said, were detecting visually similar tattoos on different people and recognizing a tattoo image from a sketch or sources other than a photo. "Improving the quality of tattoo images during collection is another area that may also improve recognition accuracy," Ngan said. The six organizations that participated in the challenge include Compass Technical Consulting, LLC.; the Fraunhofer Institute of Optronics, System _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 54 Technologies and Image Exploitation; the French Alternative Energies and Atomic Energy Commission; MITRE; MorphoTrak and Purdue University. In addition to discussing the self-reported finding in this initial research step, participants also discussed the utility of image-based tattoo matching in operations, identified gaps and needs to improve tattoo recognition and discussed next steps NIST might take in this area. For more details regarding the discussions and outcomes of the workshop, visit www.nist.gov/itl/iad/ig/tatt-c.cfm NIST has been the go-to source for testing and evaluation in biometrics for more than half a century, with the goal of ensuring biometric systems are accurate. The laboratory has played a major role in biometric research, including large-scale evaluations of fingerprint and face recognition systems. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 55 EIOPA modifies the methodology for calculating the relevant risk-free interest rate term structures for Solvency II Since February 2015 EIOPA publishes on a monthly basis relevant risk-free interest rate term structures that are based on the Solvency II Directive. The methodology for deriving those term structures is set out in a technical documentation published on EIOPA's website. EIOPA has decided to slightly modify the methodology for calculating the term structures. The modification relates to the daily fixing times of the swap rates, overnight indexed swap rates and government bond rates that the calculation is based on. In the future the fixing time for different currencies will be as follows: - for European and African currencies - London market closing time; - for currencies of Asia and Australia - Tokyo market closing time; - for American currencies - New York market closing time (remains unchanged). The aim of the change is to improve the reliability of the market rates used in the calculation by determining them at times of high trading activity. The average impact of the change on the term structures is expected to be very low. The modified methodology will be applied for the first time for the derivation of the term structures of end-June 2015, which will be published in July 2015. The technical documentation has been updated to reflect the modification. EIOPA will continue reviewing the methodology to implement any necessary changes in time before the start of Solvency II on 1 January 2016. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 56 To learn more: https://eiopa.europa.eu/Publications/Standards/20150619%20RFR%20B oS%20Technical_Documentation%20quick%20fix%20(clean).pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 57 Basel III implementation assessments of India and South Africa published by Basel Committee The Basel Committee on Banking Supervision published reports assessing the implementation of the Basel risk-based capital framework and the Liquidity Coverage Ratio (LCR) for India and South Africa. These form part of a series of reports on Basel Committee members' implementation of Basel standards under the Committee's Regulatory Consistency Assessment Programme (RCAP). A key component of the RCAP is to assess the consistency and completeness of a jurisdiction's adopted standards and the significance of any deviations from the regulatory framework. The RCAP does not take account of a jurisdiction's bank supervision practices nor does it evaluate the adequacy of regulatory capital and high-quality liquid assets for individual banks or a banking system as a whole. Overall, the assessment outcomes for both India and South Africa are highly positive and reflect various amendments to the risk-based capital and LCR rules undertaken by the authorities during the assessment. The Basel Committee noted that several aspects of the domestic rules in both countries are more rigorous than required under the Basel framework. India Overall, the domestic implementation of the risk-based capital framework is found to be "compliant" with the Basel standards as all 14 components are assessed as "compliant". Regarding the LCR, India is assessed overall as "largely compliant", reflecting the fact that most but not all provisions of the Basel standards were satisfied. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 58 The implementation of the LCR regulation's component is assessed as "largely compliant" and the implementation of the LCR disclosure standards' component is assessed as "compliant". South Africa Overall, the domestic implementation of the risk-based capital framework is found to be "compliant" with the Basel standards as all 14 components are assessed as "compliant". South Africa is also assessed as "compliant" with the Basel LCR standards, including the LCR regulation and the LCR disclosure standards. In carrying out the reviews of India and South Africa, the assessment teams held discussions with senior officials and technical staff of the Reserve Bank of India and the South African Reserve Bank. The teams also met with a select group of banks in both countries. Notes The Basel Committee on Banking Supervision consists of senior representatives of bank supervisory authorities and central banks. Member countries include Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, Spain, South Africa, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. The RCAP is a central element of the Basel Committee's continuing efforts to promote timely adoption of its standards and to monitor its members' full and consistent compliance with the Basel framework. The RCAP also helps member jurisdictions identify deviations from the Basel framework, weigh the materiality of any deviations and undertake necessary reforms. Based on the findings of these assessments, many assessed jurisdictions have already amended their regulations to align them more closely with the Basel framework, thereby helping to promote global financial stability and a level playing field for internationally active banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 59 The Basel Committee has previously published jurisdictional assessments of Australia, Brazil, Canada, China, the European Union, Hong Kong SAR, Japan, Mexico, Singapore, Switzerland, and the United States. To learn more: http://www.bis.org/bcbs/implementation/l2.htm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 60 Disclaimer The Association tries to enhance public access to information about risk and compliance management. Our goal is to keep this information timely and accurate. If errors are brought to our attention, we will try to correct them. This information: is of a general nature only and is not intended to address the specific circumstances of any particular individual or entity; should not be relied on in the particular context of enforcement or similar regulatory action; - is not necessarily comprehensive, complete, or up to date; is sometimes linked to external sites over which the Association has no control and for which the Association assumes no responsibility; is not professional or legal advice (if you need specific advice, you should always consult a suitably qualified professional); - is in no way constitutive of an interpretative document; does not prejudge the position that the relevant authorities might decide to take on the same matters if developments, including Court rulings, were to lead it to revise some of the views expressed here; does not prejudge the interpretation that the Courts might place on the matters at issue. Please note that it cannot be guaranteed that these information and documents exactly reproduce officially adopted texts. It is our goal to minimize disruption caused by technical errors. However some data or information may have been created or structured in files or formats that are not error-free and we cannot guarantee that our service will not be interrupted or otherwise affected by such problems. The Association accepts no responsibility with regard to such problems incurred as a result of using this site or any linked external sites. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 61 The International Association of Risk and Compliance Professionals (IARCP) You can explore what we offer to our members: 1. Membership – Become a standard, premium or lifetime member. You may visit: www.risk-compliance-association.com/How_to_become_member.htm If you plan to continue to work as a risk and compliance management expert, officer or director throughout the rest of your career, it makes perfect sense to become a Life Member of the Association, and to continue your journey without interruption and without renewal worries. You will get a lifetime of benefits as well. You can check the benefits at: www.risk-compliance-association.com/Lifetime_Membership.htm 2. Weekly Updates - Subscribe to receive every Monday the Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next: http://forms.aweber.com/form/02/1254213302.htm 3. Training and Certification - Become a Certified Risk and Compliance Management Professional (CRCMP) or a Certified Information Systems Risk and Compliance Professional (CISRSP). The Certified Risk and Compliance Management Professional (CRCMP) training and certification program has become one of the most recognized programs in risk management and compliance. There are CRCMPs in 32 countries around the world. Companies and organizations like IBM, Accenture, American Express, USAA etc. consider the CRCMP a preferred certificate. You can find more about the demand for CRCMPs at: www.risk-compliance-association.com/CRCMP_Jobs_Careers.pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 62 You can find more information about the CRCMP program at: www.risk-compliance-association.com/CRCMP_1.pdf (It is better to save it and open it as an Adobe Acrobat document). For the distance learning programs you may visit: www.risk-compliance-association.com/Distance_Learning_and_Certificat ion.htm For instructor-led training, you may contact us. We can tailor all programs to specific needs. We tailor presentations, awareness and training programs for supervisors, boards of directors, service providers and consultants. 4. IARCP Authorized Certified Trainer (IARCP-ACT) Program - Become a Certified Risk and Compliance Management Professional Trainer (CRCMPT) or Certified Information Systems Risk and Compliance Professional Trainer (CISRCPT). This is an additional advantage on your resume, serving as a third-party endorsement to your knowledge and experience. Certificates are important when being considered for a promotion or other career opportunities. You give the necessary assurance that you have the knowledge and skills to accept more responsibility. To learn more you may visit: www.risk-compliance-association.com/IARCP_ACT.html 5. Approved Training and Certification Centers (IARCP-ATCCs) - In response to the increasing demand for CRCMP training, the International Association of Risk and Compliance Professionals is developing a world-wide network of Approved Training and Certification Centers (IARCP-ATCCs). This will give the opportunity to risk and compliance managers, officers and consultants to have access to instructor-led CRCMP and CISRCP training at convenient locations that meet international standards. ATCCs use IARCP approved course materials and have access to IARCP Authorized Certified Trainers (IARCP-ACTs). To learn more: www.risk-compliance-association.com/Approved_Centers.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 63 12-15 October, The Excelsior Hotel, Hong Kong The World’s Largest Risk Management Event Series' Asian Conference * 10% DISCOUNT OFFER * Quote VIP Code: FKN2438BCP Join 200+ senior risk managers from around the world 20+ CROs in attendance Learn from 80+ speakers across 85+ sessions Find out more & claim your 10% discount today on: www.riskmindsasia.com/FKN2438BCP Please contact ICBI for all enquiries: Email: [email protected] Tel: +44 (0)20 7017 7200 Note: The IARCP is media sponsor of RiskMinds Asia 2015 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)