1. P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped theweeks agenda, and what is nextDear Member,I thought that I had seen everything, but I waswrong.Whospokeabout thefounderoftheEmirates, SheikhZayedbinSultanAlNahyan at El Paso,Texas?Richard W. Fisher, President and CEO of the Federal Reserve Bank ofDallas. Of course, heexplained thewordEmiratesRichard said:Thefounder of theEmiratesacollectionof former Trucial Statesalongthelowercoast oftheArabian SeawasSheikhZayedbin SultanAlNahyan, a wiseman whohadno formal education but knew of itsenormousvalue. He said, Education is a lanternwhich lightsthe darkalleys of ignorance.Doyou want toknow whichthe titleof the speech is?Oil and Gas,BlondesandOver-Accessorized Brunettes, andRuthless, Hard-DrinkingCowboys(WithReference to SheikhZayed, DianaNatalicio, My Nephew Charlesand President PeaNieto)International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com

2. P a g e | 2Richard wantstoset the record straight. He said:I find that when I speak about my district in foreign landssay, in NewYorkorWashington, D.C.thereisastereotypicalreactionnot unliketheimageprojected by the TV showDallas.Of course you are doingwell,theysay.You are rich in oil and gas, blondesand over-accessorizedbrunettes,and ruthless, hard-drinkingcowboys.Today, I want to set the recordstraight.Richard, theyareright tobelievethat!Ok, I admit that your presentation is superb, and that you convinced mein some ways, but I still believe that you are rich in blondesandover-accessorizedbrunettesin Texas.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 3. P a g e | 3Note: The aboveslideis about employment, not employment ofblondesand over-accessorizedbrunettesRead moreat Number 2below.Welcometo the Top 10list.BestRegards,GeorgeLekatisPresident of the IARCPGeneral Manager, ComplianceLLC1200G Street NW Suite800,Washington DC20005,USATel: (202) 449-9750Email: lekatis@risk-compliance-association.comWeb: www.risk-compliance-association.comHQ:1220N. Market Street Suite804,Wilmington DE 19801,USATel: (302) 342-8828International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 4. P a g e | 4Report to G20 Finance Ministers and CentralBank Governorson monitoringimplementation of Basel III regulatory reformFull, timely and consistent implementationof BaselIII remainsfundamental tobuilding a resilientfinancial system, maintainingpublicconfidence in regulatory ratiosandprovidinga level playing field for internationallyactivebanks.This report updatesG20 FinanceMinistersand Central Bank GovernorsonprogressinadoptionoftheBaselIII regulatoryreformssincetheBaselCommitteeon BankingSupervision issueditsOctober 2012reportOil and Gas, Blondesand Over-AccessorizedBrunettes, and Ruthless, Hard-DrinkingCowboys(WithReferencetoSheikh Zayed, DianaNatalicio, MyNephew Charlesand President Pea Nieto)Remarksat theUniversityof Texasat El PasoCentennial LectureRichard W. Fisher, President and CEOFederal Reserve Bank of Dallas, El Paso, TexasInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 5. P a g e | 5Quantitative and qualitative monetaryeasingSpeechby Mr Haruhiko Kuroda, Governor of theBank of Japan, at a meetingheld by theYomiuri International EconomicSociety, TokyoRichardM. Ashton, DeputyGeneralCounselIndependent ConsultantsBefore the Subcommitteeon Financial Institutionsand ConsumerProtection, Committeeon Banking, Housing, and UrbanAffairs, U.S.Senate, Washington, D.C.Joint CommitteeReport onRisksand Vulnerabilities in the EU Financial SystemTheEuropean financial system continuesto face a dauntingrangeofinterrelated risks, necessitatinga concerted responseby policymakersboth at the political level and from theEuropean System of FinancialSupervision, includingthe European SupervisoryAuthorities(ESAs), inorder to restorethe confidenceand trust that hasbeen erodedduringrecent yearsfinancial crisis.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 6. P a g e | 6EU Bank Capital RequirementsRegulation and DirectiveTheEU Capital RequirementsRegulation (CRR) and Directive (CRD)aim tostabilize and strengthenthebanking system bymakingbanks setaside more and higher qualitycapital asa cushion against crises.Thenew rules should alsofoster a convergence of supervisory practicesacrosstheEU.Banks that are better ableto withstandfuture crisesshould be morecapableof financinginvestment and growth.EIOPA Guidelinesonpreparing for Solvency IIOn 27 March2013the European Insuranceand Occupational PensionsAuthority (EIOPA) publisheditsConsultationson Guidelinesonpreparingfor SolvencyII along witha cover note tobe read inconjunction withtheconsultations.Monetary policy many targets, manyinstruments. Where do we stand?Remarksby Mr Mervyn King, Governor of the Bank of England, at theIM F Conferenceon Rethinkingmacro policy II: first stepsand earlylessons,Washington DCInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 7. P a g e | 7SME financing, market innovation and regulationSpeechby Mr Benot Coeur, Member of the ExecutiveBoard of theEuropean Central Bank, at the plenarySession 11Challengesand feasibilityof diversifying thefinancingof EU corporatesand SMEs, at the EurofiHighLevel Seminar,organisedin associationwiththeIrishPresidencyoftheCouncil of the EU, DublinFinancial inclusionOpeningaddressby Mr DentonRarawa,Governor of Central Bankof Solomon Islands,atthe10th Meetingof the PacificIslandsWorking Group (PIWG) on Financial inclusion, HoniaraInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 8. P a g e | 8Report to G20 Finance Ministers andCentral Bank Governorson monitoringimplementation of Basel III regulatoryreformApril 2013SummaryFull, timely and consistent implementationofBasel III remainsfundamental to building aresilient financial system, maintainingpublic confidencein regulatoryratios and providinga level playing field for internationallyactivebanks.This report updatesG20 FinanceMinistersand Central Bank GovernorsonprogressinadoptionoftheBaselIII regulatoryreformssincetheBaselCommitteeon BankingSupervision issueditsOctober 2012report.Thescope of this update is broader than previousprogressreportsto theG20.In additiontoreportingon the stepstaken by Basel CommitteememberjurisdictionstowardsimplementingtheBaselIII capitalstandards,whichwasthe focusof thelast report, this updatealsocoversdevelopmentsinother Basel III regulatory standards, and banksprogressin bolsteringtheir capital bases.Thereport alsohighlightsspecific implementation-relatedshortcomingsthat are surfacing, whichrequire continued policy and operationalattention.BaselCommitteemembersagreedtobegin implementationof BaselIIIscapital standardsfrom 1January 2013, requiring that theytranslatetheBasel III standardsintonational lawsand regulationsbeforethisdate.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 9. P a g e | 9Sincethe Basel CommitteesOctober 2012report, eight more memberjurisdictionshave issued final Basel III-basedcapitalregulations,bringing the total to14.Eleven Basel Committee member jurisdictions now have final Basel IIIcapital rules in force: Australia, Canada, China, Hong KongSAR, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa andSwitzerland.Three BaselCommittee member jurisdictionsArgentina, Brazil andRussiahaveissuedfinal rulesandwill bring themintoforcebyend2013.Theother 13member countriesthat missed the1January 2013deadlinefor issuing final regulationshave published their draft regulations:ninecountriesthat are alsomembersof the EuropeanUnion, Indonesia, Korea, Turkey and theUnitedStates.The Basel Committee is urging those jurisdictions to issue final versionsof their regulations as soon as possible and to align their implementationwiththe internationallyagreedtransitionperioddeadlines.It is particularlyimportant for member jurisdictionsthat are home toglobalsystemicallyimportant banks(G-SIBs) tocompletetheissuanceoffinal Basel III regulations.Despitesome delays in implementingBaselIII regulations,nationalsupervisorsare ensuring that internationallyactivebanks are, wherenecessary, makingsteady progressin strengtheningtheir capital basetomeet the new Basel III standards.Thelatest data collected by theBasel Committeeindicatethat, for the 12monthsending June2012,largeinternationallyactivebankson averageraised their capital ratios.For example, the averageCommon EquityTier 1(CET1) capital ratiosrosefrom 7.1%to8.5% of risk-weightedassets.For thosebanksthat do not yet meet thefully-phased inrequirements,CET1capital shortfallsfell from roughly 450billion to200billion.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 10. P a g e | 10TheBaselCommitteesRegulatory ConsistencyAssessment Programme(RCAP) introducedin 2012is helpingadvanceand deepen theBasel IIIreform efforts.TheRCAP is monitoring progressin introducingregulations, assessingtheir consistencywiththe agreed international standards, and analysingoutcomesacrossbanksandregulatoryregimes, therebyhelpingtoensureconfidencein the regulatoryframework.TheRCAP is alsohelpingemphasisethat issuingdomestic BaselIII-basedrulesalone doesnot guaranteeeffectiveimplementation.Sound supervisory and industry practicesalong withrigorousenforcement and analysisof intendedprudential outcomesare alsorequiredfor effectiveimplementation of theBasel III framework.Acentral element of theRCAP is the assessment of the content andsubstanceof different jurisdictionsregulations.TheBasel Committeehaslaunched a series of theseassessmentstogaugethe consistencyof domestic regulationswiththe requirementsoftheBasel framework.Thefirst three assessmentscovered final capital regulationsin Japan anddraft capital regulationsin the European Union and the UnitedStates.Subsequently, theBasel Committeeassessedregulationsin Singaporeand isnow evaluatingBasel III capital regulationsin China andSwitzerland.Evaluationsof regulationsinAustralia, Brazil and Canada will beginduringthe second half of 2013.There will alsobenew assessmentsof EU and US regulationsimmediatelyafter theyare finalisedand issued.TheCommitteeaimsto completea firstassessment of BaselIII capitalregulationsin every member jurisdictionby the end of 2015.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 11. P a g e | 11TheRCAP alsostudies theconsistencyof regulationseffectson banks.This work, whichtheCommitteestartedin 2012,is analysingthe sourcesof variation acrossbanksin their estimatesof risk weightedassets(RWAs).The first set of findings, which was published in January 2013, identifiedconsiderable variation in the risk weighting of assets held in the tradingbook dueto factorsother than risk exposures.Preliminaryresultsfor the assetsheld in thebankingbook point in asimilar direction.While some variationin RWAs is natural and desirable, excessivevariationdiminishesthe comparability of thereportedcapital ratios.Further analysisisthereforeunder way, and areaswhere Basel Committeestandardsmight bemodifiedtoreduceexcessivevariationare becomingapparent.TheCommitteehasbegun to consider what form some of thesemodificationsmight take.Three typesof policyoptionsare emerging:(i)Improving public disclosure and regulatorydata collectiontoaid theunderstandingof bankscalculationsof RWAs;(ii) Narrowingthemodellingchoicesfor banks;and(iii)Further harmonisingsupervisorypracticeswithregard to modelapprovals(toreducethe level of variationin RWAs).In this context, the Committees fundamental review of the market riskframework will address some of the key findingswith regard to the riskmeasurement of tradingbook assets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 12. P a g e | 12TheCommitteecontinuesitsworktofinalisethedevelopment of itspost-crisisreforms, includingtheremainingoutstanding componentsoftheBasel III framework.With respect to Basel IIIsliquidityreforms, the final form of theLiquidityCoverageRatiowaspublishedin January 2013.TheCommitteeintendsto finaliseitswork on the leverageratio in2013,and most if not all work on theNet StableFunding Ratio, thetradingbook, securitisationand largeexposuresshould be finishedin2014.It remainsessential, however, that theBasel frameworkbe adopted andfullyimplementedin a timelymanner.While the BaselCommitteecontinuestostrengthenitsimplementationmonitoring effortsand theRCAP, it urgesG20 FinanceMinistersandCentral Bank Governors torenew their commitment to completion of theBasel III regulatory reforms consistently, expeditiouslyand completely.Progressreport on Basel III implementationFull, timely and consistent implementationof Basel III is fundamental tobuildinga resilient financial system, maintainingpublic confidenceinregulatoryratios and to providing a level playing field for internationallyactivebanks.Toaid in the implementationprocess, the Basel Committeehas put inplacetheRegulatoryConsistencyAssessment Programme (RCAP) tomonitor, review and report on Basel III implementation.It coversthree areas:(i)Thetiming of Basel standardsadoption;(ii)Theconsistencyof domestic regulationswiththeBasel standardsandidentificationof material gaps;and(iii)Theconsistencyof theregulationseffects.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 13. P a g e | 13This report providesan overview of the statusof Basel III (includingBasel II and 2.5).It providesanupdateon policy development workand on the progressbankshave madein adjustingto thenew Basel standards.Thereport alsooutlinesprogresson:(i)Completing thedevelopment and issuanceof standardsunder theBasel framework;(ii)Adoption of rulesand assessment of consistencybyBasel Committeemembers;and(iii)analyzing outcomes(eg impact studiesand international studiesofconsistencyin bank risk measurement practices).(i) Completing the Basel III frameworkThecore componentsof the Basel III capital frameworkwerefinalised in2011. Since then, theBasel Committeehassubstantiallycompletedtheremainingcomponents(seeTable1).Thecapital frameworksfor global and domestic systemicallyimportantbanks(G-SIBs and D-SIBs) werepublishedin 2011and 2012respectively.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 14. P a g e | 14TheCommitteeissuedthefinal standardfortheLiquidityCoverageRatioin January2013,withimplementationscheduledtocommence in 2015.It isactivelyworkingtofinalisethespecificationoftheotherkeyelementsof the Basel III package:in particular, theleverageratioand the NetStableFunding Ratio.Agreement on the Liquidity Coverage RatioOn 6 January2013,the Group of Central Bank Governorsand HeadsofSupervision(GHOS) the governingbody of the Basel Committeeendorsedthe revisedLCR.TheLCR is one of theBasel Committees key reformsto strengthenglobal liquidityregulationswiththe goal of promotinga more resilientbankingsector.TheLCR promotesthe short-term resilienceof a banksliquidityriskprofile.It doesthis byensuringthat a bank hasan adequatestock ofunencumberedhigh-qualityliquid assetsthat can be converted intocasheasilyand immediatelyin privatemarketstomeet itsliquidityneedsfor a30calendar day liquiditystressscenario.It will improve the banking sectors ability to absorb shocks arising fromfinancial and economic stress, whatever the source, thusreducing the riskof spilloversfrom thefinancial sector tothe real economy.TheLCR will be introducedon 1January2015with theminimumrequirement at 60%, risingin equal annual stepsof 10percentagepointstoreach 100% on 1January2019.This graduated approach is designed to ensure that the LCR can beintroduced without disrupting the orderly strengthening of bankingsystemsor the ongoing financingof economic activity.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 15. P a g e | 15(ii) Adoption of Basel III-based regulationsand assessment ofconsistencyTable2summarisestheoverall progressBasel Committeemembershavemadein implementingthe Basel risk-basedcapital framework asofend-March2013.Membershavemade considerableprogresssincethe last report waspublishedin October 2012.Moredetail regardingtheimplementationstatusof each memberjurisdictioncan be found in the tablesinAnnex 1, which includesummaryinformation about the next stepsand theimplementation plansbeingconsidered.Basel IIOf the27Basel Committeemember countries, 24have nowimplementedBasel II fully.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 16. P a g e | 16TheUnited States,whichisone of the three jurisdictionsyet to fullyimplement Basel II, hasissuedfinal regulationson BaselII; however, itslargest banks arestill on parallel run for implementingthe advancedapproaches.Theremainingtwojurisdictions(Argentina and Russia) havealsoinitiatedtheprocessfor the implementation of Basel II and planto issuethefinal regulationsin 2013.Basel 2.5Thenumber of members whohave implemented Basel2.5 fullyhas risento22. Of theremainingfive members,threehave initiatedstepstoimplement theregulations.Basel IIIEleven members havenow issued final Basel III rules, whichare legallyin force in these jurisdictions.Threemembershaveissuedfinal rulesbut havenot yet brought themintoforce.All remainingmembers have issueddraft rules.Going forward, the monitoring of the adoption of the Basel standardswillbe broadened to include other components of the framework, such as theLCR and the requirementsfor G-SIBs and D-SIBs.Thebroadened monitoringwill alsobecome part of the periodic updatespublishedbythe Basel Committee, thenext of whichis expected inOctober 2013.Regardingnon-Basel Committeemember jurisdictions,in 2012theFinancial Stability Instituteof the Bank for International Settlementspublishedtheresultsof itsbiennial surveyon the adoption of the Baselstandards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 17. P a g e | 17Seventy non-member jurisdictionsparticipatedin the survey, and morethan half indicatedtheywerein the processof implementingBasel III.Consistency of domestic regulationswith Basel standardsIn 2012,the Committeeconducted the first detailed assessmentsof thecontent and substanceof thefinal regulationsimplementingtheBaselIIIpackagein Japan, and the draft regulationsin the European Union andtheUnited States.TheCommitteecontinued theprogramme withthe assessment ofSingapore, whichwaspublished in March2012,and is currentlyin theprocessof assessingSwitzerlandand China.AssessmentsofAustralia, Brazil and Canada will commence later thisyear.Also, new assessmentsof theEU and USassessmentswill be conductedoncetheir final Basel III regulationshave been published.TheBasel Committeeurgesjurisdictionsto addressmaterialinconsistenciesbetweendomesticregulationsand the globallyagreedBasel frameworkidentifiedby the final assessments.It will monitor progressin future reviewsaswell asfuture analysisofprudential outcomes.Theseassessmentscontributeto greater consistencyin thenationaladoption of BaselIII standards.For example, in thecaseof Singapore, the MonetaryAuthority ofSingaporepromptly resolved a number of initial assessment findingsbyamending thedomestic regulationsthat implement Basel III.Theseamendmentscontributedtoa more consistent domesticimplementationoftheBaselframework,and thusset apositiveprecedentfor future assessments.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 18. P a g e | 18(iii) Regulatory outcomesBank progressin adjusting to Basel III capital standardsSince2010the BaselCommittee hasperiodicallymonitored theprogressof a sampleof banksin itsmember jurisdictionsin adjustingtotheminimum BaselIII requirementsfor capital and liquidity.Atotal of 210banksparticipatedin themost recent study, including101largeinternationallyactive(Group 1) banks and 109other (Group 2)banks.Overall, banks aremakingsubstantial progresstowardsmeeting theBasel III minimum standards.Graph 1showsbankscapital shortfallsassumingfull implementationoftheBasel III requirementsasof 30June2012,includingchangestothedefinitionof capital and risk-weightedassets,and ignoring phase-inarrangements.Group 1banksthat could not currentlymeet theminimum requirementswouldhave had an overall shortfall of 3.7billion for the CET1minimumcapitalrequirement of 4.5%, risingto208.2billionforaCET1target levelof 7.0% (ie includingthe capital conservation buffer); thelatter shortfallalsoincludesthe capital surchargesfor G-SIBs accordingto theupdatepublishedbythe Financial Stability Board in November 2012whereapplicable.As a point of reference,the sum of profitsafter tax prior todistributionsacrossthesame sampleof Group 1banksbetween1July2011and 30June2012was379.6billion.Compared toDecember 2011, theaggregate CET1 shortfall withrespect tothe4.5% minimum for Group 1banksimproved theshortfall was8.2billion (68.7%) lower.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 19. P a g e | 19At the CET1target level of 7.0% (plusthesurchargeson G-SIBsasapplicable), the aggregate CET1 shortfall for Group 1banks alsoimproved it was175.9billion(45.8%) lowerthan in December 2011.Therevised G-SIB surchargesdid not significantlychange the amount oftheshortfalls.Graph 2 showstheweightedaveragecapital ratios for the banksin thesample.TheweightedaverageCET1ratio for Group 1banksassumingfullimplementationof theBasel III requirementsimproved from 7.1% inJune2011to 8.5% in June 2012,while their total capital ratioincreasedfrom 8.6% to9.9%.As of end-June2012,average capital ratiosunder the Basel III frameworkfor a consistent sample of Group 2 bankswerehigher than thoseforGroup 1banks, but had improved onlyslightly.CET1ratios increasedfrom 8.8% in June 2011to 9.0% in June 2012,andtotal capital ratiosimproved from 11.1%to 11.3% over the same period.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 20. P a g e | 20Studiesof risk-weighted assetsand consistency of regulatoryoutcomesAs part of its implementationprogramme, the Basel Committeeinitiatedstudiesintotheconsistencyof thecalculation of the risk-basedcapitalratio (theratioof capital toRWAs) acrossbanks.Inconsistenciesin the measurement of risk-weightedcapital ratiosmaystem from either calculationsof capital or risk weightedassets,ie thenumerator or the denominator of the ratio(Table3).Thestudies initiallyfocused on the consistencyof measuring RWAs, thedenominator of theratio.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 21. P a g e | 21With regard tothemeasurement of RWAs, the Baselstandardsdeliberatelyallowbanks and supervisorssome flexibility in measuringrisksin order toaccommodatedifferencesin riskappetiteand localpractices,but alsowiththe goal of accommodatinggreater precision.Somevariation in RWAsshould thereforebe expected.In addition, from a financial stabilityperspective,some diversityin riskmanagement practicesis desirableto avoid a situation in whichall banksact in a similar way, whichpotentiallycould createadditional instability.However,excessivevariation that is, that doesnot reflect materialdifferencesin theunderlying riskstakenby banks is undesirable andcould be harmful tothe international level playing field.As a first step, the Committeeexaminedin more detail thedrivers ofpossibleinconsistenciesin themeasurement of RWAsfor thebankingbook and tradingbook of banks.Importantly, theobjectiveof thisworkwasnot tojudgethecorrectnessofbanksmodelling choicesor toassessthecompliance of supervisoryapproachestakenin different jurisdictions.Rather, theobjectivewastoobtain a preliminaryestimate of thepotentialfor variationin RWAsacrossbanks and tohighlight aspectsof the Baselstandardsthat contribute to this variation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 22. P a g e | 22Thefindingsprovideadirectionfor policy optionsthat canbeconsideredif theCommitteewishestonarrowthepotential forvariationinthefuture.In January 2013, the preliminaryfindingsregardingthe RWAsin thetradingbook werepublished.Theanalysis investigatingRWAsin the bankingbook is under way, anditsresultsare expectedto bepublishedin the comingmonths.Analysisof risk-weighted assets in the trading bookIn the tradingbook study, the Committeeundertook(i)An analysis of publicly available data of largegloballyactivebankswith significant tradingoperationsand(ii)Ahypothetical test portfolio exerciseto examinewhat methodologychoicesarethe greatestpotential driversbehind the variabilityof internalmarket riskmodel outcomes.Thereview of publicdisclosuresfocusedon a sampleof 16 global bankswith significant tradingactivity.Theobservationperiodincludedthemost recent changesrelatedtoBasel2.5, whichhad takeneffect in some jurisdictionsbut not all.Despitethe asynchronousadoption of Basel 2.5, value wasfound incomparing market riskRWAs acrosspre- and post-Basel 2.5 jurisdictionsbecausemany of theissuescarryover tothenew regime, for exampleregardingthe contribution to RWAs from internal models andstandardisedapproaches.For some banks, thedisclosuresrequired under Basel II (Pillar 3)factored intothe analysisand provided a chancetoevaluatethe utilityofsuch disclosures.Basedon public disclosures,the analysisshowedconsiderablevariationin averagepublishedRWAsfor tradingassetsand provided someInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 23. P a g e | 23indicationthat differencesin the composition and size of tradingpositionsare correlatedwith banksaveragemarket riskRWAs.However,thequalityof disclosureswasgenerallyfound tobeinsufficienttoallowinvestorsand other interestedpartiesto assesshow much of thevariationreflectsdifferinglevelsof actual risk andhowmuchisaresult ofother factors.Thefocusof the hypothetical test portfolioexercisewasto discover thedesignelementsof internalmodelsthat havethegreatest potentialimpacton thelevel of variability in market risk RWAs.Hypothetical test portfoliosovercome thelimitationsencountered whenattemptingto usepublic and supervisorydata on real portfolios toinvestigatepotential sourcesof variationbecausetheycontrol fordifferencesin portfolio composition.However,they showonly potential and not realised variation in outcome.Moreover,inthiscase, theexercisefocusedon aseriesofsimplelongandshort positions,designedtoreveal theimpact of model designfeatures.Toshed light on theeffect of different sources of variation on morerealisticportfolios, theCommitteeplanstoconduct afurtherhypotheticaltest portfolio exerciselater in 2013.This will includeother, more complex, hypothetical test portfolios, withtheaim ofhelpingtheCommitteetodeepenitsanalysisofthevariationinrisk measurement of trading booksacrossbanks.Thehypothetical test portfolioexerciseindicatedthat there can be asubstantial differencebetweenthebank reporting the lowestRWAsandthebank reportingthe highest.This outcome isattributedto a rangeof factors:- Asizeableportionof thevariation isduetosupervisorydecisionsapplied either toall banksin a jurisdiction, or to individual banks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 24. P a g e | 24An exampleof the former wouldbe policy decisionstorestrictmodellingoptions(eg to disallowanydiversification benefit betweentypesof risk).An exampleof the latter would be the application of supervisorymultipliers:around onequarter of thetotal variation in thehypothetical diversified portfolio could beattributed to thissinglefactor.Thesesupervisoryactionstypicallyresult in higher capitalrequirementsthan wouldotherwisebe the casebut can alsoincreasethevariation in RWAs betweenbanks, particularlyacrossjurisdictions.Thesesupervisoryactions,particularlyat anindividualbank level, areoftennot disclosed.- Another key sourceof variation ismodellingchoicesmade by banks.Theexercisefound that a small number of keymodellingchoicesarethemain driversof the remainingmodel-drivenvariability.Thestudydid not seek to identify the optimal level of variation, but thepreliminaryfindingshighlight potential policy optionsthat could reducefor variationwhereit is consideredexcessive.Thesepolicy optionscomplement important policyinitiativesthat arealready under way, such asthe fundamental review of thetradingbook, and policy work on disclosures.Thepolicyoptionsare further discussedbelow.Analysisof risk-weighted assets in the banking bookTheCommitteeisfinalisingits first studyon sourcesof materialdifferencesacrossbanksin RWAsin thebanking book.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 25. P a g e | 25Aswiththetradingbook, theCommitteehasbeenassessingtheextent towhichthesevariationsare driven by differencesin risk levelsor inpractices,by analysing data and studying banksrisk assessment andquantification practices.TheCommitteerevieweda widerangeof existinganalysesof RWAsacrossbanksand countries toassessmethodologies and identify possibledriversof RWAvariation.Thestudieshighlightedmany potential drivers,most of whichsuggestedthat RWAdifferencesare due to both risk-basedand practice-basedfactors.Risk-based factors are those that stem from differences in underlying riskat the exposure or portfolio level and in business models, including assetclassmix.Practice-basedfactorsincludedifferencesin bank practices(egapproachestorisk management and measurement) and in the regulatoryenvironment (eg supervisorypractices,implementinglawsandregulationsincludingnational discretion, accounting standards).While the focusof the studiesvaried acrossthese factors, noexistingstudycould pinpoint thedefinitivecausesof RWAdifferencesbetweenbanks.Supervisory data analysisTheCommitteeanalysed supervisorydata it collectedaspart of itsongoing capital monitoring.Theanalysis covered 56large, internationallyactivebankingorganisationsand 44 non-internationallyactive banking organisationsin15jurisdictions.Theanalysis suggeststhat a major portionof the variation in RWAsisdrivenby asset classmix, a risk-baseddriver.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 26. P a g e | 26Theremainingdispersion is duetodifferent risk weightswithin assetclasses either from differencesin actual risk (risk-based) or itsmeasurement (practice-based).Key practice-baseddrivers includethechoiceof modellingapproachforcredit risk, capital floor adjustment, the treatment of defaultedandsecuritisationexposures, aswell asthecalibrationof associatedprobabilitiesof default (PDs) and losses-given-default (LGDs).Many, although certainlynot all, of thesedriversreflect elementsof theflexibilityprovided tobanksand supervisorswithin the Baselframework.Portfolio benchmarking analysisA portfolio benchmarking exercise was used to explicitly investigate themagnitude of practice-based differences, by controlling for risk throughthe useof common obligorsacrossbanks.Thirty-twobanks from 13jurisdictionsparticipatedin theexercise,reporting PD and LGD estimatesfor a set ofsovereign, bank, and corporateexposures.The findings indicate that there is considerable consistency across bankswith regard to the relative riskinessof obligorsin the exercise (ie the rankorder in terms of risk), but that there are sizeable differencesin the levelsof the perceived risk.Theanalysis suggeststhat different estimatesof the PD and/ or LGD forthesameexposurescreatematerial differencesin risk-weightedassetsacrossbanks.Range of practicesand meetingswith banksTheCommitteealsoidentified and assessedthesignificanceof a list ofpractice-baseddriversof RWA variation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 27. P a g e | 27Many of thesedriversare provided for in theBasel standardsor inindividual countriesimplementation of theBasel framework.Further insightson practiceswerecollectedthrough meetingsin March2013with 12of the 32 banksthat participatedin theportfoliobenchmarkingexercise.Themeetingsfocused on the banksRWA modellingpracticesforbankingbookexposureswithaviewtodevelopingabetterunderstandingof the specific driversof observed variation.Potential policy optionsand directions for future workThepreliminaryresultsfor both thetradingbook and the bankingbookindicateconsiderablevariation in average risk-weightedassetsacrossbanks,of whichonlya part can be explainedbyvariation in actualrisk-taking.While some amount of variation isexpectedin any regime basedoninternalmodels, whereit is consideredexcessivethe findingssuggest apotential direction for future policy work that could narrow down thepotential variation.Generally, the analysis highlightsthree potential typesof policy optionsthat could be consideredin thefuture:(i)Improvement of public disclosureand regulatorydatacollectiontoaidin theunderstandingof risk-weightedassets;(ii)Narrowingdownthemodellingchoicesfor banks, includingthroughfurther use of floorsand/ or benchmarks;and(iii)Further harmonisation of supervisory practiceswith regard to modelapprovals.At this stage, the suggestionsfor policyoptionsshould not be seen ascomprehensive, nor aspre-emptingany specific policy measures,butInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 28. P a g e | 28rather aspotential directionsfor future work tobe consideredby theCommittee.Furthermore, the potential policymeasuresshould not be seenasmutuallyexclusive: some combination of the three could be appropriategoingforward.Morebroadly, the Committeehasbeen consideringthe appropriatebalancebetweenrisk sensitivity, comparabilityand simplicity.In thenear term, theCommitteeintendstopublisha paper settingout itsthinkingon the relevant policy trade-offsand identifying potential policyoptionsthat the Committeeintendsto explore tomakethe regulatoryframeworksimpler and more comparable.Annex 1TheBasel III frameworkbuilds upon and enhancesthe regulatoryframeworkset out under BaselII and Basel2.5.Thetablesherein thereforereviewmembersregulatoryadoptionof BaselII, Basel2.5 and Basel III.- BaselII, whichimprovedthemeasurement ofcredit riskandincludedcapture of operational risk, wasreleased in 2004and wasduetobeimplemented from year-end 2006.TheFramework consistsof threepillars:Pillar 1containstheminimum capital requirements;Pillar 2 setsout the supervisoryreview processand Pillar 3 correspondstomarket discipline.- Basel 2.5, agreed in July2009, enhanced themeasurementsof risksrelatedtosecuritisation and trading book exposures.Basel 2.5 wasduetobe implemented no later than 31December 2011.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 29. P a g e | 29- In December2010,theCommitteereleasedBaselIII, whichsethigherlevelsfor capital requirementsand introduceda new global liquidityframework.Committeemembersagreedtoimplement Basel III from 1January2013,subjecttotransitional and phase-inarrangements.In November 2011, G20 Leadersat theCannesSummit calledonjurisdictionstomeet their commitment toimplement fullyandconsistentlyBasel II and Basel 2.5 by end 2011, and Basel III, starting in2013and completingby 1January 2019.In June 2012,G20 Leadersat the LosCabosSummit reaffirmed their callfor jurisdictionstomeet their commitments.This messagewasreiteratedin Moscowin February 2013by theG20FinanceMinistersand Central Bank Governors.MethodologyThedata contained in this annex arebasedon responsesfrom BaselCommitteemember jurisdictions.Thefollowingclassificationis used for thestatusof adoption of Baselregulatoryrules:1.Draft regulation not published:no draft law,regulation or other officialdocument hasbeen made public todetail theplanned content of thedomesticregulatory rules.This statusincludescaseswherea jurisdictionhascommunicatedhigh-levelinformationabout itsimplementation plansbut not detailedrules.2.Draft regulation published: a draft law, regulation or other officialdocument is alreadypublicly available, for examplefor publicconsultation or legislativedeliberations.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 30. P a g e | 30Thecontent of the document hasto be specificenough to beimplemented whenadopted.3.Final rule published:the domesticlegal or regulatory framework hasbeen finalisedand approved but isstill not applicableto banks.4.Final rulein force: thedomesticlegal and regulatory frameworkisalready applied to banks.In order tosupport and supplement the statusreported, summaryinformation about thenext stepsand theimplementationplansbeingconsideredby membersare alsoprovided for each jurisdiction.In additiontothe statusclassification, a colour code is used toindicatetheimplementationstatusof each jurisdiction.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 31. P a g e | 31International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 32. P a g e | 32International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 33. P a g e | 33International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 34. P a g e | 34Annex 2Singapore reviewIn March2013, theBasel Committeecompleteditsassessment ofSingapore.Theassessment evaluated the localregulationsestablishedby theMonetaryAuthority of Singapore (MAS), whichimplementsBasel III inSingapore.Theregulationswerepublished in September 2012and further amendedin November 2012.Additional regulationsimplementingassociateddisclosurerequirementswerepublishedin December 2012and werealsoconsidered in theassessment.Theassessment found that Singapores overall capital regimeis in linewith therequirementsof theBasel framework.Singaporesregulationswerefound tobe compliant in 12out of the 14componentsassessed.While twoother componentswereassessedaslargelycompliant, thedeviationswerenot consideredto be material by the assessment team.As a result, the overall framework wasgraded withan overall assessmentoutcome of compliant.Theassessment team alsonoted Singapores activeand continuingcommitment totheglobal regulatory reforms that form part of thepackageof reformsannounced by the Basel Committee.In this regard, it must be highlightedthat the MonetaryAuthority ofSingapore (MAS) wasable to promptly resolvea number of initialInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 35. P a g e | 35assessment findingsby issuing amendmentsto thedomestic rulesthatimplement Basel III.Theseamendmentscontributedto thefavourableassessment outcome.Annex 3Sample of banks included in the Basel Committees monitoringexerciseIn 2010 the Committee started periodically monitoring the progress of asample of internationally active banks in adjusting to the new Basel IIIstandardsfor capital and liquidity.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 36. P a g e | 36Thetablebelow showsthe distributionof participationby jurisdictioninthemost recent study.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 37. P a g e | 37Oil and Gas, Blondesand Over-AccessorizedBrunettes, and Ruthless, Hard-DrinkingCowboys(With Reference to Sheikh Zayed, Diana Natalicio, My NephewCharlesand President Pea Nieto)Remarksat theUniversityof Texasat El PasoCentennial LectureRichard W. Fisher, President and CEOFederal Reserve Bank of Dallas, El Paso, TexasI so appreciate being here at the University of Texas atEl Paso (UTEP), my first outing since returning from atrip totheUnitedArab Emirates.Thefounder of theEmiratesacollectionof former Trucial Statesalongthelowercoast oftheArabian SeawasSheikhZayedbin SultanAlNahyan, a wiseman whohadno formal education but knew of itsenormousvalue.He said, Educationis a lanternwhichlightsthedark alleysofignorance.I mention this becauseI cannot think of an educator whoembodies thispractical dictum better than Diana Natalicio.President Natalicioisa bright, shininglantern in the worldof education.Actually, thatsan understatement:Sheisa klieg light!We are blessedto have her lead UTEP and move Texasand thenationforwardon the frontiersof higher education.I am tremendouslyhonored tobe introduced by her. Thank you, Diana.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 38. P a g e | 38I am goingto depart from my usual format today and rely heavily onslidesslidesthat provide afactual basisfor what isgoingtobeadoseofTexasbrag.With itsbranchesin El Paso, SanAntonio and Houston, the FederalReserveBank of DallastheFederal ReservesEleventh Districtcoversabout 27millionpeople over 360,000squaremilesstretchingfromnorthern Louisiana tosouthern New Mexico.Over 96percent of theeconomic output of the district comesfrom Texas.I find that when I speak about my district in foreign landssay, in NewYorkorWashington, D.C.thereisastereotypicalreactionnot unliketheimageprojected by the TV showDallas.Of course you are doingwell,theysay.You are rich in oil and gas, blondesand over-accessorizedbrunettes,and ruthless, hard-drinkingcowboys.Today, I want to set the recordstraight.PricesAre Presently Stable; Employment IsFar From Optimal;the Efficacy of Quantitative Easing Is asYet UnclearTheroadtodignityisthroughwork:Jobsprovidethemeansforeconomicadvancement.As the nationscentral bank, the Federal Reserveistasked withmaintainingprice stabilitya common monetary policy goal of allresponsiblecentral banks.But under the lawscreated by Congressthat govern our franchise andallowit to operateindependently, theFed worksunder a dual mandatetoconduct monetary policy that keepspricesfrom inflatingor deflatingand to achievefull employment.At the moment, and for the foreseeablefuture, neither inflationnordeflationappearson the forecasthorizon.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 39. P a g e | 39However, the longer-term inflationaryconsequencesof themassivequantitativeeasingprogramswehaveundertakenprogramsI haveopposedin our Federal Open Market Committee(FOMC) meetingsbutthat have been approved by themajorityof the committeeare asyet unclear.Thoseaftereffectswill depend on how artful the committeewill be inunwindingthat accommodation on a timely basis.Indeed, one of the signal achievementsof Federal Reserve policy underBen Bernankesleadershipis tohave formalizeda long-term inflationtarget of 2 percent, something theFOMC had never beforedistinctlydeclared.Presently, the 12-month inflation rateis 1.6percent, accordingto ourcalculationat the DallasFed, wherewedoa trimmedmean analysisof178itemsconsumersuse,includinggunsand beer (hopefullynot enjoyedsimultaneously) and thecost of gasoline,food, getting your hair cut oryour shoesrepaired, or buying an electronic device.Given that thetrimmed mean analysis hasproven tobe an excellentrule-of-thumbpredictorofheadlineinflationoneyear forward,wecansaywith some degreeof confidencethat, at present, wearekeepinginflationat or below our 2percent target.Employment, however, is not at a comfortablelevel.Pick up anynewspaperor goto anynewswebsiteor broadcastmediumand you will read or hear of the still-too-high unemployment rate thatbedevils our economy.Monetarypolicyactswithalag, includingunorthodoxmonetarypolicy asit is nowbeingconducted.It wouldappear from some studies and from anecdotal evidencethatcompanies are startingto usethecopiouscheap money theyhave accesstofor investing in capital projectsand employing increasingamountsofworkers.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 40. P a g e | 40But it isnot yet clearthat wewillachieveajustifiablebangforthetrillionsof bucksthe Fed hasfloodedtheeconomy with.Onlytimewill tell if theefficacyof quantitativeeasingwehaveundertaken wasjustifiable in regard to job creation and deliveringon thesecond component of our dual mandate.Yet many things doemerge when you examine the entrailsofemployment data from acrossthe country.Onethingis that you learna lot about Texas, whichis thefocusof myremarks today.If You Pull TexasOut of the Puzzle, the Country FallsDownFor thepast 22years, Texashasoutgrownthecountryby a factor of morethan 2-to-1.Here is a slidethat showsthe percentageincreasein jobscreatedbyseveral largestatesand for the U.S.asa wholesince1990:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 41. P a g e | 41And here is a look at therate of job creationfor thosesame statesand theU.S. asa wholesince2000:We wereone of thelast statesto gointothe recent recession and one ofthefirst tocomeout. In termsofjobs,asof now,10stateshavecomebacktoor have exceededemployment levelsthat prevailed beforethe crisis:Alaska, Louisiana, Massachusetts,NewYork, NorthDakota, Oklahoma, South Dakota, Texas,Utah and West Virginia.The Federal Reserve has no index that measures the number of blondesor ruthless cowboys in Texas, but we can account for the influence of oiland gason our stateswelfare:Oil and gasextractionand mining support directlyaccountsfor 2.4percent of our workforcetwo-point-four percent.And the energy sectorstotal contribution toour statesgrossdomesticproduct (GDP) is roughly 10 percent.Soyes, the foreignersare correct: We have a strong energy sector inTexas.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 42. P a g e | 42We are theNo. 1producer of oil and gasin the nation.We producemore oil than Venezuelaand more natural gasthan Canada.On net, high energypricesdo, indeed, benefit Texans.But look at this slideof the number of jobscreated by sector in 2012:Oil andgasandminingandtheir supportservicesaccountedfor22,100,orlessthan 7percent, of the 335,500jobscreated in Texaslast year.Professional and businessservicesaccounted for 74,200;trade, transportationand utilities62,000;leisureand hospitality52,400;educational and health services41,000;and construction 27,000.Each ofthesesectorscreatedmore jobsthan theenergy sector.Of course,the oil and gassector haslargemultipliers,sotheoveralleconomicimpact is greater than justthese22,100jobs.TheUniversity of Texasat SanAntonioyour sister organizationestimatesthat the EagleFord Shale generated over $61billion in economicimpact in 2012.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 43. P a g e | 43As this chart shows, however,oursis a diversifiedeconomy, creatingjobsacrossthespectrum.But thesejobsareall lowpaying, our uninformed friendssay.And tothat I respond:You are right.We createmore low-paying jobsin Texasthan anybody else.Yet look at this breakdownof job creationby income quartile for TexasversustheUnited StatesminusTexasfor the past 10-plusyears:We created a lot of low-payingjobs. But wealsocreated far morehigh-paying jobs.Most importantly, while the UnitedStateshasseen job destructionin thetwomiddle-incomequartiles, Texashascreated jobsfor thosevitalmiddle-incomeworkers,too.Thebottom linewehave experiencedgrowthacrossall sectorsand inall income categories.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 44. P a g e | 44And it continues:In February, job growthin Texaswasan annualized6.9percent.Year todate, construction, tradeand transportation, and professional andbusinessserviceshave ledthepack in what webelievewill be another yearofemployment growththat, knock onwood, willapproach3percent.Here aresomeotherfactsthat helproundout theeconomicpictureof ourstate.Our banksare more profitablethan thosein the rest of thenation In the housing sector, wehave fewerunderwatermortgagesInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 45. P a g e | 45Robust new-homeconstruction International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 46. P a g e | 46And an export sector that hascome out of the recession like gee-whiz.In, fact, you can seefrom this graph that without Texas,thetopblueline,exportsfrom the rest of theUnited States, indicatedby the red line, arehoveringaround thepeak level of 2008:My littlenephew,Charles, wasplaying witha three-dimensional woodenpuzzle map of the United Statesin hispreschool classtheother day.He camehome withthepiece that wasTexasand a smirk on hisface:Mom, he said, guesswhat?If you pull Texasout of thepuzzle of theUnitedStates,the rest of thecountry fallsdown!Although littleCharleslivesin Massachusetts,he getsthepicture.It came asno surprisewhena recent study by the highlyrespectedBrookingsInstitution, asreported in the Wall Street Journal lastweek, revealed that only14of thenations100biggest metropolitanareashavemore peopleemployed than theydid before the 200709recessionandInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 47. P a g e | 47that six of them arein Texas:Austin, SanAntonio, McAllen, Dallas,Houston and El Paso.Robust employment in the oil and gasindustrieshelped the Texascities,the article read, although data from the TexasWorkforceCommission suggeststhe job recovery hascome from a varietyofindustries.Amen to that.El Paso at a CrossroadsYoull notethat El Pasowasmentionedin theBrookingsstudy. Lets talka littleabout this uniquecity.Its nosmall wonderthat of the 23,000studentsenrolledat UTEP, 77percent areMexicanAmericansand another 6percent commute fromCiudad Jurez, acrossthe border.El Pasois at the verynexusof the culturesand economiesof twocountries.As Roberto Coronado, our economist and assistant vice president inchargeat our El PasoBranch, likes topoint out, Given itsuniquegeographicposition, El Pasois very good at importing recessionsbothfrom the north and from the south of theRio Grande.I wouldadd that its alsogood at drawingfrom thebest of both countriesin recoveries.TheEl Pasolabor market hasoutperformed that of theU.S.for severalyears.Here is a graph that showshow the El Pasoemployment picture haschangedrelativeto the U.S.sincethe onset of theGreat Recession:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 48. P a g e | 48Now, as the following chart demonstrates, it remains a fact that the localemployment picture is less bright in El Paso than in Texass other majormetroareas.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 49. P a g e | 49Theunemployment rate here is hoveringaround 9 percent. El Pasosunemployment rate hashistoricallybeen 2 percentagepointshigher thantheU.S. rate and 3.2percentagepointsabove the Texasrate.In part, this isdue topopulation growth. El Pasohad more than 21millionborder crossingsin 2011alone.Most of thesevisitorscametoshop, but manystayed and looked for jobs.Thesevisitorsincreasethe number of job seekersin theunemploymentequation, drivingthe rate upward.Of additional concern is that El Pasoismore dependent on federalgovernment employment thananyotherTexascity, with5percent ofyourworkforcecoming from the public sector.And that isbeforeaccounting for the payroll of Fort Blissitself and theimpact it hason private-sectoremployment and consumption.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 50. P a g e | 50Clearly, El Pasoisquitevulnerabletoconstrictionin thegrowthoffederalspending. This will ultimatelypresent seriouschallengesasthe federalgovernment strugglesto right its fiscalimbalances.The Good NewsBut there isgood newsthat offsetsthat risk:ThankstotheNorthAmerican Free TradeAgreement, or NAFTAanagreement that, asDianamentioned, I played a rolein implementingasdeputyU.S. trade representativeEl Pasois nolonger at theedgeof theUnitedStatesbut, instead, at a strategic locationin thevast NorthAmerican market.In this context, the maquiladorasof Ciudad Jurez become an importantfactordeterminingEl Pasoseconomicfate.Therelationshipexistsvia a ricochet effect that beginswithU.S.industrial activitypickingup, sayin automanufacturing, followedbynewproduction ordersbeingsent toCiudad Jurez maquiladoraplantsandthen economicbenefits flowingback toEl Paso.Theflowback toEl Pasocomesfrom firmson this sideof theborderprovidinglogisticalsupport, insuranceand other servicestothemaquiladorasaswell asin the aforementioned form of maquiladoraemployeesshoppingand consumingmore on thisside of the border.And, asthis tableshows, it resultsin an increaseof high-value-addedsalesof El Paso-basedservicesintoCiudad Jurez, making up forreductionsin manufacturingjobson thissideof theborder:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 51. P a g e | 51Sigue Mxico!As the maquiladoraexampleillustrates,Mexicohasa significant impacton thefate of theEl Pasoeconomy.ThisisfortunatebecausetheMexicaneconomyisbeingtransformedtoagreater degreethan most people here in El Norte understand.On Sunday, theDallasMorningNewskindlyran an op-ed pieceI wrotebased on the workof our DallasFed economists, titled MexicoOutdoestheU.S. on FiscalDiscipline.Thearticle outlinesthe great progressMexicohasmade in transformingitseconomy and thesignificant stepstaken by President EnriquePeaNietoin the footstepsof his predecessors, from President Calderon backtoPresident Salinas.Here are thefacts:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 52. P a g e | 52MexicorecoveredmorequicklyfromtherecessionthantheUnitedStates.Mexicos3.3percent GDP growth in 2012compareswiththeU.S.s1.7percent.Mexico,home to 1980shyperinflation and a poster child of that decadesLatinAmerican debt crisis,hasrecorded a coreconsumer priceindexannual inflation ratebelow 3percent for the last three months. Infact, inflationin Mexicohastrended down for twodecadesfollowingtwoimportant reforms:central bank independencein 1994and adoption ofinflationtargetingin 2001.Meanwhile, the peso, floatingsincelate 1994, held itsownthrough theglobal financial crisis.And year todate, thepesohasgained 6.9percent against the dollar.Low and stableinflation, together witha steadypeso, hasprotected thepurchasingpowerof the Mexicanconsumer and allowed nest eggstogrow.Thosenest eggscan now be safelydepositedin banks.After a horrific banking crisisin 199495 and an ensuing decade ofstagnant lending, Mexicos banking industry is growing again andfinancial access, whilestill limited, is expandingquickly.Thenumber of Mexicanbanksincreased14.3percent in 2012;in theU.S., thenumber of institutionscontracted3.1percent.It maybesurprisingtoyou that Mexicanbanksarealsobettercapitalizedthan U.S.banks.Asof Dec. 31,2012,equity-to-asset ratioswere11.1percent at U.S.banksand 15.9 percent at Mexicanbanks.On the fiscalfront, Mexicos2012budget deficit wasa respectable2.6percent of GDP, whichcompareswith7 percent here.For all their differences, Mexicanlawmakersontheright andthelefthavea commitment tofiscal discipline.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 53. P a g e | 53Theyadopted a balanced-budget rule in 2006 and have chosen to abide byit rather than take the kick the can down the road approach of the U.S.Congress.As a result, Mexicosnational debt is stableat 28percent of GDP, whilehere it raced past $16 trillion in 2012,about 105percent of GDP.Mexicohasalsoremaineda staunch proponent of free trade.Exportsand importsnow make up 62percent of Mexicaneconomicoutput versus17.5 percent asrecentlyas1980.SinceMexico joined the GeneralAgreement on Tariffsand Trade (theforerunner of theWorld TradeOrganization) in 1986and ratifiedNAFTAin 1994, it hasforged 12 tradepactswith44 nations.With all theprogressin themacro economy, banking, financeand trade,structural reformsare what Mexiconow needstocatapult it toaleadershiprole among emerging-market economies.If President Pea Nietosfirst 100days in office areany indication, thiscriticalnext step is underway.He hasengineeredthePactoporMxico(Pact for Mexico)withtheotherpoliticalparties;arrested Elba Esther Gordillo, thecorrupt leaderof themassivenational teachersunion; brought a class-action suit againstCarlosSlims growth-retardingtelecommunicationsempire; and begun anational conversation about reformingthecountryswoefullyunderperforming, yet potentiallyrich energysector.If this effort at structural modernizationcontinues, Mexicosgrowthwillincreasesignificantly.All of this will begood for El Paso. Just asEl Pasosufferswhenrecessionafflictsboth sidesof theborder, it will prosper asexpansion takesholdhere in the U.S.and in Mexico.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 54. P a g e | 54TheGood, the Bad and the ComicalLet me giveyou a pictorial summary of this lecture:We are blessedby a force of nature named DianaNatalicio (aTexasblonde, bythe way!) Courtesyof UTEP UniversityCommunicationsInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 55. P a g e | 55By UTEP asa symbol of El Pasoscritical place at thecrossroadsofNorthAmericaBy having the good fortune to live in TexasInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 56. P a g e | 56And by sharing a border withan increasinglysuccessful neighbor tooursouth.But wealsohave challenges.It wouldbeunbecomingof a central banker tobeentirely optimisticweare a prettysober species.Sohereis thebad news.Hereswhat is holding back the economic progressof ElPaso, Texas,MexicoandAmerica:YupWashington.TheFederal Reservehasprovided plentyof, if not toomuch, high-octanefuel in the form of cheap and abundant money to propel the economyforward.Our southern neighbor, Mexico,is responsiblymanaging itsfiscal affairsand structural reforms(asis our northern neighbor, Canada).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 57. P a g e | 57Texasisshowingthe nation the waytocreate jobsand encourageprosperitywitha highlydiversified economy.And yet Congressandexecutivebranchcannot agreeon abudget, or on apath forward for taxesand spending, or on a regulatorystructurethatincentivizesbusinessto put people back towork.Thisisthesubjectofanentireseparatelecture.But tosummarizetherootfiscalproblem of past Congressesand administrations,Democrat- orRepublican-led, my staff found a clip onYouTubethat sumsit up betterthan words:www.youtube.com/ watch?v=Df_6r_tZqGo.That sketch saysit all.We must all praythat our president and our congressionalrepresentativeswill find a wayto reversetheir spendthrift waysand do what isright byputtingusback on thepath of fiscal probity.El Pasoand Texashavedonewell despitethedisorderly behavior of ournationsfiscalauthorities.Imaginehow wellwewoulddo if theyactuallymanaged toget their acttogether!As weeagerlyawait that day, let usbe thankful for the exceptional natureof this great state, this great city and thiswonderful university.ndale PuesGracias.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 58. P a g e | 58Quantitative and qualitativemonetary easingSpeechby Mr HaruhikoKuroda,Governor of theBank ofJapan, at a meetingheld by theYomiuriInternational Economic Society, TokyoIntroductionIt is a great honor tobe invitedto thismeetinghosted by theYomiuriInternational Economic Society today. This ismy first speech asGovernorof the Bank of Japan.Today, I wouldlike toexplain the Quantitativeand QualitativeMonetaryEasing that wedecided toembark on last week.I. Basic thinkingWhenI wasappointedasthegovernor,I hadthefollowingbasicthinkingin mind.Thefirst isthatweshoulddowhateverisnecessarytoovercomedeflation, whichhasbeen causing a deteriorationin Japanseconomy fornearly15years.TheBank of Japan hasengaged in a widerangeof monetaryeasingefforts includingthe implementation of the zero interest ratepolicy, thequantitativeeasingpolicy, and comprehensivemonetary easing.Despiteitscumulativeefforts, there havebeen noeasily derived concreteresults,and I have felt stronglythat weshould make all-out efforts toutilizeevery possibleresourcebestowedupon the Bank, rather than toadopt an incremental approach or, put differently, toadopt gradualism.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 59. P a g e | 59Thesecond point is the importanceof committingstronglyand clearlythat the Bank is responsiblefor achievingthe pricestability target.At the MonetaryPolicy Meetingheld in January, the Bank on itsownjudgment set theprice stabilitytarget at 2 percent in termsof theyear-on-year rate of changein the consumer price index (CPI) and madea groundbreakingcommitment to achievethat target at theearliestpossibletime.Regardingthe time frame for achieving thetarget, lookingat othereconomies,many central bankshave been making effortstoachievethepricestabilityinthemedium term, withatimehorizonof about twoyearsfor the effectsof monetary policyto permeatethe economy.I have found it appropriate for Japanseconomy aswell to make acommitment witha time horizon of about twoyears.Thethird point isto conveythe Banksstrong policystancetomarketsandeconomicentitieswith clarityand intelligibility, therebydramaticallychangingthe expectationsof market participantsaswell asfirms andhouseholds.During the course of 15 years of deflation, the publics behavior has beenbased on the assumption that priceswould either decline or be unlikely torise.It is necessaryto eliminatedeflationaryexpectationsthrough theBanksstrongcommitment and intelligible explanation.And lastly, weshouldentera new phaseof monetaryeasingboth in termsof quantityand qualityin order to underpin such a commitment.There is a reasontoemphasize the qualitativeaspect of monetary easingalongwith itsquantitativeaspect.While the Bank of Japan and other central banks in advancedeconomieshavealmost exhaustedfurther declinesin short-term interest rates,theyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 60. P a g e | 60now engagein policies to increasethesize of their balancesheetsaspartof unconventional policy measures.There is nowa broad consensuswith regard totheeffectof balancesheetexpansion.That is, thecentral bankspurchasesof government bondsand otherassetsfrom themarketshavetheeffect of encouragingfurther declinesinlong-term interest ratesand loweringrisk premia of asset pricesbyabsorbingrisks such asthe one stemmingfrom interestratefluctuations.Consequently, it becomesimportant todeterminenot only how muchliquidityto supplybut alsohowto supplythat quantity.Even withthe same amount of liquidity, purchasingshort-term T-Billsproducesdifferent effectsthan in the casewherethe Bank purchasesother assetssuch aslong-term JGBsand risk assetslike exchange-tradedfunds(ETFs).Thus, it is important to workon two aspectsof monetary easing, both intermsof quantityand quality.II. Introduction of the Quantitative and Qualitative MonetaryEasingWith thisbasicset of views,I assumed thegovernorshipand attendedtheMonetaryPolicyMeetingonApril 3 and 4.Followingdiscussion withother Policy Board members and taking intoaccount the staff view regardingpracticalities, wecame toa conclusion.Thename of the quantitativeand qualitativemonetary easingthat weintroduced this timespeaksfor itself.This is indeed a new phaseof monetary easingboth in termsof quantityandquality.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 61. P a g e | 61Strong and clear commitmentFirst, the Bank decided asI mentioned earlier toconveya strong andclear commitment.TheBank clearlyannounced in a statement that [it] will achievetheprice stability target of 2 percent in termsof the year-on-year rate ofchangein theconsumer price index (CPI) at the earliestpossibletime,with a time horizonof about twoyears.This is thedecisionof the BanksPolicyBoard namely, it expressesthewill of theBank asan institution.New phase of monetary easing both in termsof quantity andqualityNext, the Bank decidedtoembark on thequantitativeand qualitativemonetary easingasa meansto underpin thiscommitment.Concretely, witha view topursuing quantitativemonetary easing, theBank decidedtochangethemain operatingtarget for money marketoperationsfrom theuncollateralizedovernight call rate (i.e., interestrates) to themonetary base(i.e., quantity) and conduct moneymarketoperationssothat themonetary basewill increaseat an annual pace ofabout 6070trillion yen.Themonetarybaseisthecurrencysuppliedtotheeconomy asawholebytheBank; more specifically, it is the sum of banknotesand coinsincirculation and financial institutionscurrent account deposits at theBankof Japan.As of end-2012,its amount outstandingwas138trillionyen, and it isexpectedto reach about 200trillion yen at end-2013and 270trillion yen atend-2014.It will almostdoublein twoyears.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 62. P a g e | 62This accountsfor nearly60percent of nominal GDP, far abovethe levelsof anyother advanced economies.As a meanstoincreasethe monetary base, the Bank decidedtopurchaseJGBssothat itsholdingof their amount outstandingon theBanksbalancesheet will increaseat an annual pace of about 50trillion yen.Consequently, the Banksholding of JGBswill be increasedfrom 89trillionyen at end-2012to190trillionyen at end-2014.In short, it willmorethan doublein twoyears.ThemonthlyflowofJGBpurchasesisexpectedtobecome7+ trillionyen, becausetheBank needstocompensate for JGBsredeemed.In termsof quality, in increasingthe purchasesof JGBs, thosewithallmaturitiesincluding40-year bondswill be made eligible forpurchase,and the averageremainingmaturityof the Banks JGBpurchaseswill be extendedfrom slightlylessthan three years at presentto about sevenyears equivalent to theaveragematurityof theamountoutstanding of JGBsissued.We intend tostrengthenthe workingof monetary easingon the economyandpricesbyencouraginga further decline not only in shorter-terminterest ratesbut alsoin those acrosstheyield curve.Furthermore, witha view toloweringrisk premia of asset prices, theBank will purchaseETFs and Japan real estateinvestment trusts(J-REITs) sothat their amountsoutstanding on the Banksbalancesheetwill increaseat an annual paceof about 1trillion yen and about 30 billionyen, respectively.Intelligible monetary policyIn the implementationof the quantitativeand qualitativemonetaryeasing, asmentioned earlier, wehavetaken account of theneed topresent our policy stanceintelligibly to marketsaswellasfirms andhouseholds.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 63. P a g e | 63Until last week, theBanks purchasesof JGBshad been conductedaccordingto the followingtwotypesof operations:oneunder theAssetPurchaseProgram introduced in October 2010and the other forfacilitating money market operations,often referred to asRinbanoperations.ThisreflectstheBanksvariouseffortstotacklechallengesin responsetochangesin economiccircumstances.In fact, thesetypes of operations, reflectingtheir objectives,had differedin termsof thepurchasingmethodsused.However,thisframeworkwassomewhat complicatedand entailed aproblem that the Banksseriouseffortstocombat deflation bymonetaryeasingwererather difficult for the market and thepublicto understand.Basedon such recognition, the Bank hasterminatedtheAsset PurchaseProgram and synthesized purchasingmethodsof JGBs.Moreover,it hasdecided to expressthe target of JGBpurchasesasa netincreasein its JGBholdings namely, at an annual pace of about 50trillion yen.We believethat these changeswill facilitateunderstanding of the Banksintentionwithregard to monetary easingin a straightforwardmanner.As I mentioned earlier, theBank decided to adopt the monetary baseasan indicator for quantitativeeasing.This alsoreflectsour judgment that the monetary base the total amountof currencythat the Bank supplies tothe economy asa whole will be themost appropriate indicator for conveying the Banks aggressive stance onmonetary easingto the public.Continuation of monetary easingTheBank will continuewith thequantitativeand qualitativemonetaryeasingthat I have explainedthusfar, aiming toachievethepriceInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 64. P a g e | 64stability target of 2percent, aslong asit isnecessaryfor maintainingthattarget in a stablemanner.Obviously, there will be both upsideand downsiderisksto economicactivityand pricesgoingforward.TheBank will examinethoseriskscarefullyand will not hesitate tomakeadjustmentsasappropriate, should circumstanceswarrant.Onemay ask, whyisthere a connectionbetweenwhat I have justmentioned and a time horizon of about two years?In our view, the latest decisionsincludeall thenecessarymeasurestoachievethe 2 percent target with that time horizon.Nonetheless, it is not appropriatetosaythat the monetary easingwillonlylast for twoyears.Theeconomy entailsuncertainty, and there is alwaysa degreeof latitudein peoplesexpectations;for example, some peoplemay not share theview that theinflation rate will reach 2 percent in twoyears.For everyone includingthosewhoare somewhat skeptical tobeconvinced that sufficient monetary easingwill be implemented, it isappropriateto statethat the Bank will continuewithmonetaryeasing, aimingto achievetheprice stabilitytarget of 2 percent, aslongasit isnecessary.Makingsuch a commitment will, in theend, further ensure theachievement of thetarget in twoyears.I alsowant toelaborate on the meaning of aslongasit is necessary.TheBank doesnot believe2 percent inflation achievedat a certainpointin time isenough; rather, it believes2 percent inflation shouldbemaintainedin a stablemanner.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 65. P a g e | 65Therefore,evenif theinflationratehits2percent at some point, theBankcould continuewiththe quantitativeand qualitativemonetaryeasingif itis judged necessarytodo soin order tomaintainthat rate in a stablemanner.Theoppositecould alsobe true. In short, analyzing thefundamentalmovement of prices, the Bank intendsto continuewith monetary easing,aslong asit isnecessary.III. Effectsof the Quantitative and Qualitative MonetaryEasingTransmission channels of monetary easing effectsI will next explainthe mechanism of achievingthe 2percent target underthequantitativeand qualitativemonetaryeasing.TheBank expectsthat the effectsof monetary easingwill permeatetheeconomy and influencepricesprimarily through three channels.First, thepurchasesof JGBs,ETFs, andJ-REITswill encouragea furtherdeclinein long erterm interest ratesand lowerrisk premia of asset prices.This will raise firmscredit demand through a declinein fundingcosts.Second, asa result of the Banksmassivepurchasesof JGBs,bothinvestorsand financial institutionsinvestingin JGBsareexpected toshiftfrom JGBsto such riskassetsasstocksand foreign-denominatedbondsand/ ortoincreaselendingwithin their portfolios.In economictextbooks,thisisreferredtoasa portfoliorebalancingeffect.Theextension of theaverage remainingmaturityof JGB purchasesreflectsour understandingof such an effect.Third, the commitment toachievetheprice stabilitytarget at theearliestpossibletime and thecontinuation of thenew phaseof monetary easingInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 66. P a g e | 66are thought to drasticallychangetheexpectationsof marketsandeconomicentities.This is what I referred to earlier asthe eliminationof deflationaryexpectations.Arise in the expectedinflationratewill not only influenceactual pricesbut alsostimulate private demand through a decline in real interest rates.Developments in economic activity and pricesLookingat recent developmentsin economicactivityand prices,it seemsthat the conditionsare beingpreparedtodemonstratethe effectsof thequantitativeand qualitativemonetary easingthrough the threetransmissionchannelsthat I just mentioned.Indeed, Japanseconomyhasshownsome bright signs of pickingup.Going forward, we expect the economy to return to a moderate recoverypath against the background of firm domestic demand and a pick-up ingrowth ratesof overseaseconomies.In recent months, conditionsin financial marketshave significantlyturned favorable dueto the abatement of global investorsrisk aversionand expectationsfor domesticpolicies.Theyear-on-year rateof changein the CPI hasrecentlybeen at around 0percent or slightlynegative, but lookingto the future, it is expected toturn positiveand start pickingup, mainly reflectingtheimprovement intheaggregatedemand and supplybalance.Looking at breakeven inflationrates usingthe information content ininflation-indexedbonds and the resultsof economistsand householdssurveys, wehave increasingevidencethat inflationexpectationsarestartingto rise.Behind thisare expectationsfor policiesincludingmonetary policy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 67. P a g e | 67This indicatesthat policiescan moveexpectations.TheBank expectsthat the quantitativeand qualitativemonetary easingwillsupport,inatimelymanner,thepositivemovementsthathavestartedtoappear in economic activityand financial markets,contributetoafurther pick-up in inflationexpectationsthat appear tohave risen, andlead Japanseconomy to overcome deflation that haslasted for nearly15years.IV. Some points of discussion in the monetary policy conductAfter theannouncement of this timesdecision, some wonderif the Bankcan carry out the quantitativeand qualitativemonetary easingwhileotherssaythat it hasgone too far.In addition, weoften receivequestionsabout therelationshipbetweenmonetarypolicy and other policiesconductedby the government.In thefinal part of myremarks, I wishtoanswersome of thesequestions.Execution of the quantitative and qualitative monetary easingThenewlyplannedpurchaseofJGBsat anannualpaceof50trillionyenismassiveand goesbeyond theconventional knowledgeof marketparticipants.In addition, theachievement of the monetary baseof 270trillion yen atend-2014requires that financial institutionscurrent account balancesheld at the Bank reach175trillion yen.Again, this isextremely large.Furthermore, theextensionof the averageremainingmaturity fromslightlylessthan threeyears toabout seven years(i.e., allowingfor arangeof about six to eight years) necessitatesthepurchasesof JGBswithlonger maturity, including20- and 30-year bonds.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 68. P a g e | 68SuchJGBswithsuper-longmature tiesarelikelytobeheldtomaturitybyinstitutional investorsand their market is not soactive.Against this background, somemarket participantswonderif theBank isableto purchasetheseJGBsin practice.Toanswerthis question, wecan do this, in principle, solong asthe Bankpurchasesa widerange of JGBsthrough a competitiveauction.I assure you that wewill achieveour commitment.Having saidso, however,suchpurchasesby the Bank might not proceedsmoothlybecausetheygobeyond the marketsconvention.Tostart with, thesemeasures aremeant toencourage a furtherdeclineininterest rates;thus, effectson the market are inevitabletosome extent.As the Bank wantstofacilitatesuchoperations,it is vital to have thecooperationofmarket participants,suchascounterpartiesactivebiddingin the Banksmarket operations.TheBank hasdecidedto set forumsfor enhanceddialoguewiththosemarket participantsin order toexchangeviewspertainingtomoneymarket operationsand market transactionsin general.In fact, it hasalreadyinitiatedsuch dialoguewithvariousmarketparticipantssincelastweek.Relationship with financing the fiscal deficitOnce the Bank embarks on the large-scale purchase of JGBsunder thequantitative and qualitative monetary easing, some worry that this willresult in financingthefiscal deficit.TheJGBmarket remains stable,but if such purchasesby theBank wereregarded asmonetizing government debt, theJGBmarket might startdestabilizing, raisinglong-term interest ratesin a manner inconsistentwith the real economy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 69. P a g e | 69This might not onlyoffset the monetaryeasingeffectsbut alsohavenegative effectson Japansfinancial system and itseconomy asa whole.Of course,the JGBpurchasesunder thequantitativeand qualitativemonetary easingareexecutedfor thepurposeof conductingmonetarypolicy and not for the purpose of financingfiscal deficits.Moreover,in order toavoid a possiblearousal of doubt regardingtheBanks increasingpurchasesof JGBsasfinancingfiscal deficits,it is vitalfor the government toclearlyshow the future course of fiscalconsolidationand steadily make progressto reform the fiscalstructure.On thispoint, the government in the joint statement releasedwiththeBank in January stated that in strengtheningcoordinationbetweentheGovernment and theBank of Japan, theGovernment will steadilypromotemeasuresaimed at establishinga sustainablefiscal structurewith a view toensuring the credibilityof fiscal management.We stronglyexpect the government to move on that front.BecausetheBank synthesized thepurchasingmethodsof JGBsthistime,it temporarilysuspended theso-calledbanknoteprinciple.This principleindicatesthat thepurchasesof JGBsconductedforfacilitating moneymarket operationsare subjecttothelimitation that theoutstandingamount of long-term government bondseffectivelyheld bytheBank be kept below the outstanding balance of banknotesissued.In reality, however, after the introduction of theAsset PurchaseProgramin 2010,thetotal amount outstandingof JGBsheld by the Bank hasalready exceeded theoutstandingbalanceof banknotes.Basedon this recognition, the Bank hasdecided to temporarilysuspendthebanknoteprincipleasit pursuesthequantitativeand qualitativemonetary easing.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 70. P a g e | 70In anycase,letmereiteratethat theBank willnot financethefiscaldeficitduring or after theperiod of thequantitativeand qualitativemonetaryeasing, and thislineof thinking will not change.Effect on exchange rateWe also hear comments about the relationship between monetary policyand exchange rates against the background of the recent depreciation oftheyen.On thispoint, wehave no intention toconduct monetary policytargetingtheexchangerate.Theobjectiveof theBanks monetarypolicy is, obviously, topursuethestability of domesticprices.It is true that, when a central bank takesaccommodativeactions,there isa tendencyfor itscountryscurrencytodepreciate.This, however, is merely a general observation, ceteris paribus.For instance, if thegrowthpotential of theeconomy risesasa result ofmonetary accommodationaswell asappropriatefiscal policyand thegrowth strategy, its currencycould appreciaterather than depreciate.In any event, the Banksmonetary policyis focused on achievingthedomesticobjectivetoleadJapanseconomytowardovercomingdeflation.Achieving this goal will eventuallyprovide the global economy withfavorableeffects.I believe that the international community sharesa commonunderstandingonthesepoints.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 71. P a g e | 71Three-pronged strategy (three arrows)At present, the government is determined to addresschallengesthatJapanseconomy faces,includingtheovercoming of deflation, throughthecombination of three policy arrows namely, bold monetary easing,flexiblefiscal policy, and a growth strategythat promotes privateinvestment.I think it is indeed an appropriate policy package.Achieving theprice stability target of 2percent at theearliest possibletime,throughthefirstarrow(i.e., monetaryeasing) istheroleof theBankof Japan.As I have explainedto you today, the Bank will achievethis target underitsown responsibility.In addition, paralleltomonetary easing, if the government createsrealdemand and wagesand employment improve through the expansion ofconsumptionand investment, thisis expectedtocontributetogeneratinga virtuouscycle that eventuallywill lead toa gradual pick-up in inflation.It is in thissensethat the implementationof the other twoarrows namely, flexiblefiscalpolicy for the time being and a growthstrategy will lead to raisingthe growthoutlook, therebycontributingto theachievement of theprice stability target more smoothly.We havehigh expectationsthat thegovernment will make steadyprogresson thesefronts.Concluding remarksFor eight years beforeassuming the position of Governor of the Bank ofJapan, I lookedat Japan from overseasasPresident of theAsianDevelopment Bank.No other country hassuffered from deflationfor nearly15 years.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 72. P a g e | 72Given that Japanesefinancial institutions, firms, and individualsplayactiverolesin eachAsian economy, I have often found it hard to acceptthecontrasting imageat home and abroad.Theworldiseagerlywaitingfor Japan to overcome deflationand forJapanseconomy torecover itseconomicstrength.I believe steadyeffortstowardachievingthesegoalswill alsolead Japantowardregainingitsinfluenceon the global society.Thank you.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 73. P a g e | 73RichardM. Ashton, DeputyGeneralCounselIndependent ConsultantsBefore the Subcommitteeon Financial Institutionsand ConsumerProtection, Committeeon Banking, Housing, and UrbanAffairs, U.S.Senate, Washington, D.C.ChairmanBrown, RankingMember Toomey, and membersof thesubcommittee,thank you for the opportunity totestify regarding therequireduseof third-party consultingfirms(consultants) in FederalReserveenforcement actions.Use of Consultantsby Regulated Banking OrganizationsAt the outset, it might be helpful topoint out that regulated bankingorganizationsroutinely choosetoretain consultantsfor a variety ofpurposesapart from anysupervisorydirectiveby regulatorstodo so.Bankingorganizationsdecidetoretain consultantsbecausethesefirmscan providespecializedexpertise,familiarity withindustry best practices,a more objectiveperspective, and staffingresourcesthat theregulatedorganizationsdonot have internally.In this respect, reliance on consultantscan significantlycontribute totheoverall efficient governance and management of these organizationsaswell asto their safeand sound operation and their compliance withsupervisoryexpectationsand legal requirements.Use of Consultantsin Federal Reserve Enforcement ActionsIn the vast majorityof Federal Reserve enforcement actions,theorganizationitself, usingitsown personnel and resources, isdirected totake thenecessarycorrectiveand remedial action.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 74. P a g e | 74In appropriatecircumstances,the Federal Reserve hasfound that it canbeaneffectiveenforcement tool torequire regulated organizationstoretaina consultant toperform specific taskson behalf of thatorganization.However,the mandatory useof a consultant hastypicallynot been afrequent requirement in Federal Reserveenforcement actions.And, importantly, consultantsare used to conduct workthat ordinarilytheorganizationitself wouldbe required to conduct.At all times,theFederalReserveretainsauthorityto,anddoes,reviewandsupervisethe consultants work in thesame manner asif theinstitutionconducted the work directly.In all cases, theregulatedorganization isitself ultimatelyresponsible foritsown safeand sound operationsand compliancewith legalrequirements.As a general rule, our enforcement actions require the use of consultantsto perform specific functionsthat the organization involved should do buthasshown that it cannot perform itself.This may be becausea particular organizationlacksthenecessaryspecialized knowledgeor experience.Similarly, the organizationmay not havesufficient staffing resourcesinternally.In addition, it may be necessaryto havea third partyundertake aparticular project becausea more objectiveviewpoint isrequired thanwouldbe provided by theorganizationsmanagement.Over the last 10 years, for instance, there were consultant requirementsinan average of less than 15 percent of all formal enforcement actionstakenbythe agency.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 75. P a g e | 75In additiontoformal enforcement actions,Federal Reserve examinersmay informallydirect organizationstoretain consultantsto undertakedesignatedengagementson behalf of the organizationwherecircumstanceswarrant.In our enforcement actions,werequired theuseof consultingfirms toperform several limited, specializedtypesof work.In many of theseenforcement actions,an expert third party must beretainedto review and submit a report on a specific area of theorganizations operations.Thesemandatedreviewsbyconsultantshaveofteninvolvedanevaluationof an organizationscomplianceprogram, its accounting practices,or itsstaffing needsand the qualificationsand performanceof seniormanagement.These enforcement directives usually require the organization toincorporate the findings of the report into a plan to improve thatparticular area of operations.Federal Reserve regulatorsmay alsousetheproduct of a consultantsworkasa guide in developingtheongoing supervisionof theorganization.Another type of enforcement actionwhereuseof consultantshasbeenrequiredinvolvessituationswhereexaminershave found seriouspastdeficienciesin anorganizations systemsfor monitoring compliancewithBank SecrecyAct and anti-moneylaundering (BSA/ AML) requirements.In thesecases, our actionshave required a consultant retained by theorganizationto review certain kindsof transactionsthat occurredat theorganizationover a specificpast period of time and determinewhetherBSA/ AML reportswerefiled asrequired with regard to thosetransactions.Thesereviewsrequire the consultant to identify situationswhereasuspiciousactivityreport or a currencytransaction report should haveInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 76. P a g e | 76been filed, rather than to perform an assessment of the organizationscomplianceprogram.After receivingthe resultsof theconsultantsreview, the organizationwouldthen file all the required reportswiththeappropriategovernmentagencies.Finally, in severalrecent enforcement actionsthat requiredorganizationstoidentify and then compensateor otherwiseremediateinjuredconsumers, the organizationshavebeen requiredtoretain consultantstoadministerthat process.In theseactions,theconsultantswererequired tomake recommendationsabout theappropriateremediationtoindividual consumersor tomakeremediationdecisionsabout individual consumersor review theorganizations remediationdecisions.Federal Reserve Oversight of Consultant PerformanceWhen enforcement actionsrequire a regulated banking organizationtousea consultant tocarry out a particular function, the Federal Reserveoverseestheorganizations implementationof thisdirective.Our standard practiceis torequire theorganizations retention of aconsultingfirm tobe first approved by theFederal Reserve.Wetypicallylookat theparticularexpertiseandexperienceoftheselectedconsultant.Theresourcesand capacityof the firm tocarry out the particularengagement are alsoexamined.Whether theconsultant hasthe appropriate objectivityand separationfrom management isalsoa keyfactorinassessingtheacceptabilityof thefirm.Toassessobjectivity, weexaminethe extent and type of workthat theconsultant hasdone for the organizationin thepast.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 77. P a g e | 77Oneguidingprincipleis that a consultingfirm should not beallowedtoreview or evaluate work that it haspreviouslydone for the organization.How thesefactorsare evaluated is necessarilydetermined on acase-by-casebasis,depending on thespecific type of task theconsultantis beingrequired to perform.However, the approval of particular consultants is not perfunctory; wherewarranted we have disapproved a consultant that has been selected by anorganizationunder an enforcement order requirement.Additionally, our general practice is toexplicitlyrequire that theletterbetweentheorganizationand theconsultingfirm orother documentationthat describesthescope, terms, and conditionsof the particularengagement be approved by the Federal Reserve.Thus, we are able to assesswhether the consultantsplanned work will beconsistent with w