the “areas of regulatory focus”, · Active Insurance Groups - Executive Summary The Common...

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____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)

Monday, June 17, 2019 Top 10 risk and compliance related news stories and world events that (for

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

Dear members and friends, I have just read the 2018 Annual Report of the European Banking Authority (EBA). This is an interesting document, where we can learn not only the “areas of regulatory focus”, but also the “technology-enabled innovations”, and the new rules for securitization.

For 2019, the EBA (in line with the applicable legal deadlines) will prioritise those technical standards and guidelines that facilitate the use of internal models for banks investing in securitisation positions.

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The EBA intends to deliver: (i) draft technical standards on the calculation of capital requirements arising from securitised exposures using the purchase receivables approach and (ii) guidelines to determine the weighted-average maturity of a tranche. In addition, the EBA will assess the feasibility of an STS securitisation framework for balance sheet synthetic securitisations and will issue an opinion on the prudential treatment of NPL securitisations under the new securitisation framework. The EBA’s work will contribute to the key objective of the new securitisation rules, namely reviving a sound and safe EU securitisation market, which will lead to more investment opportunities and increased lending to households and businesses and will help to ensure financial stability and investor protection.

In 2019, the EBA will continue its work relating to crypto-assets, taking forward the actions identified in its report on crypto-assets. In particular, the EBA will work to support competent authorities in monitoring the cryptoasset activities of banks, investment firms, payment institutions and electronic money institutions through the development of a common template. The EBA will carry out an assessment of these institutions’ consumer facing advertising and disclosure practices regarding crypto-asset products and services. In addition, the EBA will continue to contribute to BCBS work with regard to the prudential treatment of banks’ holdings of/exposures to crypto-assets and will report to the European Commission on the conclusions of this work.

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Read more at Number 2 below. Welcome to the Top 10 list. Best regards,

George Lekatis President of the IARCP 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

mailto:[email protected]

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

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Number 1 (Page 8)

Common Framework for the Supervision of Internationally Active Insurance Groups - Executive Summary

The Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) is a set of international standards published by the International Association of Insurance Supervisors (IAIS). ComFrame is effectively an insurance-specific response to regulatory and supervisory gaps identified from the Great Financial Crisis (GFC) of 2007-09.

Number 2 (Page 9)

EBA publishes its 2018 Annual Report

The European Banking Authority (EBA) published its 2018 Annual Report, which provides a detailed account of all the work the Authority achieved in the past year and anticipates the key areas of focus in the coming year.

Number 3 (Page 11)

Trends in international law for cyberspace

This paper is a collaborative view of the NATO CCDCOE Law Branch experts, demarcating the latest trends in international law and envisioning their evolution over the next few years. It is an independent product of the CCDCOE and does not represent the official policy or position of NATO or any of its Sponsoring Nations.

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Number 4 (Page 13)

Our ongoing work to tackle hate

Over the past few years, we’ve been investing in the policies, resources and products needed to live up to our responsibility and protect the YouTube community from harmful content. This work has focused on four pillars: removing violative content, raising up authoritative content, reducing the spread of borderline content and rewarding trusted creators.

Number 5 (Page 16)

Effective Risk Management (Module II) - Implementing Effective Stress Testing and Financial Safety Nets for Islamic Banks: Governance and Regulatory Compliance

After the success of its first Executive Programme in 2018, the Islamic Financial Services Board (IFSB) is organising its second Executive Programme (EP) which will be held on 17 and 18 July 2019 at Sasana Kijang, Kuala Lumpur, Malaysia.

Number 6 (Page 18)

FSB Key Attributes - Executive Summary

The Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board (FSB) are a core element of the policy measures adopted by the G20 in the wake of the Great Financial Crisis to address the problem of financial institutions (FIs) that are “too big to fail.” Those measures represent a two-pronged strategy to reduce both the probability and the impact of failure of systemically important FIs (SIFIs).

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Number 7 (Page 19)

PATCH REMOTE DESKTOP SERVICES ON LEGACY VERSIONS OF WINDOWS

The National Security Agency is urging Microsoft Windows administrators and users to ensure they are using a patched and updated system in the face of growing threats.

Number 8 (Page 21)

Monetary Policy and Financial Stability Vice Chair for Supervision Randal K. Quarles, at "Developments in Empirical Macroeconomics," a research conference sponsored by the Federal Reserve Board and the Federal Reserve Bank of New York, Washington, D.C.

“I would like to use my time here to talk about a topic of interest to many central bankers and macroeconomists: the interaction of monetary policy and financial stability.”

Number 9 (Page 27)

Federal Reserve Board announces schedule for results from Dodd-Frank Act stress tests and Comprehensive Capital Analysis and Review (CCAR)

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Results from the latest supervisory stress tests conducted as part of the Dodd-Frank Act will be released on Friday, June 21, and the results from the related Comprehensive Capital Analysis and Review (CCAR) will be released on Thursday, June 27, the Federal Reserve Board announced on Friday.

Number 10 (Page 29)

NIST Infrared Frequency Comb Measures Biological Signatures

Researchers at the National Institute of Standards and Technology (NIST) and collaborators have demonstrated a compact frequency-comb apparatus that rapidly measures the entire infrared band of light to detect biological, chemical and physical properties of matter. Infrared light travels in waves longer than visible light and is most familiar as the radiation associated with heat.

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Number 1

Common Framework for the Supervision of Internationally Active Insurance Groups - Executive Summary

The Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) is a set of international standards published by the International Association of Insurance Supervisors (IAIS). ComFrame is effectively an insurance-specific response to regulatory and supervisory gaps identified from the Great Financial Crisis (GFC) of 2007-09. The GFC revealed issues specific to the supervision of internationally active insurance groups (IAIGs), which are the largest, most complex insurers and thus require tailored and more coordinated supervision across jurisdictions. In particular, the GFC brought to light complexities in supervising cross-border insurance groups and regulatory arbitrage opportunities arising from differing requirements in different jurisdictions. To read more: https://www.bis.org/fsi/fsisummaries/cf_sup_iais.pdf

https://www.bis.org/fsi/fsisummaries/cf_sup_iais.pdf

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Number 2

EBA publishes its 2018 Annual Report

The European Banking Authority (EBA) published its 2018 Annual Report, which provides a detailed account of all the work the Authority achieved in the past year and anticipates the key areas of focus in the coming year. In 2018, one of the EBA's priorities was to play a central role in the regulation and policy framework, with the development and maintenance of the Single Rulebook. In particular, the EBA increased its monitoring role on key parts of the prudential framework such as capital, liquidity, securitisation or models with the aim of strengthening supervisory convergence and the integrity of the single rulebook. Another important part of the EBA's work focused on payments, namely on the delivery of technical standards and guidelines under PSD2 as well as on supervisory converge to ensure that the PSD2 requirements are applied in a sound, efficient and consistent manner across the EU.

In 2018, the EBA continued to work with EU authorities and institutions to fulfil the objectives of the Council action plan to tackle NPLs in Europe. To this end, the EBA published its revised NPL transaction templates as well as the guidelines on disclosure of non-performing and forborne exposures.

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Throughout 2018, the EBA made great efforts to ensure good preparedness at all levels for the consequences of the UK's withdrawal, taking into account all possible outcomes, including the worst-case scenario. Enhancing the transparency of the European banking sector through the disclosure of individual data on EU and EEA banks remained one of the key objectives of the EBA in 2018, which was achieved mainly through the publication of the annual EU-wide transparency exercise as well as the 2018 EU-wide stress test. While the EBA has been working on financial innovation since its inception, its FinTech roadmap, published in March 2018, put in place a number of priorities for the next few years and launched the EBA FinTech Knowledge Hub. In 2018, The EBA, together with European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) worked on developing a framework aimed at improving the effectiveness of anti-money laundering and countering the financing of terrorism (AML/CFT) supervision across the EU and strengthening cooperation and information exchange between national supervisory authorities, both domestically and across borders. In particular, two technical standards and three guidelines came into force, which represent an important first step on the road towards a more consistent and effective European AML/CFT regime. The Commission's Call for Advice on the impact and implementation of the revised Basel III framework aiming to finalise the post-crisis reforms and improving the balance between simplicity, comparability and risk sensitivity of capital requirements is another important task the EBA started to work on in 2018. The report: https://eba.europa.eu/documents/10180/2590106/2018+EBA+Annual+report.pdf

https://eba.europa.eu/documents/10180/2590106/2018+EBA+Annual+report.pdf

https://eba.europa.eu/documents/10180/2590106/2018+EBA+Annual+report.pdf

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Number 3

Trends in international law for cyberspace

This paper is a collaborative view of the NATO CCDCOE Law Branch experts, demarcating the latest trends in international law and envisioning their evolution over the next few years. It is an independent product of the CCDCOE and does not represent the official policy or position of NATO or any of its Sponsoring Nations. We do not assert this to be a complete catalogue of trends, neither is the list presented in any particular order. Also, while we have made every effort to describe globally relevant legal developments, we acknowledge that the list stems from a Euro-Atlantic geopolitical perspective, and that the division between political developments and trends in law is not always clear-cut.

1. Maturing consensus that international law applies in cyberspace, but continued debate on how it applies a. It is now generally held that international law applies to cyberspace: this has been confirmed inter alia by UN GGE 2013 and 2015 consensus reports; in statements of regional organisations (NATO, EU, OAS SCO, etc.); by (joint) statements of States; and by States in the Tallinn Manual 2.0 (TM 2.0) State consultation process. However, such a conclusion does not warrant overconfidence, as States like Russia and China have been walking back their commitment even to the broad notion of the applicability of existing international law in cyberspace. b. The legal debate has shifted to how international law applies in cyberspace. This process is neither predetermined nor singular; it evolves through State practice and political statements (individually and collectively via international organisations and fora), and by scholarly legal discussion. Furthermore, it involves a number of different issues of varied specificity.

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c. Acceptance of particular legal rules to cyberspace varies. Certain rules are generally accepted, such as prohibition of intervention (Rules 66–67 of TM 2.0) and the right to self-defence (Rules 71–75 of TM 2.0). Others, in particular the exercise of (territorial) sovereignty (Rules 1–5 of TM 2.0) and due diligence (Rules 6–7 of TM 2.0) in cyberspace, have received mixed reactions on their scope and content, even from countries which do not question the relevance of existing international law to cyberspace. d. States are likewise divided on whether existing treaty and customary law is adequate (as maintained by the West) or whether new treaty instruments are needed; the SCO States are the most prominent proponents of the latter. e. The conceptual difference in approaches ‘cybersecurity vs. information security’ also persists, as does the practice of applying national sovereignty over ‘information space’ (China and Russia as prime examples). The paper:

https://ccdcoe.org/uploads/2019/05/Trends-Intlaw_a4_final.pdf

https://ccdcoe.org/uploads/2019/05/Trends-Intlaw_a4_final.pdf

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Number 4

Our ongoing work to tackle hate

Over the past few years, we’ve been investing in the policies, resources and products needed to live up to our responsibility and protect the YouTube community from harmful content. This work has focused on four pillars: removing violative content, raising up authoritative content, reducing the spread of borderline content and rewarding trusted creators. Thanks to these investments, videos that violate our policies are removed faster than ever and users are seeing less borderline content and harmful misinformation. As we do this, we’re partnering closely with lawmakers and civil society around the globe to limit the spread of violent extremist content online. We review our policies on an ongoing basis to make sure we are drawing the line in the right place: In 2018 alone, we made more than 30 policy updates. One of the most complex and constantly evolving areas we deal with is hate speech. We’ve been taking a close look at our approach towards hateful content in consultation with dozens of experts in subjects like violent extremism, supremacism, civil rights, and free speech. Based on those learnings, we are making several updates:

Removing more hateful and supremacist content from YouTube YouTube has always had rules of the road, including a longstanding policy against hate speech. In 2017, we introduced a tougher stance towards videos with supremacist content, including limiting recommendations and features like comments and the ability to share the video. This step dramatically reduced views to these videos (on average 80%). Today, we're taking another step in our hate speech policy by specifically prohibiting videos alleging that a group is superior in order to justify

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discrimination, segregation or exclusion based on qualities like age, gender, race, caste, religion, sexual orientation or veteran status. This would include, for example, videos that promote or glorify Nazi ideology, which is inherently discriminatory. Finally, we will remove content denying that well-documented violent events, like the Holocaust or the shooting at Sandy Hook Elementary, took place. We recognize some of this content has value to researchers and NGOs looking to understand hate in order to combat it, and we are exploring options to make it available to them in the future. And as always, context matters, so some videos could remain up because they discuss topics like pending legislation, aim to condemn or expose hate, or provide analysis of current events. We will begin enforcing this updated policy today; however, it will take time for our systems to fully ramp up and we’ll be gradually expanding coverage over the next several months.

Reducing borderline content and raising up authoritative voices In addition to removing videos that violate our policies, we also want to reduce the spread of content that comes right up to the line. In January, we piloted an update of our systems in the U.S. to limit recommendations of borderline content and harmful misinformation, such as videos promoting a phony miracle cure for a serious illness, or claiming the earth is flat. We’re looking to bring this updated system to more countries by the end of 2019. Thanks to this change, the number of views this type of content gets from recommendations has dropped by over 50% in the U.S. Our systems are also getting smarter about what types of videos should get this treatment, and we’ll be able to apply it to even more borderline videos moving forward. As we do this, we’ll also start raising up more authoritative content in recommendations, building on the changes we made to news last year. For example, if a user is watching a video that comes close to violating our policies, our systems may include more videos from authoritative sources (like top news channels) in the "watch next" panel.

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Continuing to reward trusted creators and enforce our monetization policies Finally, it’s critical that our monetization systems reward trusted creators who add value to YouTube. We have longstanding advertiser-friendly guidelines that prohibit ads from running on videos that include hateful content and we enforce these rigorously. And in order to protect our ecosystem of creators, advertisers and viewers, we tightened our advertising criteria in 2017. In the case of hate speech, we are strengthening enforcement of our existing YouTube Partner Program policies. Channels that repeatedly brush up against our hate speech policies will be suspended from the YouTube Partner program, meaning they can’t run ads on their channel or use other monetization features like Super Chat. The openness of YouTube’s platform has helped creativity and access to information thrive. It’s our responsibility to protect that, and prevent our platform from being used to incite hatred, harassment, discrimination and violence. We are committed to taking the steps needed to live up to this responsibility today, tomorrow and in the years to come.

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Number 5

Effective Risk Management (Module II) - Implementing Effective Stress Testing and Financial Safety Nets for Islamic Banks: Governance and Regulatory Compliance

After the success of its first Executive Programme in 2018, the Islamic Financial Services Board (IFSB) is organising its second Executive Programme (EP) which will be held on 17 and 18 July 2019 at Sasana Kijang, Kuala Lumpur, Malaysia. This year, the EP is themed, “Implementing Effective Stress Testing and Financial Safety Nets for Islamic Banks: Governance and Regulatory Compliance", which is the second module of the IFSB’s Effective Risk Management series targeted at the Board of Directors and senior management of institutions offering Islamic financial services (IIFS). The EP intends to provide a platform for industry leaders and top management as well as regulatory and supervisory authorities to engage in high-level discussions and exchange industry experiences, on the subject of emerging risks and effective tools, strategies and best practices to manage emerging risks and issues faced by IIFS, and in particular, the implementation and oversight of effective stress testing programmes and appropriate financial safety nets for IIFS. The EP aims to facilitate a better understanding of the issues confronting the Islamic financial services industry (IFSI), and thus contribute towards advancing the development of the industry. Effective risk management, stress testing and financial safety nets are particularly important focus-areas given the more challenging global financial environment amid the heightened geopolitical uncertainties and increased potential for financial vulnerabilities as well as the ongoing changes in the dynamics of the financial services industry. The key takeaways from the EP will include providing insight on implementing effective tools and global standards to strengthen the resilience and stability of the IFSI and to address or mitigate a potential financial crisis. The two-day Executive Programme will discuss:

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- IIFS and Emerging Risks in a Changing Financial Environment - Managing the Emerging Risks for IIFS - Moderated Session: Governance of effective Stress Testing in IIFS - Digital Transformation of Risk Management in IIFS: Experience

Sharing - Effective Financial Safety Nets for IIFS: Role of SLOLR and SCDIS in an

Era of Uncertainty - Panel Discussion: Way Forward - Regulatory Priorities in Addressing

Evolving Risks in the IFSI and Financial Stability At the end of the two-day programme, participants will be updated on the emerging risks and issues for the IIFS in the current global environment, the latest approaches to risk management as well as on issues and best practices in stress testing of Islamic banks for effective risk management governance and compliance with global regulatory standards, as well as insight on overcoming the challenges in developing appropriate financial safety nets for Islamic banks and the various developments in this respect through shared industry experiences. Board of Directors, Senior and middle management from regulatory and supervisory authorities and market players from the IFSB members and non-members jurisdictions are encouraged to participate in this second module of the Executive Programme.

Interested participants are invited to register at www.ifsb.org You may contact Mrs. Ida Shafinaz Ab. Malek ([email protected]) for further information.

http://www.ifsb.org/

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Number 6

FSB Key Attributes - Executive Summary

The Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board (FSB) are a core element of the policy measures adopted by the G20 in the wake of the Great Financial Crisis to address the problem of financial institutions (FIs) that are “too big to fail.” Those measures represent a two-pronged strategy to reduce both the probability and the impact of failure of systemically important FIs (SIFIs). Measures to reduce the probability of failure include requirements for additional loss absorption capacity for global SIFIs (G-SIFIs) and more intensive and effective supervision of FIs. The Key Attributes set out the essential features that resolution regimes should incorporate to enable authorities to resolve failing FIs in an orderly manner that limits the overall impact on economic activity, without exposing public funds to loss.

Scope of the Key Attributes The Key Attributes are the international standard for resolution regimes for any type of FI. The standard consists of 12 “key attributes” (KAs). Two KAs, relating to cross-border Crisis Management Groups (CMGs), apply only in relation to G-SIFIs. The other KAs apply to resolution regimes for all FIs that could be systemic in the event of failure. However, some KAs require adaptation and sector-specific interpretation. The ”umbrella” standard is therefore supplemented with Annexes providing implementation guidance for insurers, financial market infrastructure and firms that hold client assets. The FSB has also developed guidance on resolution strategies and planning for different types of FI. To read more:

https://www.bis.org/fsi/fsisummaries/fsb_key_attributes.pdf

https://www.bis.org/fsi/fsisummaries/fsb_key_attributes.pdf

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Number 7

PATCH REMOTE DESKTOP SERVICES ON LEGACY VERSIONS OF WINDOWS

The National Security Agency is urging Microsoft Windows administrators and users to ensure they are using a patched and updated system in the face of growing threats. Recent warnings by Microsoft stressed the importance of installing patches to address a vulnerability in older versions of Windows. (https://blogs.technet.microsoft.com/msrc/2019/05/30/a-reminder-to-update-your-systems-to-prevent-a-worm). Microsoft has warned that this flaw is potentially “wormable,” meaning it could spread without user interaction across the internet. We have seen devastating computer worms inflict damage on unpatched systems with wide-ranging impact, and are seeking to motivate increased protections against this flaw. CVE-2019-0708, dubbed “BlueKeep,” is a vulnerability in Remote Desktop Services (RDS) on legacy versions of the Windows® operating system. The following versions of Windows are affected: - Windows® XP - Windows Server® 2003 - Windows® Vista - Windows Server® 2008 - Windows® 7 - Windows Server® 2008 R2 Although Microsoft has issued a patch, potentially millions of machines are still vulnerable. This is the type of vulnerability that malicious cyber actors frequently exploit through the use of software code that specifically targets the vulnerability. For example, the vulnerability could be exploited to conduct denial of service attacks. It is likely only a matter of time before remote exploitation

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tools are widely available for this vulnerability. NSA is concerned that malicious cyber actors will use the vulnerability in ransomware and exploit kits containing other known exploits, increasing capabilities against other unpatched systems. To read more: https://www.nsa.gov/Portals/70/documents/what-we-do/cybersecurity/professional-resources/csa-bluekeep_20190604.pdf?ver=2019-06-04-123329-617

https://www.nsa.gov/Portals/70/documents/what-we-do/cybersecurity/professional-resources/csa-bluekeep_20190604.pdf?ver=2019-06-04-123329-617



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Number 8

Monetary Policy and Financial Stability Vice Chair for Supervision Randal K. Quarles, at "Developments in Empirical Macroeconomics," a research conference sponsored by the Federal Reserve Board and the Federal Reserve Bank of New York, Washington, D.C.

Thank you for the opportunity to take part in today's "Developments in Empirical Macroeconomics" conference. I would like to use my time here to talk about a topic of interest to many central bankers and macroeconomists: the interaction of monetary policy and financial stability. As you well know, monetary policy has powerful effects on financial markets, the financial system, and the broader economy. Conversely, financial instability, by impairing the provision of credit and other financial services, can depress economic growth, cause job losses, and push inflation too low. Accordingly, financial stability, through its effects on the Federal Reserve's dual-mandate goals of maximum employment and stable prices, must be a consideration in the setting of monetary policy. Against this backdrop, a natural—yet quite complex—question is whether monetary policy should be used to promote financial stability. This question is hotly debated in a large and growing academic literature, and any serious answer has to be subject to considerable nuance. At the same time, my sense is that the balance is clearly tilted toward the conclusion that macroprudential policies—through-the-cycle resilience, stress tests, and the countercyclical capital buffer (CCyB)—may be better targeted to promoting financial stability than monetary policy. Before I wade into the lessons from past research and experience, I would like to highlight that this question is not just academic. As you know, the economy, monetary policy, and financial stability are intertwined.

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For example, the past three recessions were preceded by some combination of elevated asset prices, rapid increases in borrowing by businesses and households, and excessive risk-taking in the financial sector. These financial vulnerabilities have amplified adverse shocks to the overall economy time and again. Such concerns have resurfaced among some observers, as the current long expansion has brought business borrowing to new heights. My own assessment is that even though business debt is elevated, at least by some measures, overall financial stability risks are not, as the financial sector has substantial loss-absorbing capacity and is not overly reliant on unstable short-term funding. Yet, even if the risk of financial system disruption does not seem high, it well remain true that if the economy weakens, some businesses may default on this debt, potentially leading to a contraction in investment, a slow-down in hiring, and possibly to an unusual tightening in financial conditions. These concerns highlight how cyclical factors influencing monetary policy borrowers may overlap with financial stability considerations.

How Monetary Policy Can Influence Financial Stability Let me begin by laying out how monetary policy can influence financial stability. Monetary policy, operating primarily through adjustments in the level of short-term interest rates, has powerful effects on the entire financial system. A more accommodative monetary policy lowers interest rates across the maturity spectrum. The textbook result is that mortgage rates and corporate borrowing rates, among others, decline; equity prices rise; and the dollar exchange rate depreciates. In other words, financial conditions broadly ease, spurring households to buy more and businesses to invest and hire, thereby supporting economic growth and price stability. Monetary policy, however, if too accommodative, may lead to a buildup of financial vulnerabilities. These incentives arrive through a number of channels. For instance, low interest rates reduce the cost of borrowing, and so may prompt businesses and households to overborrow.

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Low rates may lead to a speculative bubble by compressing risk premiums for assets—such as equity, corporate bonds, and housing—and potentially leading investors to extrapolate price gains into the future in a bout of irrational exuberance. Low rates may also squeeze the profitability of financial intermediaries through narrow interest margins and other factors. In turn, these intermediaries as well as investors that had promised fixed nominal rates of return—such as insurance companies and pension funds—may "reach for yield," or take on more credit or duration risk in their portfolios in order to maintain high returns. Taken to extremes, this story often does not end well. Periods of excessive leverage, rapid credit growth, or buoyant credit market sentiment increase the risk to economic growth. These dynamics point to the possibility that accommodative monetary policy, while necessary to support activity during the early stages of an economic expansion, may also increase vulnerabilities in the financial system, especially if maintained for too long. These vulnerabilities weaken the financial system's ability to absorb negative shocks, and so when a shock arrives, losses mount, the financial system weakens, lending slows, and economic activity slows by more than it would have otherwise, potentially leading to an economic downturn or a more severe recession.

Should Financial Vulnerabilities Affect the Stance of Monetary Policy? These observations lead to the important question of whether and how financial vulnerabilities should affect the setting of monetary policy. One simple framework for evaluating the tradeoffs associated with actively setting monetary policy to lean against the buildup of financial vulnerabilities is to examine the costs and benefits of such a policy in terms of unemployment and inflation. In this approach, the costs of tightening monetary policy in response to a buildup of financial vulnerabilities are lower employment and potentially below target inflation in the near term. The benefits are possibly reducing the risk of a future financial crisis, an event likely associated with a much larger fall in employment and inflation.

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One view is that monetary policy curbs household and business borrowing only modestly but can boost the unemployment rate notably. And so using monetary policy to damp borrowing does more harm than good. According to this view, using monetary policy to lean against financial vulnerabilities does not generate significant net benefits and may be counterproductive—increasing unemployment and decreasing inflation below a desired level with little reduction in risks to financial stability. At the same time, some research has identified circumstances under which the benefits of using monetary policy to lean against financial vulnerabilities could outweigh the costs. A key consideration is the estimated amount of economic activity lost in a financial crisis—and some research suggests such losses may be quite large, which raises the benefits of leaning against imbalances. Similarly, monetary policy may affect a broad range of financial imbalances—excessively high house or equity prices and leverage within the financial sector—and the full set of these effects could shift the risk of financial instability sufficiently, at least under some circumstances, to make leaning against financial vulnerabilities with monetary policy desirable. The broader point is that we do not fully understand the cost–benefit tradeoff and whether monetary policy adjustments for financial stability reasons may be appropriate at some times.

Whither Macroprudential Policy? Of course, there is one additional and critical factor to consider when weighing adjustments to the stance of monetary policy for financial stability reasons: the availability and efficacy of other instruments to promote financial stability. After all, the pursuit of multiple goals—full employment, price stability, and financial stability, for example—likely requires multiple tools. This is just common sense. Economists have a name for this common-sense notion: the Tinbergen principle. Effective supervisory, regulatory, and macroprudential policy tools appear to be well placed to address financial vulnerabilities. In particular, these tools may be used to increase the resilience of the financial sector against a broad range of adverse shocks and, perhaps, lean against the buildup of specific financial vulnerabilities.

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At the Federal Reserve, we have emphasized a set of structural, or through-the-cycle, regulatory and supervisory policies as our primary macroprudential tools to promote financial stability. These measures include strong capital and liquidity requirements for banks, especially the largest and most systemic institutions. In addition, our supervisory stress tests evaluate the ability of large banks to weather severe economic stress and the failure of their largest counterparty as well as examining the risk‑management practices of the firms. Moreover, the stress-test scenarios are designed to generally be more severe during buoyant economic periods when vulnerabilities may build. Furthermore, our stress tests consider the potential effects of specific risks we have identified in our financial stability monitoring work. For example, the tests in recent years have included hypothetical severe strains in corporate debt markets, exploring the resilience of the participating banks to the risks associated with the increase in business borrowing. In addition, the Federal Reserve monitors a wide range of indicators for signs of potential risks to financial stability that may merit a policy response, and we now publish a summary of this monitoring in our semiannual Financial Stability Report. If vulnerabilities are identified as being meaningfully above normal, the Federal Reserve can require large banks to increase their loss-absorbing capacity through increases in the CCyB. Despite all of these efforts, we understand that these tools have limitations. First, central bankers' experience with macroprudential tools, including the CCyB, is limited. Second, regulation and macropudential tools can reduce economic efficiency and hamper economic growth by limiting the ability of the market to allocate financial resources. For this reason, the Federal Reserve has been evaluating ways in which our supervisory and financial stability goals can be achieved more efficiently, and it has been participating in global efforts to evaluate the effects of reforms under the auspices of the Financial Stability Board.

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Third, macroprudential policies that are targeted to banks may create an incentive for financial intermediation to migrate outside of the regulated banking system. The vulnerabilities may still emerge, albeit elsewhere in the financial system—perhaps in institutions or structures that are less stable and resilient than our banks. In part reflecting these incentives, we regularly monitor financial intermediation both inside and outside of the banking system.

Summary To sum up, while there is evidence that financial vulnerabilities have the potential to translate into macroeconomic risks, a general consensus has emerged that monetary policy should be guided primarily by the outlook for unemployment and inflation and not by the state of financial vulnerabilities. Financial system resilience, supported by strong through-the-cycle regulatory and supervisory policies, remains a key defense against financial system and macroeconomic shocks. There is a clear need for new theory and empirics to address the questions about monetary policy and financial stability I have posed today. I encourage you to continue to contribute to these answers. By engaging the help of the wider academic community, conferences such as this one provide an invaluable opportunity to make progress on issues of great importance for economic policy.

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Number 9

Federal Reserve Board announces schedule for results from Dodd-Frank Act stress tests and Comprehensive Capital Analysis and Review (CCAR)

Results from the latest supervisory stress tests conducted as part of the Dodd-Frank Act will be released on Friday, June 21, and the results from the related Comprehensive Capital Analysis and Review (CCAR) will be released on Thursday, June 27, the Federal Reserve Board announced on Friday. Results for both exercises will be announced at 4:30 p.m. EDT. Stress tests help ensure that banks have adequate capital to absorb losses so that they can lend to households and businesses even in a serious recession. The Dodd-Frank Act stress tests are a forward-looking assessment of capital sufficiency using standard capital action assumptions for the largest domestic and foreign bank holding companies. CCAR evaluates the capital planning and capital adequacy of the same firms, but incorporates their planned capital actions, such as dividend payments and share buybacks and issuances. This year only the largest and most complex banks—generally those with total consolidated assets of $250 billion or more—are subject to stress testing.

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As previously announced by the Board, less-complex banks will not be subject to the stress test during the 2019 cycle (https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205b.htm).

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Number 10

NIST Infrared Frequency Comb Measures Biological Signatures

Researchers at the National Institute of Standards and Technology (NIST) and collaborators have demonstrated a compact frequency-comb apparatus that rapidly measures the entire infrared band of light to detect biological, chemical and physical properties of matter. Infrared light travels in waves longer than visible light and is most familiar as the radiation associated with heat. The NIST setup, which occupies just a few square feet of table space, has potential applications such as disease diagnosis, identification of chemicals used in manufacturing, and biomass energy harvesting. The work is described in Science Advances at: https://advances.sciencemag.org/content/5/6/eaaw8794. Optical frequency combs measure exact frequencies, or colors, of light. Various comb designs have enabled the development of next-generation atomic clocks and show promise for environmental applications such as detecting methane leaks. Biological applications have been slower to develop, in part because it’s been hard to directly generate and measure the relevant infrared light. To showcase biological applications, the NIST team used the new apparatus to detect “fingerprints” of NIST’s monoclonal antibody reference material, a protein made of more than 20,000 atoms that is used by the biopharmaceutical industry to ensure the quality of treatments. “For the first time our frequency combs have simultaneous coverage across the entire infrared molecular fingerprint region,” project leader Scott Diddams said. “Other key advantages are speed, resolution and dynamic range in acquiring data.” Mid-infrared light is an especially useful research probe because molecules usually rotate and vibrate at these frequencies. But until now it’s been difficult to probe this region due to a lack of broadband or tunable light

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sources and efficient detectors such as those available for visible and near-infrared light, the part of the infrared spectrum closest to visible light. The new NIST apparatus overcomes these problems. Simple fiber lasers generate light spanning the entire range used to identify molecules—that is, mid-infrared to far-infrared wavelengths of 3-27 micrometers (frequencies of approximately 10-100 terahertz). The amounts of light absorbed at specific frequencies provide a unique signature of a molecule. The new system is innovative in detecting the electric fields of the absorbed light using photodiodes (light detectors) operating in the near-infrared range. “A unique feature is that we detect signals in real time by rapidly sampling the infrared electric field with a near-infrared laser,” Diddams explained. “This has two advantages: It shifts the detection from the infrared to the near-infrared where we can use inexpensive telecommunications photodiodes, and we no longer suffer from the limitations of infrared detectors, which require cryogenic (liquid nitrogen) cooling.” The researchers detected signature vibrations of three bands of amides (chemical groups containing carbon, oxygen, nitrogen and hydrogen) in the monoclonal antibody reference material. Amide bands in proteins are used to determine the folding, unfolding and aggregating mechanisms. Specific features of the detected bands indicated that the protein has a sheet structure, agreeing with previous studies. Sheets connect chemical groups in a flat arrangement. In addition to biological applications, the new apparatus might be used to detect interactions between infrared light and condensed matter for quantum computing approaches that store data in molecular vibrations or rotations. In addition, when combined with novel imaging techniques, the tabletop system could obtain nanometer-scale images of samples that currently require the use of a much larger synchrotron facility. Coauthors of the new paper include researchers from the University of Campinas, in Brazil, and the Institute of Photonic Sciences, in Spain. Funding was provided by the Defense Advanced Research Projects Agency, the National Research Council and the Air Force Office of Scientific Research.

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International Association of Risk and Compliance Professionals

You can explore what we offer to our members:

1. Membership Become a standard, premium or lifetime member. To learn more, you may visit: https://www.risk-compliance-association.com/How_to_become_member.htm

2. Weekly Updates Read our weekly newsletter at the Reading Room of the association: https://www.risk-compliance-association.com/Reading_Room.htm

3. Training and Certification The association offers distance learning and online certification programs in all countries, and in-house instructor-led training in companies and organizations in many countries. A. Distance learning and online certification programs. A1. Certified Risk and Compliance Management Professional (CRCMP), distance learning and online certification program.

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The CRCMP has become one of the most recognized programs in risk management and compliance. There are CRCMPs in 32 countries. Companies and organizations like Accenture, American Express, USAA etc. consider the CRCMP a preferred certificate. You can find more about the demand for CRCMPs at: https://www.risk-compliance-association.com/CRCMP_Jobs_Careers.pdf To learn more, you may visit: https://www.risk-compliance-association.com/Distance_Learning_and_Certification.htm A2. Certified Information Systems Risk and Compliance Professional (CISRCP), distance learning and online certification program. To learn more, you may visit: https://www.risk-compliance-association.com/CISRCP_Distance_Learning_and_Certification.htm A3. Certified Risk and Compliance Management Professional in Insurance and Reinsurance CRCMP(Re)I, distance learning and online certification program. To learn more, you may visit: https://www.risk-compliance-association.com/CRCMP_Re_I.htm A4. Certified Cyber (Governance Risk and Compliance) Professional CC(GRC)P, distance learning and online certification program. To learn more, you may visit: https://www.risk-compliance-association.com/CC_GRC_P_Distance_Learning_and_Certification.htm B. Instructor-led training. The association develops and maintains four certification programs, and tailors presentations and training programs for directors, executive managers, risk and compliance managers, internal and external auditors, data owners, process owners, consultants, suppliers, and service providers. For instructor-led training, you may contact Lyn Spooner.

https://www.risk-compliance-association.com/CRCMP_Jobs_Careers.pdf

https://www.risk-compliance-association.com/CRCMP_Jobs_Careers.pdf

https://www.risk-compliance-association.com/Distance_Learning_and_Certification.htm

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https://www.risk-compliance-association.com/CISRCP_Distance_Learning_and_Certification.htm

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https://www.risk-compliance-association.com/CC_GRC_P_Distance_Learning_and_Certification.htm

https://www.risk-compliance-association.com/CC_GRC_P_Distance_Learning_and_Certification.htm

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4. IARCP Authorized Certified Trainer (IARCP-ACT) Programs Become a Certified Risk and Compliance Management Professional Trainer (CRCMPT) or a 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 required to accept more responsibility. To learn more: https://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 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: https://www.risk-compliance-association.com/Approved_Centers.html

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