risk management presentation july 30 2012

7/28/2019 Risk Management Presentation July 30 2012

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International Association of Risk and ComplianceProfessionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750www.risk-compliance-association.com

Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the week's

agenda, and what is next

George LekatisPresident of the IARCP

Dear Member,

Today we will start from the Financial Conglomerates Directive of theEuropean Union.

The establishment and development of large, complex groups combininglicenses in various sub-sectors of the financial market, and in particularcombining insurance business with banking business, was recognized inthe early nineties.

The Joint Forum - the G10 body of supervisors which monitors anddiscusses financial market trends affecting banking, insurance andsecurities markets - observed a need foradditional supervision of thiskind of groups and published their principles for the supervision offinancial conglomerates in 1999.

These principles explain that such supplementary supervision shouldenable supervisors to monitor, ring-fence, limit or otherwise influenceactivities which may spread risks from one entity of a financial

conglomerate to another.

The objective of this supplementary supervision was the control ofpotential risks ofdouble gearing (i.e., multiple use of capital) and "group

International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
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risks", i.e., the risks of contagion, management complexity,concentration, and conflicts of interest, which arise incrementally whenlicenses for different financial services are combined under the same roof.

The typical supervisory tools for this kind of supervision would be notonly monitoring tools such as reporting of intra-group transactions, butalso requirements forinternal governance and group-wide riskmanagement, and, of course, supervisory cooperation requirements.

Last but not least supervisors would need exclusive powers to accessinformation when approaching entities in a conglomerate.

The Financial Conglomerates Directive (FICOD), a short directive ofabout 20 articles, was adopted in 2002 as a response to the need for

supplementary supervision of complex groups laid out in those JointForum principles.

The objective of supplementary supervision has been supported eversince by stakeholders when consulting on this initiative.

FICOD supplements the two relevant sectoral directives: the CapitalRequirements Directive (CRD) and the insurance directives.

CRD provides for the prudential supervision of deposit taking banks and

electronic money institutions.

The activities of such firms build on the leveraging of available capital,and the directive aims at the protection of depositors through ensuringprudential soundness.

The capital requirements relate to bank-specific risks, which areapplicable to all regulated banking entities, stand alone and in a group.

The insurance directives, aimed at the protection of policyholders,provide for the prudential supervision of firms conducting insuranceactivities and whose activities build on the investment of paid uppremiums in such a way that the cash flows from these investmentsensure that insurance claims can be paid out.

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To this end, insurance companies calculate how much provisions (theso-called technical provisions) they should keep for these claims.

The capital requirements for insurance companies are related toinsurance-specific risks, more specifically to the uncertainty implicit inthe calculation of technical provisions.

While banking and insurance directives are thus aimed at calculatingsufficient (capital) buffers for the protection of depositors andpolicyholders, FICOD, on the other hand, is concerned with thesupplementary supervision of group risks, which are not bank- orinsurance specific, but are ratherinherent in controlling a group of manyregulated entities that operate in different kinds of financial markets.

This implies that entities which have a mutual relationship that affectsthe risk profiles of each of them must be included in the supervisoryscope.

For example, if a group were to invest in an airport, the CRD wouldrequire the bank in that group to determine a relevant exposure to theairport, if any, and keep sufficient capital for it.

FICOD, for its part, would require the conglomerate to assess thepotential contagion risks arising from difficulties or extreme stress

scenariosexperienced by the airport, and have contingency plans,ringfencing alternatives or other governance measures available

Welcome to the Top 10 list.



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Updated list of identified Financial Conglomerates

EBA has jointly published with EIOPA and ESMA the list of identifiedFinancial Conglomerates, as at 1st July 2012,as required under Article 4(3)of the Financial Conglomerates Directive.

Solvency I I News

Ashort amending Directive was adopted on 3 July.

This means that the original implementation date of1 November 2012 in the Solvency II Directive has been changed, with thenew timetable requiring transposition by Member States on 30 June 2013and implementation by firms from 1 January 2014.

SAMA Governors Statement

On the Occasion of the Issuance of the Council of MinistersResolutionApproving the Finance Laws

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Mario Draghi: Interview with Le Monde

Interview with Mr Mario Draghi, President of the

European Central Bank, in Le Monde,

conducted by Mr Erik Izraelewicz, Ms Claire Gatinois and Mr PhilippeRicard

Preliminary international banking statistics atend-March 2012

July 2012

Large movements in the latest data are highlightedin the Statistical release.

Data are available via the BIS WebStats interactivequery tool, in PDF format and CSV files on the BIS website (locationaland consolidated banking statistics), and as a single PDF file in detailedannex tables.

Final statistics, with an analysis of recent trends, will be released inconjunction with the forthcoming BIS Quarterly Review, to be publishedon 17 September 2012.

Report on the Role of InsuranceGuarantee Schemes in the Winding UpProcedures of Insolvent I nsuranceUndertakings in the EU/EEA



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Developments in Kenyas insurance industrysector

Remarks by Prof Njuguna Ndungu, Governor of the Central Bank ofKenya, at the launch of Continental Reinsurance brand and products,Nairobi office, Nairobi

The Prospectus Directive - Update

The Prospectus Directive

2003/ 71/EC (PD) and theCommissionsRegulation onProspectuses (EC 809/2004) became effectiveon 1 July 2005.

Press Conference by Tadahiro Matsushita,Minister for Financial Services

The True Sign of Intelligence

Remarks by CFTC Commissioner Scott D.OMalia, Stevens Institute of Technology- HanlonFinancial Systems Lab

Albert Einstein said, The true sign of intelligence

is not knowledge but imagination.



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NUMBER 1

Updated list of identified Financial Conglomerates

EBA has jointly published with EIOPA and ESMA the list of identifiedFinancial Conglomerates, as at 1st July 2012,as required under Article 4(3)of the Financial Conglomerates Directive.

Joint Committee

The Joint Committee is a forum for cooperation that was established on1st January 2011, with the goal of strengthening cooperation between theEuropean Banking Authority (EBA), European Securities and MarketsAuthority (ESMA) and European Insurance and Occupational PensionsAuthority (EIOPA), collectively known as the three European SupervisoryAuthorities (ESAs).

Through the Joint Committee, the three ESAs cooperate regularly andclosely and ensure consistency in their practices.

In particular, the Joint Committee works in the areas ofsupervision offinancial conglomerates, accounting and auditing, micro-prudentialanalyses of cross-sectoral developments, risks and vulnerabilities forfinancial stability, retail investment products and measures combatingmoney laundering.

In addition to being a forum for cooperation, the Joint Committee alsoplays an important role in the exchange of information with the EuropeanSystemic Risk Board (ESRB) and in developing the relationship betweenthe ESRB and the ESAs.



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NUMBER 2

Solvency I I News

Ashort amending Directive was adopted on 3 July.

This means that the original implementation date of1 November 2012 in the Solvency I I Directive has beenchanged, with the new timetable requiringtransposition by Member States on 30 June 2013 and implementation byfirms from 1 January 2014.

Article 1

Directive 2009/ 138/ EC is hereby amended as follows:

(1) Article 309(1) is amended as follows:

(a) In the first subparagraph, the date "31 October 2012" is replaced bythat of "30 June 2013";

(b)After the first subparagraph, the following subparagraph is inserted:"The laws, regulations and administrative provisions referred to in thefirst subparagraph shall apply from 1 January 2014.";

(2) In the first paragraph of Article 310, the date "1 November 2012" isreplaced by that of "1 January 2014";

(3) In the second paragraph of Article 311, the date "1 November 2012" isreplaced by that of "1 January 2014".

The European Parliament is now in recess and the Omnibus I I Directiveis scheduled for a plenary vote on 22 October.

We will continue to monitor developments over the coming months andconsider any implications for our domestic implementation plan.

In the meantime, we will continue to work with firms towards theimplementation date of 1 January 2014.

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On 18 July, we updated ourinternal model approval process (IM AP)pageswith the question bank for life insurers, as part of our review oftechnical provisions.

On 11 July we published the second in a series of Consultation Papers to

transpose the Solvency II Directive into the UK Handbook.

The full paper CP12/ 13 and further information is available on ourconsultations on Solvency I I page.

http:/ / www.fsa.gov.uk/library/policy/cp/ 2012/12-13.shtml

On 10 and 12 July E IOPA published the outcomes of its public

consultations on reporting and the Own Risk and Solvency Assessmentrespectively.We will update ourPillar 2 and Pillar 3 pages from 23 Julyonwards with more information.

Following our industry briefing on 27 February 2012, we gave furtherinformation about our approach to the review of technical provisions inour work with firms in ourinternal model approval process.

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es-for-reporting-disclosure/index.htmlhttps://eiopa.europa.eu/consultations/consultation-papers/2011-closed-consultations/november-2011/draft-proposal-on-quantitative-reporting-templates-and-draft-proposal-for-guidelines-on-narrative-public-disclosure-supervisory-reporting-predefined-events-and-processes-for-reporting-disclosure/index.htmlhttps://eiopa.europa.eu/consultations/consultation-papers/2011-closed-consultations/november-2011/draft-proposal-on-quantitative-reporting-templates-and-draft-proposal-for-guidelines-on-narrative-public-disclosure-supervisory-reporting-predefined-events-and-processes-for-reporting-disclosure/index.htmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/library/policy/cp/2012/12-13.shtmlhttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/policy/cphttp://www.fsa.gov.uk/about/what/international/solvency/implementation/imaphttp://www.fsa.gov.uk/about/what/international/solvency/implementation/imaphttp://www.fsa.gov.uk/about/what/international/solvency/implementation/imaphttp://www.fsa.gov.uk/about/what/international/solvency/implementation/imaphttp://www.fsa.gov.uk/about/what/international/solvency/implementation/imaphttp://www.fsa.gov.uk/about/what/international/solvency/impl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NUMBER 3

SAMA Governors Statement

On the Occasion of the Issuance of the Council of MinistersResolutionApproving the Finance Laws

SAMA Governor Dr. Fahad Al-Mubarak expressed his thanks andappreciation to the Custodian of the Two Holy Mosques and HRH theCrown Prince for the issuance of these significant and essential laws inrespect of the financing sector of the Saudi economy.

Al-Mubarak also expressed his pride over the high trust with whichSAMA is honored with the privilege to supervise the real estate financingsector and non-banking financial companies.

The governor pointed out that, according to the new laws, there will betwo primary finance sectors.

The first is the real estate financing sector;

the other is the non-banking financial sectorwhich will complement the

banking sector and support competitiveness in the credit market.

SAMA is working on developing the implementation regulations for thesetwo sectors, in pursuance of the powers assigned to it under these laws.

In regard to the real estate finance, he added that SAMA has developed adetailed vision through a number of regulations, most notably theImplementation Regulation of the Real Estate Finance Law, whichestablishes detailed provisions for the law including, for example, workmechanisms, consumer rights, and mechanisms to support beneficiaries

of real estate finance, in addition to the refinance regulation throughmortgage backed securities, which gives the real estate financiers directaccess to capital markets for refinancing, thereby reducing the cost offinance for the consumer.



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These securities will provide a new investment tool on the Saudi CapitalMarket.

As for the supervision of non-bank financial companies, the governorstated that SAMA is embarking on preparing regulations commensurate

with the status of the non-banking financial sectorto achieve thecherished objectives of the Finance Companies Control Law in terms ofcreating a new competitive sector for credit provision taking into accountthe principles of transparency, discipline and consumer protection.

In respect to the Implementing Regulation of the Financial Leasing Law,the governor confirmed that it will include substantial additions to thistype of service in the domestic market to address the existing weaknessesincluding, in particular, the provisions governing the rights of the lesseeand the lessor in a fair manner ensuring stability and sustainability,

thereby reducing risk and this will be reflected on pricing and the servicefor beneficiaries.

Finally, Al-Mubarak said that SAMA will post on its website the entirecontents of these regulations to receive the views of stakeholders andbeneficiaries thereof in preparation for their issuance after coordinatingwith relevant government agencies.



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Basel I I I in the Kingdom of Saudi Arabia

Working Group (WG) to Implement Basel I I I

1.Working Group on Capital Reforms

Banks should be represented by a senior officer (Chief Financial Officer,Chief Risk Officer, Strategic Planning, etc).

This WG would study Capital Reforms and examine the current positionof Banks and assess what remains to be done for its full implementation.

2. Working Group on Global Liquidity Standards

This WG will examine the under-mentioned new Global liquidityStandards for monitoring, observing and implementation in Saudi Arabia.

- Liquidity Coverage Ratio (LCR)

- Net Stable Funding Ratio (NSFR)

The WG will particularly focus on Basel II I proposals. Banks should berepresented by senior staff members from Risk Management, Treasury orFinance Department.

3. Working Group on Enhanced Risk Coverage

The WG will examine the proposals for enhanced risk coverage forimplementation in Saudi Arabia including the following:

- Securitization

- Trading Book

- Counterparty Credit Risk

The WG will particularly focus on Basel I I I proposals in relation to the

above items.

Banks should be represented by a senior staff members from RiskManagement, Treasury or Finance Department.



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4. Working Group on Enhanced Pillar 2 Reforms

This Working Group will focus on Basel I I I proposals on Pillar 2 relatedreform, and their impact on I CAAP, Supervisory Review process.

5. Pillar 3 Reforms

As in the past, SAMA will continue to develop any refinements inPrudential Templates and Guidance notes through the Chief FinancialOfficers' Committee

Major Refinements and References

Components of Basel II I: Major Regulatory Overhaul of Regulatory andPrudential Framework

Summary of Basel Committee Reforms:1)Capital- Quality and level of capital

- Capital conservation buffer

- Countercyclical buffer

- Capital Ratios Phased in

- Regulatory deduction phased in

- Non compliant instrument phased out

2) Risk Coverage

- Securitizations / Re-securitizations

- Trading book

- Counterparty Credit Risk

3) Containing Leverage- Leverage ratio

4) Pillar 2

-Risk concentration

- Off balance-sheet items

- Reputational risk

- Sound compensation practices



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- Valuation and liquidity risk

- Sound stress testing practices

5) Pillar 3-

Enhanced exposure on securitized assets, CDO's MBS, LeverageFinance

- Thematic Review in progress

6) Global Liquidity Standard and Supervisory Monitoring- Liquidity Coverage Ratio

- Net Stable Funding Ratio

- Supervisory Monitoring

- Principles for Sound Liquidity Risk

-

Management and Supervision

7) Systemic Risk and Interconnectedness- "Gone Concern" Contingent capital

- Risk coverage

- Cross-border bank resolution

- Significant Financial Institutions (SIFI's)



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From : Saudi Arabian Monetary AgencyTo : All BanksAttention : Managing Directors, Chief Executive Officers and GeneralManagersSubject : Quarterly Monitoring of Capital Leverage Ratio in 2011 and 2012

A major initiative announced by the Basle Committee (the Committee) inits Basel I I reform package issued in December 2010 relates to the CapitalLeverage Ratio to be maintained by banks in addition to the risk basedcapital ratio.

In this regard, excessive leverage in banks and the banking system was amajor cause of the global financial crisis notwithstanding that such bankswere carrying strong Basel II related risk based capital ratios.

Consequently, the Committee agreed to introduce a non risk basedcapital leverage ratio in addition to the risk based capital ratio in itsoverall Basel I I I Capital Adequacy regime.

The Capital Leverage Ratio is designed to be simple, assists inconstraining the build up of Leverage and accordingly acts as a back stopmeasure.

This Circular is intended to provide for the definition and calculation of

the Leverage Ratio which will serve as a basis for testing during theparallel run period.

In this regard, the Committee intends to have a monitoring period to testa minimum leverage ratio of 3%, as well as the underlying components ofthe agreed definitions over January 2011 to January 2012.

The testing will be carried out prior to the parallel run period (January2013 to January 2017).

Therefore, the Agency requires the completion of the attached PrudentialReturn to be submitted on a quarterly basis starting January 2011.



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The first quarterly return will be due in SAMA on 30 April 2011 concerningdata as of 31 March 2011.

Accordingly, to facilitate the quarterly submission and testing of thecapital leverage ratio, the guidance notes are attached.

All Banks must review and provide their comment by 28 February, 2011.



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LEVERAGE RATIOGuidance Notes1.Background and Objectives

- This is a simple non-risked based Capital Ratio designed to measureleverage based on Gross exposures with the exception of creditexposures which are net of specific provisions and Tier 1 capital underBasel II I.

- It provides a breaker from building excessive leverage in the Banksand the Banking systems.

- The basis of calculation is the average of the monthly leverage ratioover the quarter.

2. Reporting to SAMA on a quarterly basis effective January 2011

-Monitoring Period: January 2011 January 2012

- Parallel Runs: January 2013 end 2017



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- Migration to Pillar 1: January 2018

3. Gross ExposuresSchedule B, C and D

Exposures include On and Off-balance sheet items includes exposuresrelating to derivatives

3.1 On-Balance Sheet

All exposures On-balance sheet, non-derivatives are measured at net ofspecific provisions and credit valuation adjustments

Netting of loans and deposits not allowed

Gross exposures measured through

- No netting through collaterals

- All measurements in accordance with Accounting IFRS Rules

- No netting of offsetting debits and credit balance through nettingschemes

Items deducted from capital do not contribute to leverage and shouldalso be deducted from the measures of on-balance sheet exposures

All on balance sheets assets item to agree with balances with M-1.

3.2 Off-Balance Sheet including derivatives

These include liquidity facilities, unconditional and cancellablecommitments, direct credit substitutes, acceptances, standby letterscredit, trade letters of credits, guarantees, etc. and derivativesoutstanding.

All of balance sheet items including derivative are to be converted to theircash equivalents utilizing credit conversion factor used for in the Basle I I

framework utilizing standardized approach. Consequently, the followingelements must agree.

All notional value to agree with M.1



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All cash equivalent value to agree with Q17.5.2 for off-balance sheetitems and Q17.5.3 for derivatives outstanding.

4. CapitalSchedule E

The capital is to be measured on the Tier 1 capital based on Basel II Imethodology Accordingly, it should agree with Q17.3 (Tier 1) figure.

It should be noted that under Basel I I I, Tier I will be amended to reflectthe new definition.

5. Computation of Capital Leverage Ratio

Compute the Capital leverage ratio on a quarterly basis through capital

(D) divided by gross exposures (B+C) as a simple calculation.

6. Reporting and Monitoring Period

The monitoring period will be from 31 March 2011 to December 2012.

Banks are expected to report to SAMA on a quarterly basis theirleverage information as per the attached Prudential Return to track in aconsistent manner the underlying components of the agreed definitionand resulting ratio.

The calculation should be as of quarter end 31 March, 30 June, 30September, 31 December of each year.

The returns should be submitted within 30 days following the quarterend.

7. Parallel Runs

SAMA expects the January parallel runs to commence effective 1st

January 2013 and to last until end of 2017.

Based on the parallel run period any final adjustment will be done inthe first half of 2017 with a view to migrate to Pillar 1



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Additional guidance will be issued in this regard in due course.

8. Bank Level Disclosure

Bank level disclosure of the capital leverage ratio and its component will

start on 1 January 2015.

9. Implementation as a regulatory measures

The actual implementation as a regulatory ratio and as a component ofPillar 1 is likely to commence from 1st January 2018.



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NUMBER 4

Mario Draghi: Interviewwith Le MondeInterview with Mr MarioDraghi, President of theEuropean Central Bank, in LeMonde, conducted by Mr ErikIzraelewicz, Ms ClaireGatinois and Mr PhilippeRicard

* * *

The International Monetary Fund (IM F) has revised downwards its

global growth forecasts because of Europe. Is there a risk of recession?

No. Since the start of the year, the risks of a deterioration in the economythat we had feared have certainly materialised in part.

The situation has gradually worsened, but not to the point of plunging thewhole of the Monetary Union into recession.

We still expect a very gradual improvement in the situation by the end ofthis year or the beginning of next year.

Thanks to the ECB?

The cuts in interest rates at the end of 2011 and in July should producetheir effects, as should the unprecedented LTROs, three-year loans tobanks, which we carried out to deal with the risk of a credit crunch, arestriction or an increase in the costs for loans.

Should the ECB not do more to ease the economy, as the IMF hasrequested?

We are very open. We do not have any taboos. We decided to reduceinterest rates to below 1% in July because we forecast that inflation wouldbe close to or below 2% at the start of 2013.



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It now seems likely that it will fall sooner than expected, at the end of2012.

Our mandate is to maintain price stability in order to prevent both higherinflation and a generalised, broadly based fall in prices.

If we see such risks of deflation, we will act.

The European Council of 28 and 29 June was positively received by themarkets which since then have expressed doubts.

The Summit was a success. For the first time, it seems to me, a clearmessage was given: exit the crisis with more Europe.

By putting in place a roadmap to create a Union with four building blocks financial, fiscal, economic and political and delivering tangible

results: a financial union, one banking supervisor, allowing the rescuefunds to recapitalise banks once this supervision is in place.

And a calendar for implementation.

These are long-term solutions. Doesnt something need to be done aboutthe urgency of the situation?

Let me tell you about my experience. In 1988 the Delors Committee setout the route towards Monetary Union, with a goal, a timetable andcommitments to be respected.

This prospect resulted in the Maastricht Treaty in 1992. Italys borrowingrates were very high at the time.

But as a result of its involvement in the project of Monetary Union, I talysaw an abrupt fall in its rates, before there was even a decrease in thedeficit, which stood at 11% of GDP!

This leads me to believe that if countries make firm commitments, evenof a long-term nature, this has an impact in the short term.



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The ECB has been criticised for not doing more for the governments. Isthe ECB waiting for government efforts to be made before acting?

This idea that there is bargaining between the governments and the ECBis a quiproquo.

Our mandate is not to resolve the financial problems of countries, but toensure price stability and to contribute to the stability of the financialsystem in full independence.

What do you think of the growth pact held dear by Franois Hollande?

It will certainly help, but we need to go further. Each country must alsomake efforts.

Are you thinking more of structural reforms than of a Keynesian stimulus?

Yes, although, in my view, the focus is too often on labour market reforms,which do not always translate into increased competitiveness becausecompanies sometimes benefit from monopolies or situation rent.

So we also need to look at the markets for products and services andliberalise where necessary to increase competitiveness.

Politically, these are difficult decisions to take.

A European agenda of the reforms to be undertaken would help hugely.

We also need to strengthen joint decision-making in these areas at the

European level.

So it is a victory for liberal arguments?

No. Putting an end to certain situation rents is a question of fairness, foremployees and entrepreneurs, and for all citizens.

What do you think of the policies followed in France?



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I welcome the continuation of fiscal consolidation, which remainsindispensable, and I also welcome the emphasis on growth potential thatwill pave the way for recovery.

Debt reduction is vital.

And the country must respect its commitment to bring its deficit backdown to 3% of GDP in 2013 so that it can continue to benefit from lowinterest rates.

You are one of the most influential men in Europe, yet you are notelected. Does this not pose a problem for democratic legitimacy?

I am cognisant of the importance of being accountable for our actions. I

stand before the European Parliament about ten times a year, and we arevery active in terms of communication.

We stand ready to do more, if our powers were to be strengthened.

In the extraordinary conditions that we are experiencing, it is necessary tosee the ECB take a stand beyond monetary policy for matters that cannotbe addressed by monetary policy, such as high public deficits, a lack ofcompetitiveness or unsustainable imbalances, especially where financialstability may be at risk. Safeguarding the euro is part of our mandate.

When you arrived at the head of the ECB, you were considered the mostGerman of the Italians. Is this still the case?

Thats up to you to judge! We have to maintain price stability in bothdirections, face problems as they present themselves, and act withoutprejudice.

In some ways you are very German when you support the calls forpolitical union made by Angela Merkel

Any move towards a financial, budgetary and political union is, to mymind, inevitable.



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This will lead to the creation of new supranational entities. In somecountries the transfer of sovereignty I prefer to say sharing that thisimplies is a major stake, in others it is no problem.

But one must remember that with globalisation, it is precisely by sharingsovereignty that countries can better preserve it.

In the long term, the euro must be based on a greater degree ofintegration.

Is a Greek exit from the euro area still a leading concern?

Our unequivocal preference is for Greece to remain in the euro area.

But that is a matter for the Greek government. I t has stated its

commitment, now it must deliver results.

Regarding the renegotiation of the memorandum [to ease the austeritymeasures and reforms imposed on the country], I will not take any stancebefore seeing the Troikas report.

On Friday, 20 July, the finance ministers of the euro area should havecompleted the aid plan for banks. Have they done so? Will it suffice toprevent the country from defaulting?

One important point is the involvement of senior creditors of banks: theECB believes that such involvement should be possible in the case of theliquidation of a bank.

Savers must be protected, but creditors should be part of the solution ofthe crisis.

It is a matter of limiting the involvement of taxpayers. They have alreadypaid a great deal!

Do you think you can go on holiday this summer in peace?

I never plan my holidays ahead and I only ever go away for a few days.



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One thing is certain: I will not be going to Polynesia. Its too far.

So is the euro still in danger?

No, absolutely not. From the outside, analysts are seen to be imaginingscenarios in which there is an explosion of the euro area.

That underestimates the political capital that our leaders have invested inthis union, as well as the support of European citizens. The euro isirrevocable!

Having formerly worked for Goldman Sachs, what do you think of theLibor scandal?

It undermines trust in one of the cornerstones of the world financialsystem.

Just think that hundreds of trillions of euro of financial operations arebased on the Libor and that in many countries all over the world peoplebuy their homes with mortgages indexed to the Libor.

The unspeakable personal behaviour and design flaws have shown onceagain a faulty governance of the process.

Two inquiries are under way in the United Kingdom and in the UnitedStates, as well as an inquiry about the Euribor. They must shine a light onthese matters.

Does your time at Goldman Sachs make you uncomfortable?

No, indeed, I value this experience of the world of finance and of theprivate sector.

Obviously, there is much to do to rebuild the financial services industryafter the crisis.



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Much has been done by the governments, by the regulators and by theindustry itself, but much still remains to be done.

Heads of State and Government want to place the ECB at the heart ofbank supervision. Are you in favour of this?

The European Commission is responsible for preparing proposals on thisin consultation with the ECB and the European Parliament.

The fact that the central bank plays a role in banking supervision hasworked well at national level, particularly in France and Italy.

If this role fell to the ECB, it would work with national supervisors,counting on their considerable experience and abilities.

Do you not fear a conflict of interest between monetary policy and thissupervisory role?

Monetary policy must be kept separate from banking supervision so thatthe former is not contaminated by the latter. You can build anindependent structure, and at the same time benefit usefully frominformation provided by supervision.

Would such a system have enabled the banking crisis in Spain to beavoided?

A centralised system is preferable to take account of the very high degreeof financial integration that a monetary union entails.On the subject of Spain, the ECB has warned the country on severaloccasions not to let the current account deficit get out of control and hasalso warned of the excessive growth of credit.

But in a monetary union, the fight against property bubbles stems from

macro-prudential policies carried out at national level.



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Elizabeth A Duke: Central bank cooperation intimes of crisis

Speech by Ms Elizabeth A Duke, Member of theBoard of Governors of the Federal Reserve System, at

the Center for Latin American Monetary Studies 60thAnniversary Conference, Mexico City, 20 July 2012.

* * *

It is a pleasure to participate in this commemorative conference on theoccasion of the 60th anniversary of the Center for Latin AmericanMonetary Studies (CEMLA).

Since its establishment in 1952, CEMLA has achieved a great deal on boththe policy and research fronts to promote our understanding of monetary

and banking issues in Latin America and the Caribbean.

The topic I have been asked to speak about today, Central BankCooperation in Times of Crisis, is very important.

As we know, central banks typically work individually to achieveobjectives for their domestic economies.

In the case of the Federal Reserve, monetary policy is conducted toachieve our statutory objectives of maximum employment and pricestability.

And, of course, fostering a stable financial system is key to attaining thesegoals.

But the experience of the past few years has illustrated first with theglobal financial crisis and more recently with the strains in Europe thatcooperation and coordination among central banks around the world maybe necessary at critical junctures to achieve these domestic objectives.

In my remarks today, I will describe the evolution of the Federal

Reservespolicies during and after the global recession and show howmany of those policies were undertaken in coordination with, or inparallel to, similar actions by other central banks.



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I will start with the monetary policy responses of the Federal Reserve andother central banks during the financial crisis.

I will then discuss the efforts that the Federal Reserve has made, often incooperation with other central banks and international partners, to help

enhance financial stability.

Finally, I will focus on the challenges facing Latin American centralbanks, whose economies and financial systems were affected by the crisisitself, and by the responses of other central banks to the crisis.

Federal Reserve policies and coordination with other centralbanks

Although the financial crisis that emerged in the summer of 2007 initiallymanifested itself as a sharp deterioration in U.S. mortgage markets, the

roots of the problem ran deeper.

Indeed, the consequences of a credit boom combined with excessiveleverage, mispricing of risk, and deficiencies in risk management becameincreasingly apparent.

And given the international extent of these vulnerabilities andinterconnections, the crisis quickly became global.

Central banks around the world responded forcefully.

From the outset, the Federal Reserve vigorously used its traditionaltoolkit for managing short-term interest rates.

The Federal Reserve reduced the target federal funds rate from 5-1/4percent in August 2007 to a range of 0 to 1/4 percent by the end of 2008.

International coordination on policy rate decisions is rare, but in October2008, the Federal Reserve announced a reduction in its policy rate jointlywith five other major central banks: the Bank of Canada, the Bank ofEngland, the European Central Bank, the Swedish Riksbank, and theSwiss National Bank.

With clear signs of simultaneous economic slowing in many countries,this coordinated action sent a strong positive signal to financial markets



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about policymakerscollective intent to mitigate the effects of the crisison their economies.

Although not through directly coordinated actions, other central banks,including those in Latin America, were also reducing policy rates.

The stresses in financial markets and liquidity shortages were severe.

So, in addition to cutting policy rates, the Federal Reserve took measuresdesigned to provide liquidity first to banks and later to other financialinstitutions.

A thir

risk management presentation july 30 2012

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