International Association of Risk and Compliance Professionals (IARCP)

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International Association of Risk and Compliance Professionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

Dear Member,

I was travelling from London to Dubai to chair the Marcus Evans conference (Strategic Risk & Compliance 2013). I had a headache when I read:

If a medicine does not work as expected, it's not necessarily because the dosage was too low.

Wow. Is he talking to me?

He was not. He was not even a doctor.

He was Jaime Caruana, General Manager of the Bank for International Settlements, speaking about Hitting the limits of "outside the box" thinking? Monetary policy inthe crisis and beyond.

Speeches like that are not usually good when you have a headache, but as I am a Basel iii addict, it worked handsomely for me.

Mr. Caruana continued:

Prolonged monetary accommodation gives borrowers, financial institutions and policymakers an incentive to keep "kicking the can down the road", delaying necessary repair and reform.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 2

If I see someone kicking a can down the road, I have to remember why he does it it is due to prolonged monetary accommodation.

I did not have a headache any more. I had even started understanding the non-financial world around me!

Mr. Caruana continued:

The global bond market crash of 1994 is a cautionary tale of the risks involved in exiting from a prolonged period of low interest rates.

Unbelievable! This is the stress test I was looking for. A great scenario for a major investment bank I consult. Who is going to challenge that? Will supervisory authorities disagree? It is Mr. Caruanas own idea!Read more at Number 1 below. Time for a puzzle now which is your opinion about the URL that follows?http://www.cbrc.gov.cn/showWhist.do What is it about?

No, you did not find it! Dont lie to me!

Ok, you saw it is *.cn ChinaOk, you saw it is *gov.cn Government of China But what is the showWhist.do?

Whist is a classic English trick-taking card game which was played widely in the 18th and 19th centuries.

What? Websites belonging to the Chinese government explore EnglishInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 3

trick-taking card games?

According to Merriam-Webster, Whist is a card game for four players in two partnerships that is played with a pack of 52 cards and that scores one point for each trick in excess of six.

No, it is not about Whist. It is about Whistleblowers!A Chinese Sarbanes-Oxley (like) approach from theInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 4

The main functions of the CBRC include: To formulate supervisory rules and regulations governing the banking institutions, to authorize the establishment, changes, termination and business scope of the banking institutions, to conduct on-site examination and off-site surveillance of the banking institutions, and take enforcement actions againstrule-breaking behaviors, to conduct fit-and-proper tests on the senior managerial personnel of the banking institutions.

Welcome to the Top 10 list.

Best Regards,George Lekatis President of the IARCPGeneral Manager, Compliance LLC 1200 G Street NW Suite 800, Washington DC 20005, USATel: (202) 449-9750Email: lekatis@risk-compliance-association.com Web: www.risk-compliance-association.com HQ: 1220 N. Market Street Suite 804, Wilmington DE 19801, USATel: (302) 342-8828International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 5Hitting the limits of "outside the box" thinking? Monetary policy in the crisis and beyond

Speech by Jaime Caruana, General Manager of the Bank for International Settlements, to OMFIF (Golden Series Lecture), London, 16 May 2013

Central banks have had to "think outside the box" toaddress unprecedented financial instability and to provide monetary stimulus in trying times.NIST Posts Initial Analysis of RFI Comments on Cybersecurity Framework for Critical Infrastructure

The National Institute of Standards and Technology (NIST) has posted an initial analysis of hundreds of comments submitted by industry and the public related to the President's "Improving Critical Infrastructure Cybersecurity" Executive Order, issued Feb. 12, 2013.Opening Remarks at SEC Roundtable on Credit Ratings

By Chairman Mary Jo WhiteU.S. Securities and Exchange Commission, Washington, D.C.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 6Raising the bar for the next phase of growth and development sustaining transformative momentum

Welcoming address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 10th IFSB (Islamic Financial Services Board)Summit 2013 The future of the Islamic financial services industry resilience, stability and inclusive growth, Sasana Kijang, Kuala Lumpur.Changes in the Large Exposure Regime

This paper contains full details of theproposals to substantially alter the Large Exposure principles and guidance that apply to licensed deposit takers that are incorporated in Guernsey.Governor Sarah Bloom RaskinAt the Society of Government Economists and the National Economists Club, Washington, D.C.

Prospects for a Stronger RecoveryInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 7Opening Speech

by Yolanda Banks McCoy,Head Investments and Securities Division,Cayman Islands Monetary Authority at the 100WHF Cayman Event 2013A Perspective on the U.S. Economic Outlook and Monetary Policy

Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of PhiladelphiaGlobal Interdependence Center's Central Banking Series: Recovery 2013 Strength or Stagnation, Milan, ItalyMichael S. Gibson, Director, Division of Banking Supervision and Regulation

Cross-Border Resolution

Before the Subcommittee on National Security andInternational Trade and Finance, Committee on Banking, Housing, and Urban Affair, U.S. Senate, Washington, D.C.

In my remarks, I would like to first reflect on the improvements that have been made in the last few years in the underlying strength and resiliency of the largest U.S. banking firms, and then turn to a discussionInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 8

of what has been accomplished and what remains to be accomplished in facilitating a cross-border resolution.Adjustment and growth in the euro area

Speech by Mr Peter Praet, Member of the Executive Board of the European Central Bank, at the European Business Summit, Brussels, 16 May 2013.

Many of you will have come across commentators who claim that adjustment is in fact inimical to growth; and that consolidating government budgetswhile introducing structural reforms is the main cause of our currentdifficulties.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 9Hitting the limits of "outside the box" thinking? Monetary policy in the crisis and beyond

Speech by Jaime Caruana, General Manager of the Bank for International Settlements, to OMFIF (Golden Series Lecture), London, 16 May 2013

Central banks have had to "think outside thebox" to address unprecedented financial instability and to provide monetary stimulus in trying times.

Monetary accommodation has been critical to stabilise the financial system and the economy.

But questions remain about the efficacy of such policies as long as balance sheets and structural headwinds are not more fully addressed.

Monetary accommodation can only be as helpful as the balance sheet, fiscal and structural policies that accompany it.

Looking ahead, central banks will continue to face daunting challenges as they navigate in uncharted waters, including how best to integrate new perspectives on the financial cycle and global spillovers into their monetary policy frameworks.

Full speech

Ladies and gentlemen,

It is a great pleasure to be here at OMFIF.

The crisis and its aftermath have posed formidable challenges for central banks.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 10

They have had to "think outside the box" to address unprecedented financial instability and provide monetary stimulus in the face of the constraint imposed by the zero lower bound of policy rates.

Looking ahead, the challenges remain daunting. Central banks have to navigate uncharted waters.

In the near term, the question is how monetary policy can best contribute to what has so far been an uneven recovery.

Can't central banks do much more?

Perhaps the relevant question is whether central banks can make up for insufficient action elsewhere.

What monetary policy can substitute for balance sheet repair by banks and borrowers?

What monetary policy can remove impediments to a worker moving from an overbuilt sector to a more promising one?

These kinds of question require a medium-term perspective, and in a medium-term perspective monetary accommodation will prove only as good as the balance sheet, fiscal and structural policies that accompany it.

From a longer-term perspective, a challenge is to better integrate financial stability considerations into monetary policy frameworks.

The recent crisis brought the global financial system to the verge of collapse and has had dire social and economic consequences.

This has raised fundamental questions about how to integrate a modern understanding of the financial system into our traditional monetary policy models.

These are all exceedingly difficult questions, the situation is different from country to country and no one can claim to have a crystal ball that provides definite answers.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 11

Yet, experience does offer at least some pointers for the future.

In the following, I will therefore start by reviewing the main insights suggested by monetary history, before turning to the current challenges.

Insights from monetary history

The past century saw considerable changes in the conduct of monetary policy.

These changes were often the result of both historical events and new ways of thinking about the role of central banks.

By the end of the 20th century, there was a clear consensus that a remit of monetary policy focused on price stability had many benefits.

This view reflected lessons from the painful experience of double-digit inflation rates and erratic growth that prevailed in many countries worldwide in the 1970s, and in some emerging market economies well into the 1990s.

The main reason for this dismal inflation and economic performance was that monetary policy neglected price stability.

Instead, central banks pursued other goals, which turned out to be inconsistent with price stability.

In many advanced economies, for example, monetary policy was too accommodative during the 1970s, and central banks ended up pushing output beyond sustainable levels.

In emerging market economies, political pressures to generate seigniorage income and finance public spending programmes via the printing press were frequent sources of high inflation.

In all these experiences, the neglect of price stability did not improve economic performance.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 12

Over time, we learned, quite painfully, that there is no beneficial long-run trade-off between inflation and growth.

Indeed, we learned that high and volatile inflation rates go hand in hand with erratic growth, large exchange rate swings, and even economic and political crises.

Chastened by these experiences of the 1970s and 1980s, central banks had to rethink their roles.

At that time, the result was to consider a narrow mandate for price stability.

To be sure, this required a very painful adjustment process.

Central banks had to squeeze inflation out of their economies at the cost of recessions. But that cost was well worth the price.

Those who had the courage to try were vilified then, only to be recognised as having done the right thing years later.

Another lesson learnt during this period was that central bank autonomy is critical to achieve price stability.

One main underlying cause of inflation instability was the failure to shield monetary policymakers sufficiently from short-term political cycles.

Some central banks, such as the Bundesbank and the Swiss National Bank, had led the way.

They enjoyed a high degree of effective independence and, on this basis, consistently delivered lower inflation than their peers during thepost-Bretton Woods era.

These are hard-earned lessons that should not be forgotten.

Today, central banks are once again "thinking outside the box" as new challenges have arisen.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 13

Even before the crisis, concerns among central bankers were growing that the policy environment was changing in ways that called for a further evolution of central banking.

In particular, the narrow focus on near-term domestic price stability did not seem to be enough in an environment in which the financial cycle and global spillovers were becoming more prominent.

With respect to the financial cycle, we now see that monetary policy played an important part in the build-up of financial imbalances during the 2000s.

After the bust of the dotcom boom, monetary policy in the advanced economies remained accommodative for many years. Interest rates were low, and credit and house prices soared.

Of course, the relevance of the financial cycle for central banks is not an entirely new insight.

The forging of many central banks, such as that of the Federal Reserve in 1913, was the direct result of the banking crises of the 19th and early 20th century.

It became less relevant in the early postwar period against the background of tightly regulated financial systems put in place after the Great Depression and the Second World War.

But the far-reaching financial deregulation pursued since the 1970s allowed the financial cycle to re-emerge as a major macroeconomic force that grew ever stronger.

Globalisation, too, has been changing the policy environment in significant ways.

In addition to the growing influence of global factors on domestic inflation dynamics, globalisation appears to have added fuel to the monetary easing in the run-up to the recent crisis.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 14

The unusually low policy rates prevailing in the major advanced economies affected others via a resistance to currency appreciation pressures.

Many emerging market economies kept interest rates lower than would have been suggested by domestic macroeconomic conditions alone.

In turn, their accumulation of foreign exchange reserves put additional downward pressure on yields in the advanced economies.

The net result was unusually accommodative global monetary conditions. Real interest rates averaged a mere 1.5% globally between 2002 and 2007 while output grew robustly at roughly 4%.

Managing the post-crisis recovery

While the pre-crisis period already gave central banks much food for thought, the crisis has given them still more to chew on.

The financial crisis has tested the crisis-management readiness of central banks, and the subsequent phase their ability to nurse the economy back to growth.

Central banks have responded in an unprecedented way in both scale and scope.

They have provided ample liquidity in their lender of last resort functions, have committed to low - often effectively zero - interest rates, have engaged in large-scale balance sheet policies, have augmented this with enhanced forward guidance linked to real-economy outcomes, have put in place targeted lending schemes, have purchased risky assets and so on.

The response of central banks has had important benefits.

There is no question that in the most acute phase of the crisis it prevented the financial system from imploding, which would have brought the real economy down.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 15

Low policy rates and the unprecedented deployment of balance sheet policies boosted confidence and improved financial market conditions.

And as doubts re-emerged in financial markets more recently, central bank measures effectively reduced perceived financial tail risks.

And yet, despite these unprecedented actions, the global recovery has been lacklustre.

Five years into the recovery, economic performance is lagging previous ones at the same stage.

Economic activity is well below its pre-crisis trend in the major advanced economies and unemployment is stubbornly high.

There is, understandably, frustration about this apparent lack of traction.

This frustration has led some to call for ever more monetary policy activism.

But is it really justified?

If a medicine does not work as expected, it's not necessarily because the dosage was too low.

Maybe instead the overall treatment, and the role of the medicine within it, should be reconsidered.

Most likely something else is needed.

Balance sheet recessions are special: it is less clear than often thought that monetary policy can foster a quick and robust recovery in a balance sheet recession.

When private sector balance sheets need repair, accommodative monetary policies are less effective.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 16

When the problem is too much debt and agents are in the mood to retrench, it is unrealistic to expect monetary policy to revive strong growth by lowering interest rates.

When financial institutions are weak, it is equally unrealistic to expect them to effectively transmit monetary impulses.

Moreover, it is well known by now that growth tends to be weaker after financial crises than after ordinary economic downturns.

This is not just, or even primarily, a question of deficient demand.

It reflects the need for the economy to reabsorb the aggregate and sectoral real imbalances that built up during the preceding unsustainable expansion, hidden under the froth of the financial boom.

Such booms typically leave in their wake not only too much debt, but also too much capital and labour in the wrong sectors.

Therefore, the challenge for countries in the next few years will be to reallocate labour and capital among sectors both within and across national borders.

Structural reform to remove rigidities, not monetary policy, is the way to facilitate this.

True, monetary policy can buy time to implement the necessary balance sheet repair and structural reforms.

But it cannot substitute for them. After five years of buying time, one has to ask whether that time has been - or will be - used wisely.

Refocusing the policy mix to rely more on repair and reform and not to overburden monetary policy is crucial because the balance of risks of prolonged very low interest rates and unconventional policies is shifting.

The costs are growing in relation to the benefits, for a number of reasons:International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 17

First, prolonged monetary accommodation gives borrowers, financial institutions and policymakers an incentive to keep "kicking the can down the road", delaying necessary repair and reform.Certainly, progress has been made in a very trying environment. But more needs to be done.Indeed, the slow progress in the implementation of structural reforms and in the deleveraging process may signal that this delaying mechanism is at work.

Persistent high unemployment rates in many advanced economies indicate the challenges of labour rigidities and sectoral rebalancing that still face us.

At the same time, although some private sector deleveraging is occurring in some countries, and the financial system is better capitalised, the total debt figures are not reassuring.

Since the end of 2007, total debt of the G20 non-financial sector, both private and public, has risen by more than 30 trillion US dollars, which runs counter to deleveraging, at least as I understand the term.

It is noteworthy that over the same period global central bank assets have increased by roughly 10 trillion US dollars.

Second, prolonged accommodation can produce other unintended side effects.

In the 1970s, the desire to lift output and employment back to pre-crisis levels resulted in surging inflation.

One might argue that the situation today is quite different from then.

Inflation has remained low in most jurisdictions and close to central bank targets.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 18

However, monetary stimulus may find its way into asset prices and leverage before influencing goods and services price inflation.

Moreover, prolonged very low interest rates can distort market signals, mask underlying balance sheet weaknesses and undermine the earnings capacity of banks, the business models of life insurance companies and the solvency of pension funds.

This may further misallocate credit, weaken financial institutions' balance sheets and encourage excessive and unwelcome risk-taking.

Another significant side effect arises from global monetary policy spillovers.

Persistently low interest rates in the major advanced economies generally encourage capital flows to fast-growing emerging market economies and put upward pressure on emerging market exchange rates.

This can complicate the ability of emerging market central banks to pursue their stabilisation goals.

On the one hand, if central banks in emerging markets keep policy rates very low, capital inflows would be discouraged, but domestic credit growth would be encouraged.

If, on the other hand, they raise policy rates, the risks of destabilising capital flows would rise.

So far, we have been seeing a combination of these forces at work.

Despite some slowing of capital flows over the past year, private sector credit and property prices have been surging in a number of these economies, as well as in some open advanced economies.

Finally, prolonged accommodation raises risks to central banks themselves.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 19

If economies remain weak and structural problems unresolved despite repeated rounds of further monetary stimulus, the credibility of central banks may suffer, and credibility is important for effectiveness.

Let me insist here that results in the real economy will depend on the extent that needed repair and reforms are carried out.

Results will depend to a large extent on factors that are not under central banks' control.

A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they actually can deliver.

This may ultimately undermine their credibility and, with it, their legitimacy and effectiveness.

All this underscores the importance of being prepared for the eventual exit from the extraordinarily accommodative monetary conditions that have prevailed for the past several years.

While central banks surely have all the tools available to technically engineer an exit, it cannot be taken for granted that it will be smooth.

The global bond market crash of 1994 is a cautionary tale of the risks involved in exiting from a prolonged period of low interest rates.

At the same time, we also have to recognise that the situation today is rather different from back then in at least one critical dimension: central banks are much more transparent about their policy intentions now and their communication is much better.

This should reduce the risk of major policy surprises.

That said, the policy environment central banks have to grapple with today is also much more complex in some important dimensions.

Record levels of debt have been issued at very low interest rates.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 20

Central banks, at least for now, are playing an important, if not dominant, role in key financial market segments.

So, as interest rates rise and central banks pare back and eventually reverse large-scale asset purchases, financial markets will have much to digest.

Different national conditions will require unsynchronised exits, which may raise additional complexities.

Even in the current environment of enhanced central bank transparency and credibility, a choppy exit is a material risk.

It goes without saying that I would love to be proven wrong about this, and that a lot of work is being done to reduce exit risks.

Monetary policy and the financial cycle

As we peer further into the future, one key challenge central banks face is how to better integrate financial stability considerations into their monetary policy frameworks.

The economic and social damage of the recent crisis has painfully shown what is at stake.

And central banks must reflect on how they can forge a new consensus about the way forward.

This is not just a narrow operational issue, for example about how to respond to credit and asset price booms and busts.

It raises the much broader conceptual question of how to shift our traditional purely macroeconomic perspective towards a new, fully integrated macro-financial perspective.

As I see it, the crisis has not discredited the core elements of pre-crisis monetary policy frameworks.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 21

The credibility of central banks as guarantors of price stability has been instrumental in anchoring inflation expectations, on both the downside and the upside, during the crisis and its aftermath.

A strong, credible anchor helps to counteract the destabilising forces hitting the economy and financial markets.

At the same time, the pre-crisis monetary policy frameworks did not prevent the crisis from happening.

The experience in the run-up suggests that central banks need to better appreciate their role in influencing the financial cycle.

For this purpose, by financial cycle I refer to the combined endogenous behaviour of credit and asset prices, particularly house prices.

Regulatory reform obviously plays a key role in mitigating financial cycles, and we have already seen significant progress in this area: better and higher buffers, the introduction of countercyclical capital buffers under the new Basel III framework and the development of macroprudential frameworks and tools.

To be sure, prudential and macroprudential measures are clearly necessary.

But they alone will not be enough and can also be circumvented by regulatory arbitrage.

This is why monetary policy has a complementary role to play.

The policy rate represents the universal price of leverage in a given currency and cannot be bypassed easily.

In this respect, central banks will need to reflect on how best to respond to financial stability concerns in the future.

The crisis has clearly shown that financial stability is essential for lasting price stability.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 22

One lesson is that monetary policy may need to respond more symmetrically to the financial cycle than in the past - tightening more strongly in booms and easing less aggressively, and persistently, in busts.

In practice, this means paying more attention to policy challenges beyond the conventional policy horizons of two or so years.

When financial stability concerns grow, policy horizons need to be lengthened to take account of the fact that the financial cycle is considerably longer than the business cycle.

Analytical frameworks also need to better reflect the characteristics of financial cycles and their interactions with financial and macroeconomic stability.

Central banks' pre-crisis workhorse models generally assigned no meaningful role to macro-financial linkages.

The financial crisis has demonstrated that such analytical perspectives are woefully inadequate.

Another dimension along which central banks need to reflect is a better appreciation of global monetary policy spillovers.

Global feedback effects amplified the pre-crisis financial boom, and we might be seeing this mechanism at work again.

In a highly globalised world, keeping one's own house in order surely is not enough.

What does this mean in practice?

It does not require central banks to coordinate their policies closely.

But, at a minimum, it does call for them to appreciate better the global side effects and feedbacks that arise from their monetary policy decisions.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 23

This is in each central bank's own interest, especially if the spillovers have the potential to foster regional financial instability that ends in crisis, with significant global repercussions that swing back to the originating countries, like a boomerang.

A precondition for this shift in perspective is a more global analytical approach that factors in interactions and feedbacks appropriately.

Finally, I do not want to leave you with the impression that fiscal policy is irrelevant in this discussion.

Indeed, fiscal policy plays an important role in financial stability, too. The financial crisis has demonstrated the importance of having the fiscal capacity to support the financial sector through bank rescue packages and the real economy through fiscal buffers.

But the financial crisis has pushed fiscal policy in many economies onto an unsustainable path.

This is a lesson that we have to keep in mind for the future.

Accumulating budget surpluses in good times provides governments with the ability to respond flexibly to a financial crisis without putting fiscal sustainability at risk.

In other words, governments need to factor in the financial cycle and to build up additional fiscal buffers during good times that can be drawn down to provide support in bad times.

Summing up

Let me sum up. There is little disagreement that the past five years have been unusually challenging.

Central banks have played a critical role in managing the crisis and its aftermath.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 24

They are now under huge pressure to promote a sustainable recovery under difficult circumstances.

And, looking ahead, they will continue to find themselves confronting major challenges.

I have suggested that monetary history provides a valuable compass to navigate these tricky waters: a clear focus on lasting price stability, a more symmetrical approach to the financial cycle, and a better appreciation of global spillover effects - these would appear to be the key elements of stronger monetary policy frameworks.

At the current juncture, there is also a premium on central bank communication.

Central banks need to clearly communicate the limits of monetary policy, both to the public and to other policymakers.

The private sector and policymakers, who have been facing their own set of daunting challenges in extraordinarily difficult times, will have to play a larger role in the next leg of the global recovery.

Crucially, this would also allow central banks to normalise monetary policy in a manner consistent with a return to sustainable and balanced growth.

Thank you.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 25NIST Posts Initial Analysis of RFIComments on Cybersecurity Framework for Critical Infrastructure

The National Institute of Standards and Technology (NIST) has posted an initial analysis of hundreds of comments submitted by industry and the public related to the President's "Improving Critical Infrastructure Cybersecurity" Executive Order, issued Feb. 12, 2013.

NIST is making this initial analysis available as a status update and to help provide background for a workshop later this month to discuss the cybersecurity framework.

The Executive Order calls for NIST to work with industry to develop a voluntary framework to reduce cybersecurity risks to the nation's critical infrastructure, which includes power, water, communication and other critical systems.

The first step toward drafting the framework was soliciting information on current risk management policies, existing standards and guidelines, and specific industry practices from stakeholders through a Request for Information (RFI).

These comments were due April 8, 2013. NIST received more than 200 responses and posted them publicly.

NIST's approach to analyzing the input from the RFI, as well as identification of the common cybersecurity framework themes that emerged as a result of the analysis, is described in the paper, Initial Analysis of Cybersecurity Framework RFI Responses.

In addition to identifying and describing the common themes, this paper provides questions for stakeholders to consider.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 26

The paper can be found athttp://csrc.nist.gov/cyberframework/nist-initial-analysis-of-rfi-respons es.pdf

and additional information about the cybersecurity critical infrastructure framework project is available at www.nist.gov/itl/cyberframework.cfm

Information on the 2nd Cybersecurity Framework Workshop, May 29-31, 2013, at Carnegie Mellon University is at www.nist.gov/itl/csd/cybersecurity-framework-workshop-may-29-31-20 13.cfm

Cybersecurity Framework

Recognizing that the national and economic security of the United States depends on the reliable functioning of critical infrastructure, the President under the Executive Order Improving Critical Infrastructure Cybersecurity has directed NIST to work with stakeholders to develop a voluntary framework for reducing cyber risks to critical infrastructure.

The Framework will consist of standards, guidelines, and best practices to promote the protection of critical infrastructure.

The prioritized, flexible, repeatable, and cost-effective approach of the framework will help owners and operators of critical infrastructure to manage cybersecurity-related risk while protecting business confidentiality, individual privacy and civil liberties.

Background - NIST Responsibilities

NIST will develop the Framework in a manner that is consistent with its mission to promote U.S. innovation and industrial competitiveness.

The Framework will be developed by ongoing engagement with, and input from, stakeholders in government, industry, and academia, including an open public review and comment process, workshops and other means of engagement.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 27

To develop the Framework, NIST will use a Request for Information (RFI) and ongoing stakeholder engagement to:

identify existing cybersecurity standards, guidelines, frameworks, and best practices that are applicable to increase the security of critical infrastructure sectors and other interested entities;

specify high-priority gaps for which new or revised standards are needed; and

collaboratively develop action plans by which these gaps can be addressed.

The Framework will seek to promote the wide adoption of practices to increase cybersecurity across all sectors and industry types.

It will seek to provide owners and operators a flexible, repeatable and cost effective risk-based approach to implementing security practices while allowing organizations to express requirements to multiple authorities and regulators.

The below presentation shows the process by which NIST will work with stakeholders to develop the Initial Framework.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 28Initial Analysis of Cybersecurity Framework RFI Responses Introduction

On February 26, 2013, NIST issued a Request for Information (RFI) on Developing a Framework To Improve Critical Infrastructure Cybersecurity.

The purpose of this paper is to describe the methodology used to perform the initial analysis of the submitted responses, and to identify and describe the Cybersecurity Framework themes that emerged as a part of the initial analysis.

This initial analysis will serve as the basis for additional discussion and study at the Cybersecurity Framework Workshop #2 to be hosted at Carnegie Mellon University in Pittsburgh, Pennsylvania on May 29-31, 2013.

Analysis Methodology

NIST implemented a consistent and repeatable methodology to conduct its initial analysis of the RFI responses to Federal Register Notice 78 FR 13024.

a. Review and Categorize RFI Responses

Each submitted RFI response2 was reviewed and analyzed by NIST.3 The review of each RFI response included:

Analysis of response coverage across critical infrastructure sectors and organization types;

Identification of sections of text relevant to one or more of the RFI questions;

Categorization of relevant text to category/sub-category, as shown in Appendix A; andInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 29

Specification of terms and phrases that identify key points in each categorized section of relevant text.

The resulting categorization was then used to identify commonalities and recurring themes.

b. Identification of Commonalities and Recurring Themes

Commonly used terms and phrases identified during the RFI response categorization helped identify commonalities and recurring themes among responses.

Due to the variance in terminology and nomenclature across sectors, NIST identified and normalized terms that expressed key points.

For example, the terms security requirement, security measure, and security control were often used interchangeably.

To correlate these terms, NIST selected the term security control to label this concept.

The selected term allows for consistency in nomenclature.

Examples of commonly used terms and phrases include, but are not limited to:International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 30NIST used the commonly used terms and phrases to group relevant text from RFI responses. These groupings identified recurring and common themes, which were then separated into three categories:

Framework Principles: Characteristics and considerations the Framework must encompass.

Common Points: Practices identified as having wide utility and adoption.

Initial Gaps: For the purposes of RFI input analysis, initial gaps are those areas where RFI responses were not sufficient to meet the goal of the Executive Order.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 31The results of the initial analysis of RFI responses, including the description of each Cybersecurity Framework theme, identification of associated key terms and phrases, summary statistics, examples of RFI responses, and representative questions are included in the following sections.

This information represents an initial, high-level analysis of the inputs NIST has received to assist with the development of the Framework. Stakeholders are asked to evaluate the themes identified by NIST, determine if these themes are reflective of the comments receivedInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 32

through the RFI, and assist in those areas where additional stakeholder engagement will be needed to develop a sufficiently robust Framework.

To assist, NIST has provided a series of representative questions to encourage discussion on these key themes.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 33Opening Remarks at SEC Roundtable on Credit RatingsBy Chairman Mary Jo WhiteU.S. Securities and Exchange Commission, Washington, D.C.

Good morning everyone, and welcome to the Securities and Exchange Commission's Credit Ratings Roundtable, which I have been very much looking forward to and which will address a range of critical subjects.

I would like first to extend a special welcome to our distinguished Members of Congress here today: Senator Franken, Senator Wicker, and Chairman Garrett.

Thank you for taking time from your hectic schedules to speak to us today.

Thank you also in advance to our distinguished panelists for contributing your time and knowledge to this roundtable.

There are many questions about the appropriate role of credit ratings in our financial marketplace generally.

We take all the questions seriously.

But today, our discussions will center on whether and how to change the agency assignment system and alternatives to the compensation models now in use.

When Congress enacted the Dodd-Frank Act, it noted the critical "gatekeeper" role played in the debt market by Nationally Recognized Statistical Rating Organizations (NRSROs).International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 34

It also noted the systemic importance of credit ratings and that credit rating agencies are central to capital formation, investor confidence, and the efficient performance of the U.S. economy.

Congress also cited the adverse impact on the economy of inaccurate ratings assigned to structured finance products during the financial crisis.

And it noted that in certain activities particularly advising arrangers of structured financial products on potential ratings rating agencies face conflicts of interest that need to be recognized and carefully monitored.

As a result, the Commission was charged with studying the credit rating process for structured products and the conflicts of interest associated with the issuer pay and subscriber pay rating agency models.

We also were instructed to examine the feasibility of establishing an assigned ratings system and alternate means to compensate NRSROs.

When reporting to Congress, we were required to submit recommendations for regulatory or statutory changes that would be needed to implement our findings.

The Commission requested public comment and, in preparing the report, the Commission's staff carefully reviewed each of the comment letters received as well as studies, articles, and testimony regarding potential conflicts of interest and alternate compensation models.

We also met with several NRSROs, proponents of alternative models, and other market participants.

Relying on the information gathered from these efforts, the staff report described potential benefits and concerns with the systems proposed, and identified potential regulatory or statutory changes that could be undertaken with respect to each proposal.

The staff report was filed with Congress in December 2012.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 35

Given the complex issues the study brought to our attention and the varying and sometimes conflicting viewpoints expressed, the Commission's staff recommended convening a roundtable dedicated to these topics during which all sides could discuss the issues and the potential actions the study addressed.

Today is the day for that discussion.

As I said, I am very much looking forward to hearing the exchange of ideas by today's speakers and panelists, and using what we learn today as we consider approaches and appropriate responses.

Before I turn the floor back to Tom Butler (director of the SEC's Office of Credit Ratings), I would like to thank him and all of the staff from across the Commission who provided help and assistance in organizing this roundtable.

It was their tireless effort and coordinated activities that made today's extremely impressive assemblage of speakers and panelists possible.

Thank you all.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 36

Addressing Conflicts of Interest In the Credit Ratings IndustryBy Commissioner Luis A. AguilarU.S. Securities and Exchange Commission Remarks at the Credit Ratings Roundtable Washington, D.C.

Good morning. I am very pleased to be here at the Roundtable on Credit Ratings.

I strongly support the Commissions effort to evaluate ways to improve our credit ratings system.

Effective oversight of Nationally Recognized Statistical Rating Organizations (NRSROs) is critical to ensuring accurate ratings and promoting investor confidence.

Before I begin, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (SEC or Commission), my fellow Commissioners, or members of the staff.

As an SEC Commissioner, I have focused singularly on how the SEC can best serve the needs of investors.

It is clear that the role played by credit rating agencies can have an impact on the integrity of our markets and investor confidence.

Todays roundtable and the Commissions December 2012 Report to Congress on Assigned Credit Ratings are direct outgrowths of industry practices that permitted inaccurate ratings to undermine the securities market and the integrity of the credit ratings industry.

A number of studies have concluded that inflated credit ratings, among other factors, contributed to the financial crisis by masking the true risk of many mortgage-related securities.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 37

For example, prior to the financial crisis, NRSROs issued credit ratings for tens of thousands of U.S residential mortgage backed securities (RMBS) and collateralized debt obligations (CDO).

A majority of the products received AAA and other investment-grade credit ratings despite their risky features.

Although AAA-rated securities have historically had less than 1% probability of incurring defaults, over 90% of the AAA ratings given to subprime RMBS securities that originated in 2006 and 2007 were later downgraded by the NRSROs to junk status.

These large numbers of downgrades resulted in great harm and requires that we make sure they dont reflect a faulty systemic process.

Too that end, one of the key concerns raised by commentators regarding the current structure of the credit ratings process is the issue of conflicts of interest associated with the issuer-pays model.

This model allows the party planning on issuing a financial instrument to pay an NRSRO for assigning the rating.

A number of commentators have argued that this business model encourages ratings shopping by the issuers and investment banks selling the securities, and results in undue pressure for NRSROs to give favorable ratings to attract business.

Investors use credit ratings to make investment decisions, generally opting for investment-grade products those rated as AAA to BBB-

Products that carry a greater risk are labeled below investment grade.

Obviously, products that receive an investment grade rating have a much broader market in which to sell.

As a result, there can be a great deal of incentive to have a product rated at investment grade level.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 38

Therefore, it is important to establish processes to ensure that a product receive the appropriate rating level.

A faulty system of assigning credit ratings can devastate the best financial planning and destroy financial security, particularly for investors that are retired or nearing retirement.

Given the importance of credit ratings, it is critical that credit ratings be issued with integrity and transparency.

It is clear that the past cannot be repeated. The financial crisis cost Americans $3.4 trillion in retirement savings and it triggered the worst crisis since the Great Depression.

The Financial Crisis Inquiry Committee concluded that the failures of the credit rating agencies were essential cogs in the wheel of financial destruction [and] were key enablers of the financial meltdown.

I want to thank all of the panelists for being here today to share your views.

All of you have important information to share with us about the credit ratings system, and I appreciate that youve taken the time to be with us.

As todays discussion unfolds, we should remember the needs of investors, who deserve a credit ratings system that is transparent, orderly, and that is not derailed by conflicts of interest.

Thank you.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 39Raising the bar for the next phase of growth and development sustaining transformative momentum

Welcoming address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 10th IFSB (Islamic Financial Services Board) Summit 2013 The future of the Islamic financial services industry resilience, stability and inclusive growth, Sasana Kijang, Kuala Lumpur.

It is a great pleasure to welcome you to this 10th IFSB Summit, on the The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth.

Bank Negara Malaysia is most honored to host this years summit, which is held in conjunction with the 10th anniversary of the Islamic Financial Services Board (IFSB).

It was here in Kuala Lumpur 10 years ago that we witnessed the momentous occasion of the IFSB inauguration, that was the culmination of international collaboration among the founding member countries with the support of several key international and multilateral institutions.

Its landmark establishment in 2002 as the international prudential standard setting body for the Islamic finance marked a major milestone in the effort to strengthen the international infrastructure for the Islamic financial system, steering the path for its successful integration as a viable component of the global financial system.

A decade on, the work of the IFSB in ensuring a cohesive cross-border regulatory framework and the international best practices that are attuned to the intrinsic characteristics and peculiarities of Islamic financial intermediation, have served to underpin the development of a sound andInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 40

stable Islamic financial system, ushering in a phase of rapid growth and greater internationalization of the industry.

Indeed, 10 years since the founding of the IFSB have been a period of significance, during which the Islamic financial services industry has grown impressively with its landscape dramatically evolved.

This growth acceleration has been accompanied by the widening of its geographical reach transcending its traditional borders in Muslim majority countries to the more established financial centres.

In addition, Islamic finance has evolved as a comprehensive system of intermediation servicing all segments of society, including governments, businesses and households regardless of scale of businesses and income levels.

In this decade, Islamic finance has also evolved from being domestic-centric to become increasingly internationalized,intermediating funds across borders and becoming a new vehicle that bridges economies and fostering closer financial linkages, particularly among emerging and developing markets.

As a form of financial intermediation that is well anchored to serve the real economy, Islamic finance offers distinct potential to achieve the goals of inclusive growth and financial stability.

Its foundations have been strengthened with the setting up of the IFSB and before that, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), have taken the lead in setting the prudential and accounting standards for the industry.

Combined with continuous capacity building initiatives and institutional development, it has resulted in the opportunity to achieve scale and has allowed the Islamic financial services industry to transition into a dynamic, fast growing and competitive form of financial intermediation for the global community.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 41

The IFSB today is celebrating its tenth anniversary in a world which is changing profoundly.

A new growth and development agenda is unfolding before us.

Given the severe damage and devastation caused by the global financial crisis and the ensuing economic downturns, the road to an enduring recovery and lasting prosperity demands a global policy response that brings about a new economic trajectory built on a strong, more inclusive and more sustainable growth path.

Common challenges that have also come to the forefront, such as poverty, increasing inequality and the imperative for greater social cohesion, have also called for the construction of policy objectives and strategies that can enhance stability, social well being and environmental sustainability.

In the wake of the global financial crisis, there is consensus on the need for a return to financial systems that serve the real economy, and the demands for more responsible financial practices from the financial sector, that also includes the commitment to achieve socio-economic goals.

In response, the international community is prioritizing financial stability by strengthening financial regulation.

This includes financial reforms aimed at protecting depositors from excessive risk-taking, over-leveraging and unfettered innovation.

The reform initiatives have also focused on enhancing capital and liquidity standards, reinforced by moves to strengthen themacro-prudential orientation of regulation to complementmicro-prudential supervision to manage the risks arising from the interdependencies within the financial system.

Whilst the breadth of regulatory changes being considered collectively endeavor to strengthen financial system resilience, the key challenge forInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 42

policymakers and regulators going forward is also to achieve inclusive and more sustainable growth, whilst ensuring financial stability.

Whilst Islamic finance has benefited from a well-developed, more competitive and well regulated eco-system, it needs to build on and reinforce the solid foundations that has been achieved in this decade.

As the industry transitions into a new era of growth and development in this post-crisis world, the competitive financial landscape is being redrawn by the evolving international regulatory reforms, changing operating models, rising consumer expectations and increased competition.

In this more challenging environment, the success of sustaining the momentum of Islamic finance as a transformative agent for the economy, will hinge on the ability to keep raising the bar in the pursuit of an effective functioning and sound Islamic financial system.

Post-crisis, the increased emphasis for inclusive and sustainable products as well as responsible corporate behavior provides clear potential for Islamic financial players to demonstrate leadership by capitalizing on core value propositions of Islamic financial intermediation.

There is also scope for greater leverage on the advances of technology and new institutional arrangements that can enhance operational excellence, particularly distribution channels for extending outreach to the range of users from households to microenterprises and small and medium scale enterprises.

In addition, innovations in Islamic financial solutions will need to take into account the higher regulatory expectations for more transparency, and the need for the effective management of risks and capital.

This involves strengthening the resilience of the Islamic financial system in alignment with the evolving international regulatory developments thus raising the bar of industry performance.

The IFSB has made significant advancements in leading the efforts toInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 43

review specific measures put forward by the Basel Committee for possible adoption in Islamic finance.

Further to this is the imperative to cultivate a strong risk culture within institutions.

Reinforced by a robust shariah governance framework, it will ensure that innovation for furthering the development of Islamic finance is harnessed within the boundaries of the Shariah, which would avert overzealous innovative activities that could undermine financial stability.

Let me conclude my remarks.

Much has been achieved, both in terms of the role and contribution of the IFSB, and the advancement made by Islamic finance in this recent decade.

This has been an outcome of cumulative efforts to strengthen the foundations of the Islamic financial system.

As the industry gears itself for the next phase of growth in the more challenging environment, our commitment and strategies to keep raising the bar to bring Islamic finance to a new level will enhance its prospect to contribute to achieving our shared vision of inclusive growth in an environment of financial stability.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 44Changes in the Large Exposure Regime

CONSULTATION PAPER GUERNSEY FINANCIAL SERVICES COMMISSION

1: Executive Summary1.1 Overview

This paper contains full details of the proposals to substantially alter the Large Exposure principles and guidance that apply to licensed deposit takers that are incorporated in Guernsey.

It is proposed that the new regime would take effect from 1 January 2014.

These proposals include changes to enhance the quarterly prudential reporting to the Commission and this would affect not only licensed deposit takers incorporated in the Bailiwick, but also those licensed deposit takers whose principal place of business is outside the Bailiwick.

The context for the review is that the existing Principle 1/1994/24 Principles and Guidance to be followed by a locally incorporated licensed deposit taking institution entering into a large exposure paper published by the Commission in 1994 no longer adequately addresses the risks associated with large exposures, particularly those arising from the systemic and market risks that became evident as a result of the 2007/2008 financial crisis.

In respect of large exposures, the Commission has tended to be a pragmatic supervisor rather than a rigid standard based supervisor, and, it has from time to time allowed suitably collateralised large exposures in excess of 25% of net capital base.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 45

Given that any change to a more restrictive approach may have a business impact on licensees the Commission feels that it is appropriate to seek the views of industry.

The Commission is proposing to retain several elements of its pragmatic approach and in seeking the views of industry it will be open to bilateral discussions with licensees about particular types of exposures.

What is proposed?

The substantive changes being proposed in updated guidance are as follows:

Exposures to central governments and market loans of less than 12 months maturity, which are exempt from the current large exposure regime, will be deemed to be large exposures under the new regime.

The current upstreaming regime will change to express agreed exposure limits to parent/group banks as a proportion (i.e. %) of capital base rather than a proportion of assets. The upstreaming regime will include on balance sheet and off balance sheet exposures.

Exposures to third party banks will normally be limited to a maximum of 100% of net capital base and will comprise cash placements, holding of debt instruments and off balance sheet exposures. The maximum proportion (%) of exposure will be determined according to the rating of the third party bank, although limited flexibility will be permitted in the case of exceptional short-term excesses.

In relation to exposures to sovereigns, the concept of Zone A and Zone B countries will be replaced with two different OECD-based groupings - High Income OECD countries and other countries.

Exposures will be capped at a maximum of 1000% of net capital base and will be determined according to the rating of the sovereign.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 46

Exposures to clients or groups of connected clients will be capped at a maximum of 25% of net capital base, unless the exposure is secured by cash and/or High Income OECD government securities, or the exposure is subject to a parental guarantee (which in itself would need to be included in any upstreaming limit).

Sub-participation agreements that transfer credit risk off the balance sheet of the Guernsey bank will also be considered.

Better definition of what constitutes connected clients will be provided.

The prudential reporting forms will be changed to better capture large exposures that have not previously been reported; e.g. holdings of debt that equate to more than 10% of a banks net capital base.

In accordance with expected international developments, the Commission also proposes to capture the top twenty, rather than the current top ten, largest exposures.

Branches will be asked to report similar details, but in terms of their parental capital, so that data on any significant credit concentration risk in a branch in Guernsey that may impact on a head office elsewhere can be collected.

Breaches of large exposure limits will be a reportable event. The Commission is proposing a staged approach to dealing with exposures that cannot be regularised.

The 800% aggregate limit on exposures would be retained, but exposures to Group, to third party banks and to sovereigns would be excluded from this aggregate.

Large exposures existing prior to the intended effective date for the new regime of 1 January 2014 would be grandfathered in.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 47

1.3 Rationale for change

The large exposure regime is all about capturing concentration risk and it is covered by s24 of The Banking Supervision (Bailiwick of Guernsey) Law, 1994.

Conventional wisdom, as dictated by the Capital Requirements Directive and the Basel Core Principles for Effective Banking Supervision, states that no exposure to a client or connected group of clients should equate to more than 25% of net capital.

Short term interbank exposures have historically been exempt from this requirement.

Our current environment reflects these exemptions and also permits exposures to clients to exceed the 25% limit.

Whilst pure concentration risk to single obligor counterparties was not seen as a major direct contributor to the 2008 financial crisis, nonetheless elements of concentration risk were seen as indirect contributors.

Interconnectedness within and between groups were seen as magnifiers of some exposures and concentrations through sectoral exposures to particular economic sectors (e.g. the Irish property development sector) affected credit assessments of many organisations.

That said, the guidance on large exposures remains historic in nature; the Basel Committee guidance on measuring and controlling large exposures dates back to 1991, and our own local regime has not been significantly updated since 1994.

However, there have been substantial changes to the EU large exposure regime.

These substantial changes have their origin in late 2007 and early 2008, when the Committee of European Banking Supervisors (CEBS), which has since become the European Banking Authority, reported to theInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 48

European Commission on the effectiveness of the large exposure provisions of the Capital Requirements Directive.

The report concluded that market failures associated with systemic risk and moral hazard applied to interbank exposures regardless of maturity.

Accordingly, the large exposure regime for EU member states was revised with effect from December 2010 to tighten large exposure limits, particularly in relation to interbank and intra-group lending, which the European Commission agreed was a major systemic risk in the wake of the financial crisis.

Under the revised EU regime, short term loans to banks are no longer exempt and whilst limited national discretion is available to member states in relation to intra-group lending, loans to third party banks are now capped at 25% of net capital, unless the lending bank is very small.

In reality, by the time the changes to the EU regime came along, market practice had already changed to reflect this more cautious approach to interbank lending.

It is worth noting that the CEBS conclusions were also reflected in the UK Governments response to the report on banking reform by the Independent Commission on Banking (the Vickers Report).

The HM Treasury white paper Banking Reform delivering stability and supporting a stable economy published in June 2012 envisages the limiting of a ring-fenced banks exposure to financial institutions in order to prevent systemic shocks.

Clearly Guernsey is not in the EU, but nevertheless we would not wish to be a complete outlier in respect of large exposures.

The Basel Core Principles for Effective Banking Supervision do give the supervisor some latitude in permitting minor deviations from the 25% limit, but the economic climate that has prevailed for all but the last few years combined with the Commissions wish to be a pragmatic regulator has meant that these minor deviations have been permitted moreInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 49

frequently in the past than is arguably now prudent in the current economic and regulatory climate.

The guidance however, remains the same and a change is needed to manage expectations and formalise a prudent approach.

In developing proposals for a new large exposure regime the Commission has had regard to a number of other regimes, including those operating in the UK and the other Crown Dependencies.

None of these are a good fit in their entirety for the type of banking business done in and from within the Bailiwick.

The Commission has therefore tried to balance the requirements of other regimes against the type of banking business that exists in the Bailiwick, recognising also the intra-group funding that many licensees provide.

1.4 Who would be affected?

Licensed deposit takers that are incorporated in Guernsey would be those principally affected, given that limits on exposures are being proposed in relation to capital.

However, the proposed revisions to the large exposure regime include enhanced quarterly prudential reporting for all licensees and branches would therefore be affected by these changes to the BSL/2 reports.

The Commission

The Guernsey Financial Services Commission is the regulatory body for the finance sector in the Bailiwick of Guernsey. The Commissions primary objective is to regulate and supervise financial services in Guernsey, with integrity and efficiency, and in so doing help to uphold the international reputation of Guernsey as a finance centre.

To learn more: http://www.gfsc.gg/Banking/News/Documents/Consultation%20pap er%20for%20Commission%20website.pdfInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 50Governor Sarah Bloom RaskinAt the Society of Government Economists and the National Economists Club, Washington, D.C.

Prospects for a Stronger Recovery

Thank you.

I am very pleased to be here among an audience of professional economists, which is certainly preferable to appearing before an audience of unprofessional economists.

I like your kind! Your talents are needed now more than ever as we try to put the tools of the economic profession to work for the common good.

It's easy to be an economist who looks back on crises and crashes and tries to explain why they happened, but much harder to be an economist whose efforts manage to help stop them from happening in the first place.

Economic policymaking, at its best, reflects a continuous struggle to make sure that data and explanations of such data are consistent with real experience.

If we're to engage in this struggle honestly, it's no easy task. It involves understanding not just the reliability and signal in various data, but also questioning whether the data accords with our understanding of actual experience.

So, to get this right requires many different perspectives, not just on the data but on the underlying realities the data are trying to capture.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 51

Government economists understand that non-economists bring something valuable to the table in policymaking--a grounded perspective in what is happening in the economy.

With that said, what is really happening now in the American economy?

What do the economic data we see at the Federal Reserve currently show, and how do we think these data line up with the economic realities of most American households and businesses?

In my remarks today I will offer my assessment of recent economic developments and the economic outlook, and I will discuss the actions that the Federal Reserve has been taking, in light of its view of developments and the outlook, to support the economic recovery.

Before I begin, I should note that the views that I will be presenting are my own and not necessarily those of my colleagues on the Federal Open Market Committee (FOMC) or the Board of Governors.

Recent Economic and Financial Developments

For the past three and a half years the U.S. economy has been in a recovery--albeit a very weak one--from a severe financial crisis and the deepest recession of the post-World War II period.

The unemployment rate, which reached a high of 10 percent in the fall of 2009, has since come down 2-1/2 percentage points, to 7.5 percent in April.

The increase in economic activity and the decline in the unemployment rate are, of course, welcome, but we still have a long way to go to reach what feels like a healthy economy.

In fact, the pace of recovery has been slower than most had expected.

The gap between actual output and the economy's potential remains quite large, according to estimates from the Congressional Budget Office, and the unemployment rate today remains well above levels seen prior toInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 52

the recession, and well above the level that the Committee thinks can be sustained once a full recovery has been achieved.

In addition, the number of long-term unemployed--people who have been unemployed for 27 weeks or more--remains historically high.

My interpretation of the economic data that we have received over the past few quarters is that the recovery has continued to gain traction.

The Bureau of Economic Analysis reported last month that real gross domestic product (GDP) rose at an annual rate of 2-1/2 percent in the first quarter of this year after barely expanding at all in the fourth quarter of 2012.

The step-up in growth in the first quarter partly reflected a rebound from last year's drought and Hurricane Sandy.

Smoothing through these factors, real GDP was about 1-3/4 percent above its year-earlier level in the first quarter, a modest gain that is about in line with the pace of growth during much of the recovery.

The strength of the recovery among the components of GDP has been mixed recently.

In terms of the housing sector, there is no question that many communities and neighborhoods were devastated by the effects of the financial crisis.

Recently, we see that overall demand has been strengthening, with both home sales and prices rising markedly in many areas.

Both new and existing home sales have moved up, on net, since late 2011, and housing starts averaged an annual rate of nearly 1 million units in the first quarter of this year, up considerably from the extremely low levels that prevailed through 2011.

Inventories of new homes for sale have become quite lean in mostmarkets over the past year, a notable change from earlier in the recovery.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 53

The increase in activity in the housing sector has been driven by historically low mortgage rates, growing optimism about future house prices, continued gains in the job market, and sizable purchases of homes by investors.

Elsewhere in the household sector, consumer spending--abouttwo-thirds of overall final demand--has continued growing at a moderate pace.

On the whole, families have benefited from the modest improvement in the labor market, and rising stock prices and rebounding home values have helped some households recoup part of the wealth they lost during the recession.

However, overall wage growth has been anemic, and many households have not seen their circumstances improve materially.

As I described in a speech last month, globalization and technological change have continued to shift the occupations and industrial distribution of new jobs available.

These currents of globalization and technological change continue on their path, making it more likely that workers who were laid off during the recession would be unable to find reemployment that is of comparable quality to their previous jobs.

About two-thirds of all job losses in the recession were in middle-wage occupations--such as manufacturing, skilled construction, and office administration jobs--but these occupations have accounted for less than one-fourth of the job growth during the recovery.

By contrast, lower-wage occupations, such as retail sales, food service, and other lower-paying service jobs, accounted for only one-fifth of job losses during the recession but more than one-half of total job gains during the recovery.

As a result of these trends in job creation, which could well have been exacerbated by the severe nature of the crisis, the earnings potential forInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 54

many households likely remains below what they had anticipated in the years before the recession.

Moreover, as you all know, the temporary payroll tax cut has now expired, and many households have seen their disposable incomes reduced for this reason as well.

Spending in the business sector recently has increased only modestly, perhaps due in part to the effect of these recent tax changes on consumers.

Real spending on equipment and software rose about 4 percent over the past 12 months, according to the most recent GDP report, a modest gain for this category of spending.

Indicators for capital investment in the months ahead, including new orders for durable capital goods and survey measures of business sentiment, suggest that growth in business spending on new equipment and software is likely to remain modest in the coming quarters.

Turning to the government sector, the legislated reduction in spending by the federal government is exerting a clear and continuing drag on economic activity.

Even prior to the bulk of the spending cuts associated with sequestration, real purchases by the federal government were reported to have dropped at an annual rate of more than 8 percent in the first quarter of this year, following an even larger drop in the fourth quarter of last year.

These cuts in federal spending are likely to be an important influence on the near-term prospects for economic growth, and I will say more about this issue in a moment.

In contrast to the federal government, the budget outlook for state and local government continues to improve, and the drag on economic activity from this sector's cutbacks in spending has diminished considerably.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 55

Reflecting some of these mixed influences, as I already noted, real GDP has been rising at a very modest rate, and the labor market has shown similarly modest gains over the past year, with the unemployment rate coming down about 1/2 percentage point.

To more fully understand the experience of the 11.7 million Americans who can't find work, we look to broader measures of labor underutilization, which take into account job seekers who have stopped looking for work because they have become discouraged, and people working part time but who would prefer to work full time.

Recently, these numbers seem to be coming down.

The gains in payroll employment over this period have been about in line with the decline in the unemployment rate, although, as is typical, the pace of job gains has been somewhat erratic in recent months.

Since the beginning of the year, the increases in payroll employment have averaged 196,000 per month, a little above the 183,000 average monthly gains observed during 2012.

Other indicators from the labor market have also shown some improvement recently. Initial claims for unemployment insurance have declined since last summer, and the number of job openings appears to be increasing.

I hope these indicators mean we are turning the corner on some of the painful costs associated with being unemployed or underemployed in America.

Turning to inflation, recent data show that price pressures have remained subdued. Both total and core inflation were only about 1 percent over the 12 months ending in March, below the FOMC's long-run objective of 2 percent.

Inflation is being restrained by the continued slack in labor and product markets, while stable inflation expectations have offset disinflationary pressures to some extent.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 56

Moreover, the increase in gasoline prices that we saw earlier in the year appears to have fully reversed, and the path of oil futures prices is downward-sloping, suggesting that energy prices are likely to hold down headline inflation rates in the years ahead.

The Economic Outlook

Let me now turn to the outlook.

As my Federal Reserve colleagues and I have noted in the past, the pace of the economic recovery has been restrained by lingering effects of the financial crisis.

Assessing the current strength of the headwinds related to these lingering effects is an important determinant of the economic outlook for the coming years.

Unfortunately, current federal fiscal policy is one headwind to the recovery that has intensified this year.

In fact, federal fiscal policy has been tightening since 2011, after having been quite expansionary during the recession and early in the recovery.

More recently, actions by the Administration and the Congress to reduce the budget deficit have led to further tightening of federal fiscal policy.

As I already mentioned, both the tax legislation signed into law in January and the sharp spending cuts associated with sequestration will likely significantly hinder GDP growth this year.

Indeed, the Congressional Budget Office has estimated that these changes in fiscal policy would reduce GDP growth by 1-1/2 percentage points this year relative to what we otherwise would have achieved.

Looking further ahead, fiscal policy seems likely to remain restrictive at the federal level.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 57

The headwinds from the housing sector have eased, and housing market activity is likely to continue to contribute to GDP growth over the next few years.

These headwinds had been substantial, as the aftermath of the financial crisis and housing bubble left many homeowners underwater on their mortgages, a large overhang of vacant homes, and mortgage credit very hard to obtain for anyone without an excellent credit record and a sizable down payment.

The rise in house prices over the past year or so has lifted household net worth and pushed some homeowners above water on their mortgages.

These developments may help to ease credit for many households as well, although mortgage credit remains very tight.

In a speech last month, I described how the net decline in housing wealth since the recession has had particularly acute effects on the balance sheets of lower- and middle-income households, which tend to hold a relatively high share of their total wealth in their homes.

Households at the bottom of the income distribution have also had a harder time than others finding jobs during the recovery and their wages have continued to stagnate.

In my view, the large and increasing amount of inequality in income and wealth, which has been an ongoing development for decades, may have exacerbated the crisis and I think more research is required to determine whether it may also pose a significant headwind to the recovery from the crisis for years to come.

So, while I am hopeful that pressures will ease further as home prices continue to rebound, I also believe that some of the restraints on the recovery may be quite long-lasting.

The headwind from the financial sector also has diminished somewhat over the past year and should present less of a restraint on economic growth than has been the case in the recent past. U.S. equity prices are upInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 58

more than 10 percent so far this year following last year's 13 percent increase.

Risk spreads embedded in the interest rates paid by many American businesses, although still above their pre-crisis levels, have also moved down substantially over the past year to levels that are moderate, given the state of the broader economy.

The situation in Europe, although still uncertain, appears to have improved since last summer--aided importantly by the policies of the European Central Bank (ECB)--and these developments have led to an improvement in financial conditions globally.

Policy actions and promises, including the ECB's program to purchase the sovereign debt of vulnerable euro-area countries and discussions about creating a banking union, appear to have helped market participants negotiate past some recent hurdles, including the challenges in forming a governing coalition in Italy and the severe banking difficulties in Cyprus.

If policymakers in Europe can follow through on their commitments to financial integration and structural reforms, among other things, financial stress in Europe should continue to lessen, and European economies should gradually recover from their current slump.

If the economy in Europe were to begin to grow again, it could support global economic growth more broadly.

The financial condition of the U.S. banking sector has also continued to improve from the perspective of regulatory capital.

While much work remains for regulators and banks implementing pending capital requirements, most large, medium-sized, and community banks are in stronger capital positions today than they were prior to the financial crisis.

Although not all, some consumers at least, are seeing the benefits of improvements in financial markets.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 59In combination with low interest rates, the easing of financial stress has allowed some homeowners to refinance their mortgages to lower their monthly payments, and some types of loans, such as those for purchasing a new or used car, have become available to more people.

That said, we clearly still have a long way to go in assuring that Americans have access to affordable credit.

As I noted, an especially large number of people are unable to obtain mortgage credit, and credit card borrowing is also tight.

Taken together, the incoming data and my own analysis of recent developments in fiscal policy suggest that the recovery will continue at a moderate pace, and the unemployment rate will fall gradually.

According to the Summary of Economic Projections that was released by Federal Reserve Board members and Reserve Bank presidents after the March FOMC meeting, my colleagues and I expected real GDP growth to step up moderately this year, rising roughly 2-1/2 percent after having risen 1-3/4 percent in 2012.

In the projection, participants also expected the unemployment rate to be in the range of 7.3 to 7.5 percent by the end of the year.

Looking a bit further ahead, FOMC participants largely expected the unemployment rate to continue receding, but it was expected to remain above its long-run sustainable level for several years.

Meanwhile, inflation was expected to remain close to or a little below the Committee's objective of 2 percent, consistent with ongoing slack in the labor and product markets and well-anchored inflation expectations.

Monetary Policy Developments

In light of this outlook and the risks around the outlook, it has been appropriate for the Federal Reserve to continue to pursue a highly accommodative monetary policy.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 60

As you all know, during the financial crisis