Risk Management Presentation October 1 2012

7/28/2019 Risk Management Presentation October 1 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,

There are some interesting job openings and descriptions:

Vice President - Bank Regulatory Policy / BaselManhattan, NY, Salary $120,000-$180,000 / yr., Full -TimeThis individual will assist in interpretingand developing firm policy forU.S. and international banking regulations related to capital and andother regulatory reporting matters. They are seeking individuals withprior Basel I I and II I and bank capital regulations experience.

Finance and Risk Solution ArchitectLondon, Salary 80,000 - 115,000 + BonusWe are currently looking for profiles with a consulting or businessstream background in the following areas for a new business practice inthe finance sector: we are looking for individuals with the followingbackground or experience:Risk Management in Capital or Liquidityrequirements, Financial Industry Regulatory Reporting such as FSA,Dodd Frank, Basel I I / I I I & Industry Best Practice, reporting strategies& Global Transactions. Individuals will have a Business/ TechnicalArchitectural Background ideally with some Business Analysis &Consulting background.

International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
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Business Analyst with Basel III JobWe are actively seeking a contractor to lead a team in documentation,design, and traceability of requirements in support of Basel I I I implementation. This includes defining solutions to business/ systemsproblems and ensuring the integrity of delivery through customeracceptance and final disposition of solution for the Basel II I project.

This is a minimum 6-8 month project with strong possibility of extensionor conversion to full time employment.

Very interesting job descriptions and very interesting salary.

The same time, banks try hard to understand what to do with the newBasel I I I requirements (Number 1 of our list) and to find more investors

(Tier 1 capital).

Welcome to the Top 10 list.

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BIS, Results of the Basel I I I monitoringexercise as of 31 December 2011

This report presents the results of the BaselCommittee's Basel I I I monitoring exercise.

The study is based on rigorous reportingprocesses set up by the Committee toperiodically review the implications of theBasel I I I standardsfor financial markets; thefirst results of the exercise based on June 2011

data had been published in April 2012.

Financial Services Agency, TheJapanese Government

Recent Trend of Financial and Capital Markets,

Regulatory and Supervisory ChallengesRyutaro Hatanaka

Investor Protection through Audit Oversight

Lewis H. Ferguson, Board Member

California State University 11th Annual SEC Financial ReportingConference, Irvine, CA



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Annual public hearing of the chairpersons

of the three European Supervisory Authorities (EBA, ESMA and EIOPA).

Initial statement by Andrea Enria Chairperson of the EBA, in front of theEconomic and Monetary affairs committee of the European Parliament

Challenges to the single monetary policy and

the European Central Banks response

Speech by Mr Benot Coeur, Member of theExecutive Board of the European CentralBank, at the Institut dtudes politiques, Paris,20 September 2012.

EIOPA and FINMASign a Memorandum ofUnderstanding

The European Insurance and Occupational Pensions Authority (EIOPA)and the Swiss Financial Market Supervisory Authority (FINMA) havesigned a Memorandum of Understanding (MoU) in Bern.

The main objective of the MoU is to ensure optimal cooperation insupervision, in particular for insurance groups with internationalactivities in the European economic area (EEA) and Switzerland.



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European Systemic Risk BoardESRB Risk Dashboard

Simon Kwan, vicepresident at theFederal Reserve Bankof San Francisco, states his views on the current economy and theoutlook.

Maximum Employment and

Monetary Policy"

Jeffrey M. Lacker, President Federal Reserve Bank ofRichmond

Money Marketeers of New York University, Down TownAssociation, New York City, N.Y.

Basel iii in Singapore

Response to the feedbackreceived



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NUMBER 1

BIS, Results of the Basel I I I monitoringexercise as of 31 December 2011

Important parts

This report presents the results of the BaselCommittee's Basel I I I monitoring exercise.

The study is based on rigorous reportingprocesses set up by the Committee toperiodically review the implications of theBasel I I I standardsfor financial markets; the

first results of the exercise based on June 2011data had been published in April 2012.

A total of 209 banks participated in the study, including 102 Group 1banks (ie those that have Tier 1 capital in excess of3 billion and areinternationally active) and 107 Group 2 banks (ie all other banks).

While the Basel I I I framework sets out transitional arrangementstoimplement the new standards, the monitoring exercise results assume fullimplementation of the final Basel I I I package based on data as of 31December 2011 (ie they do not take account of the transitionalarrangements such as the phase in of deductions).

No assumptionswere made about bank profitability or behaviouralresponses, such as changes in bank capital or balance sheet composition.For that reason the results of the study are not comparable to industryestimates.

The study finds that based on data as of 31 December 2011 and applying

the changes to the definition of capital and risk-weighted assets, theaverage common equity Tier 1 capital ratio (CET1) of Group 1 banks was7.7%, as compared with the Basel II I minimum requirement of 4.5%.



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In order for all Group 1 banks to reach the 4.5% minimum, an increase of11.9 billion CET1 would be required.

The overall shortfall increases to374.1 billion to achieve a CET1 targetlevel of 7.0% (ie including the capital conservation buffer); this amountincludes the surcharge for global systemically important banks whereapplicable.

As a point of reference, the sum of profits after tax and prior todistributions across the same sample of Group 1 banks in 2011 was356billion.

Compared to the June 2011 exercise, the aggregate CET1 shortfall withrespect to the 4.5% minimum for Group 1 banks has reduced by26.9

billion.

At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1banks has reduced by111.5 billion.

For Group 2 banks, the average CET1 ratio stood at 8.8%.

In order for all Group 2 banks in the sample to meet the new 4.5% CET1ratio, the additional capital needed is estimated to be7.6 billion.

They would have required an additional21.7 billion to reach a CET1target 7.0%; the sum of these banks' profits after tax and prior todistributions in 2011 was24 billion.

Executive summary

In 2010, the Basel Committee on Banking Supervision1 conducted acomprehensive quantitative impact study (C-QIS) using data as of 31December 2009 to ascertain the impact on banks of the Basel I I Iframework that was published in December 2010 and revised inJune 2011.

The Committee intends to continue monitoring the impact of the BaselI I I framework in order to gather full evidence on its dynamics.



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For this purpose, a semi-annual monitoring framework has been set up onthe risk-based capital ratio, the leverage ratio, and the liquidity metricsusing data collected by national supervisors on a representative sample ofinstitutions in each jurisdiction.

This report is the second publication of results of the Basel II I monitoringexercise and summarises the aggregate results using data as of 31December 2011.

The Committee believes that the information contained in the report willprovide the relevant stakeholders with a useful benchmark for analysis.

Information considered for this report was obtained by data submissionsof individual banks to their national supervisors on a voluntary and

confidential basis.

A total of 209 banks participated in the study, including 102 Group 1banks and 107 Group 2 banks.

Memberscoverage of their banking sector is very high for Group 1 banks,reaching 100% coverage for some jurisdictions, while coverage iscomparatively lower for Group 2 banks and varied across jurisdictions.

The Committee appreciates the significant efforts contributed by both

banks and national supervisors to this ongoing data collection exercise.

The report focuses on the following items:

- Changes to bank capital ratios under the new requirements, andestimates of any capital deficiencies relative to fully phased-inminimum and target capital requirements (to include capital chargesfor global systemically important banksG-SIBs);

- Changes to the definition of capital that result from the new capitalstandard, referred to as common equity Tier 1 (CET1), including areallocation of deductions to CET1, and changes to the eligibilitycriteria for Additional Tier 1 and Tier 2 capital;



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- Increases in risk-weighted assetsresulting from changes to thedefinition of capital, securitisation, trading book, and counterpartycredit risk requirements;

- The Basel I I I leverage ratio; and

- Two Basel II I liquidity standards the liquidity coverage ratio (LCR)and the net stable funding ratio (NSFR).

With the exception of the transitional arrangements for non-correlationtrading securitization positions in the trading book, this report does nottake into account any transitional arrangements such as phase-in ofdeductions and grandfathering arrangements.

Rather, the estimates presented assume full implementation of the finalBasel I I I requirements based on data as of 31 December 2011.

No assumptions have been made about banksprofitability orbehavioural responses, such as changes in bank capital or balance sheetcomposition, since this date or in the future.

For this reason, the results are not comparable to current industryestimates,which tend to be based on forecasts and consider managementactions to mitigate the impact, and incorporate estimates where

information is not publicly available.

The results presented in this report are also not comparable to the C-QISthat was prepared using end-December 2009 data because that reportevaluated the impact of policy questions that differ in certain key respectsfrom the finalised Basel II I framework.

As one significant example, the C-QIS did not consider the impact ofcapital surcharges for global systemically important banks.



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Key resultsCapital shortfalls

Assuming full implementation of the Basel I I I requirements as of 31

December 2011, including changes to the definition of capital andrisk-weighted assets, and ignoring phase-in arrangements, Group 1 banks

would have an overall shortfall of11.9 billion for the CET1 minimumcapital requirement of 4.5%, which rises to374.1 billion for a CET1 targetlevel of 7.0% (ie including the capital conservation buffer); the lattershortfall also includes the G-SIB surcharge where applicable.

As a point of reference, the sum of profits after tax prior to distributionsacross the same sample of Group 1 banks in 2011 was356 billion.

Compared to the June 2011 exercise, the aggregate CET1 shortfall withrespect to the 4.5% minimum for Group 1 banks has improved by 26.9billion or 69.3%.

At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1banks has improved by111.5 billion or 23.0%.

Under the same assumptions, the capital shortfall for Group 2 banksincluded in the Basel I I I monitoring sampleis estimated at7.6 billion for

the CET1 minimum of 4.5% and21.7 billion for a CET1 target level of7.0%.

The sum of Group 2 bank profits after tax prior to distributions in 2011was24 billion.

Further details on additional capital needs to meet the Basel I I Irequirements are included in Section 2.

Capital ratios

The average CET1 ratio under the Basel I I I framework would declinefrom 10.4% to 7.7% for Group 1 banks and from 10.4% to 8.8% for Group 2banks.



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The Tier 1 capital ratios of Group 1 banks would decline, on average from11.7% to 8.0% and total capital ratios would decline from 14.2% to 9.2%.

As with the CET1 ratios, the decline in other capital ratios iscomparatively less pronounced for Group 2 banks; Tier 1 capital ratioswould decline on average from 11.0% to 9.2% and total capital ratioswould decline on average from 14.3% to 11.0%.

Changes in risk-weighted assets

As compared to current risk-weighted assets, total risk-weighted assetsincrease on average by 18.1% for Group 1 banks under the Basel I I Iframework.

This increase is driven largely by charges against counterparty credit risk,trading book exposures, and securitization exposures (principally thoserisk-weighted at 1250% under the Basel I I I framework that werepreviously 50/ 50 deductions under Basel I I).

Banks that have significant exposures in these areas influence the averageincrease in risk-weighted assets heavily.

As Group 2 banks are less affected by the revised counterparty credit riskand trading book rules, these banks experience a comparatively smaller

increase in risk-weighted assets of only 7.5%.

Even within this sample, higher risk-weighted assets are attributedlargely to Group 2 banks with counterparty and securitisation exposures(ie those subject to a 1250% risk weighting).

As discussed in Section 4.1, the increase in risk-weighted assets containscertain estimates pertaining to trading book exposures for banks thathave already adopted the Basel 2.5 enhancements.

Leverage ratioThe average Basel I I I Tier 1 leverage ratio for all banks is 3.6%. The BaselI I I average for Group 1 banks is 3.5%, and the average for Group 2 banksis 4.2%.



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Liquidity standards

Both liquidity standards are currently subject to an observation periodwhich includes a review clause to address any unintended consequences

prior to their respective implementation dates of1 January 2015for theLCR and 1 January 2018for the NSFR.

Basel I I I monitoring results for the end-December 2011 reporting periodgive an indication of the impact of the calibration of the standards basedon the December 2010 rules text and highlight several key observations:

- A total of 102 Group 1 and 107 Group 2 banks participated in theliquidity monitoring exercise for the end-December 2011 referenceperiod.

- The weighted average LCR for Group 1 banks is 91%, compared to90% for 30 June 2011, while the weighted average LCR for Group 2banks is 98%.

The aggregate LCR shortfall is1.8 trillion which representsapproximately 3% of the61.4 trillion total assets of the aggregatesample.

- The weighted average NSFR is 98% for Group 1 banks and 95% forGroup 2 banks, compared to 94% for each of the Group 1 and Group 2samples as at 30 June 2011.

The aggregate shortfall of required stable funding is2.5 trillion.

Sample of participating banks

A total of 209 banks participated in the study, including 102 Group 1banks and 107 Group 2 banks.

Group 1 banks are those that have Tier 1 capital in excess of3 billion andare internationally active.



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All other banks are considered Group 2 banks.

Banks were asked to provide data as of 31 December 2011 at theconsolidated level.

Subsidiaries are not included in the analyses to avoid double counting.

Table 1 shows the distribution of participation by jurisdiction.

For Group 1 banks memberscoverage of their banking sector was veryhigh reaching 100% coverage for some jurisdictions.

Coverage for Group 2 banks was comparatively lower and varied acrossjurisdictions.

Not all banks provided data relating to all parts of the Basel II Iframework.

Accordingly, a small number of banks are excluded from individualsections of the Basel I I I monitoring analysis due to incomplete data.

In certain sections, data are based on a consistent sample of banks.

This consistent sample represents only those banks that reported

necessary data at both the June 2011 and December 2011 reporting dates,

in order to make more meaningful period-to-period comparisons.



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Capital shortfalls

Chart 5 and Table 2 provide estimates of the amount of capital that Group1 and Group 2 banks would need based on data as of 31 December 2011 in

addition to capital already held at the reporting date, in order to meet thetarget CET1, Tier 1, and total capital ratios under Basel II I assuming fullyphased-in target requirements and deductions.

Under these assumptions, the CET1 capital shortfall for Group 1 bankswith respect to the 4.5% CET1 minimum requirement is11.9 billion.

The CET1 shortfall with respect to the 4.5% requirement for Group 2banks, where coverage of the sector is considerably smaller, is estimatedat7.6 billion.

For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plus the 2.5%capital conservation buffer, plus any capital surcharge for Group 1 G-SIBsas applicable), Group 1 banksshortfall is374.1 billion and Group 2banksshortfall is21.7 billion.

The surcharges for G-SIBs are a binding constraint on 21 of the 27 G-SIBsincluded in this Basel I I I monitoring exercise.

As a point of reference, the aggregate sum of after-tax profits prior to

distributions for Group 1 and Group 2 banks in the same sample was356billion and24 billion, respectively in 2011.

Compared to the June 2011 exercise, the aggregate CET1 shortfall withrespect to the 4.5% minimum for Group 1 banks has improved by 26.9billion or 69.3% (see Chart 5).

At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1banks has improved by111.5 billion or 23.0%.

Assuming the 4.5% CET1 minimum capital requirements were fully met(ie, there were no CET1 shortfalls), Group 1 banks would need anadditional32.5 billion of additional Tier 1 or CET1 capital to meet theminimum Tier 1 capital ratio requirement of 6.0%.



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Assuming banks already hold 7.0% CET1 capital, Group 1 banks wouldneed an additional 219.3 billion of additional Tier 1 or CET1 capital tomeet the Tier 1 capital target ratio of 8.5% (ie the 6.0% Tier 1 minimumplus the 2.5% CET1 capital conservation buffer), respectively.

Group 2 banks would need an additional2.1 billion and an additional

11.9 billion to meet these respective Tier 1 capital minimum and targetratio requirements.

Assuming CET1 and Tier 1 capital requirements were fully met (ie, therewere no shortfalls in either CET1 or Tier 1 capital), Group 1 banks wouldneed an additional100.2 billion of Tier 2 or higher quality capital to meetthe minimum total capital ratio requirement of 8.0% and an additional224.3 billion of Tier 2 or higher quality capital to meet the total capital

target ratio of 10.5% (ie the 8.0% Tier 1 minimum plus the 2.5% CET1

capital conservation buffer).

Group 2 banks would need an additional4.1 billion and an additional8.6 billion to meet these respective total capital minimum and targetratio requirements.

As indicated above, no assumptions have been made about bank profitsor behavioural responses, such as changes balance sheet composition,that will serve to ameliorate the impact of capital shortfalls over time.



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Impact of the definition of capital on Common Equity Tier 1capital

As noted above, reductions in capital ratios under the Basel I I Iframework are attributed in part to capital deductions not previouslyapplied at the common equity level of Tier 1 capital in most jurisdictions.

Table 3 shows the impact of various regulatory adjustment categories onthe gross CET1 capital (ie, CET1 before adjustments) of Group 1 andGroup 2 banks.

In the aggregate, regulatory adjustments reduce the gross CET1 of Group1 banks under the Basel I I I framework by 29.0%.

The largest driver of Group 1 bank deductions is goodwill, followed bycombined deferred tax assets (DTAs) deductions, and intangibles other

than mortgage servicing rights.

These deductions reduce Group 1 bank gross CET1 by 14.0%, 4.3%, and3.5%, respectively.



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The category described as other adjustments reduces Group 1 bank grossCET1 by 3.8% and pertain mainly to deductions for provision shortfallsrelative to expected credit losses and deductions related to defined benefitpension fund schemes.

Holdings of capital of other financial companies reduce the CET1 ofGroup 1 banks by 1.9%.

The categoryExcess above 15% refers to the deduction of the amountby which the aggregate of the three items subject to the 10% limit forinclusion in CET1 capital exceeds 15% of a banks CET1, calculated afterall deductions from CET1.

These 15% threshold bucket deductions reduce Group 1 bank gross CET1by 1.6%.

Deductions for MSRs exceeding the 10% limit have no impact on Group 1CET1 in the aggregate.

Table 3 also compares regulatory adjustments for Group 1 banks with theresults of the previous period for those banks which participated in bothexercises.

Overall, deductions have been reduced by 2.6 percentage points, mainlydriven by lower deductions for goodwill and financials.

Regulatory adjustments reduce the CET1 of Group 2 banks by 20.4%.Goodwill is the largest driver of deductions for Group 2 banks, followedby holdings of the capital of other financial companies, deductions forintangibles other than mortgage servicing rights, and combined DTAsdeductions.

These deductions reduce Group 2 bank CET1 by 7.5%, 2.3%, 2.3% and1.9%, respectively.



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Other adjustments, which are driven significantly by deductions forprovision shortfalls relative to expected credit losses, result in a 3.1%reduction in Group 2 bank gross CET1.

Deductions for items in excess of the aggregate 15% threshold basketreduce Group 2 bank gross CET1 by 1.2%.

Deductions for mortgage servicing rights above the 10% limit have noimpact on Group 2 banks.

Changes in risk-weighted assets4.1 Overall results

Reductions in capital ratios under the Basel I I I framework are alsoattributed to increases in risk-weighted assets.

Table 4 provides additional detail on the contributors to these increases,to include the following categories:

Definition of capital:

These columns measure the change in risk-weighted assets as a result ofproposed changes to the definition of capital.



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The column heading other includes the effects of lower risk-weightedassets for exposures that are currently included in risk-weighted assetsbut receive a deduction treatment under Basel I I I.

The column heading 50/50measures the increase in risk-weightedassets applied to securitisation exposures currently deducted under theBasel I I framework that are risk-weighted at 1250% under Basel II I .

The column heading thresholdmeasures the increase in risk-weightedassets for exposures that fall below the 10% and 15% limits for CET1deduction;

Counterparty credit risk (CCR):

This column measures the new capital charge for credit valuationadjustments (CVA risk) and the higher capital charge that results fromapplying a higher asset value correlation parameter against exposures tofinancial institutions under the IRB approaches to credit risk.

Banks have not been asked to provide data on the risk-weighted asseteffects of capital charges for exposures to central counterparties (CCPs)or on any impact of incorporating stressed parameters for effectiveexpected positive exposure (EEPE);

Trading book:

As data from most countries already include the RWA impact of the Basel2.5 market risk rules, the incremental impact for changes in market RWAshown in these tables has been estimated using the sum of the followingelements relative to elements in place under Basel I I : the proportion ofinternally modeled general and specific risk that is attributable to stressvalue-at-risk, the incremental risk capital charge (IRC), capital chargesfor the correlation trading portfolio, and capital charges under thestandardised measurement method (SMM) for other securitisationexposures and nth-to-default credit derivatives.

The effect of higher capital charges for re-securitisation exposures in thebanking book and increased conversion factors for short-term liquidity



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facilities to off-balance sheet conduits are not considered in these tablesgiven the data are no longer available for all countries.

However, prior reports have shown the impact of these charges to begenerally small for both Group 1 and Group 2 banks.

Risk-weighted assets for Group 1 banks increase overall by 18.1% forGroup 1 banks.

This increase is to a large extent attributed to higher risk-weighted assetsfor counterparty credit risk exposures, which result in an overall increasein total Group 1 bank risk-weighted assets of 7.9%.

The predominant drivers behind this figure are capital charges for CVA

risk and the higher asset value correlation parameter, which is included inthe column labelledCCR.

Trading book exposures and securitisation exposures currently subject todeduction under Basel I I, also contribute significantly to higherrisk-weighted assets at Group 1 banks at 4.9% and 4.2%, respectively.

Risk-weighted assets of Group 2 banks increase overall by 7.5%.

Banks in this group tend to have smaller counterparty credit risk and

trading book exposures, which explains the lower increase risk-weightedassets for Group 2 banks as compared to Group 1 banks.



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Securitisation exposures currently subject to deduction, CCR exposures,and exposures that fall below the 10% and 15% CET1 eligibility limits aresignificant contributors to changes in risk-weighted assets for Group 2banks.

Changes in risk-weighted assets show significant variation across banksas shown in Chart 6.

Again, these differences are explained in large part by the extent of bankscounterparty credit risk and trading book exposures, which attractsignificantly higher capital charges under Basel I I I as compared tocurrent rules.



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Liquidity6.1 Liquidity coverage ratio

One of the two standards introduced by the Committee is a 30-day

liquidity coverage ratio (LCR) which is intended to promote short-termresilience to potential liquidity disruptions.

The LCR has been designed to require global banks to have sufficienthigh-quality liquid assets to withstand a stressed 30-day funding scenariospecified by supervisors.

The LCR numerator consists of a stock of unencumbered, high-qualityliquid assets that must be available to cover any net outflow, while thedenominator is comprised of cash outflows less cash inflows (subject to a

cap at 75% of outflows) that are expected to occur in a severe stressscenario.

102 Group 1 and 107 Group 2 banks provided sufficient data in the 31December 2011 Basel I I I monitoring exercise to calculate the LCRaccording to the Basel II I liquidity framework.

The weighted average LCR was 91% for Group 1 banks, compared to 90%for 30 June 2011, and 98% for Group 2 banks.

These aggregate numbers do not speak to the range of results across thebanks.

Chart 8 below gives an indication of the distribution of bank results; thethick red line indicates the 100% minimum requirement, the thin redhorizontal lines indicate the median for the respective bank group.

47% of the banks in the Basel I I I monitoring sample already meet orexceed the minimum LCR requirement, an increase from 45% at the end

of June 2011, and 62% have LCRs that are at or above 75%.



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For the banks in the sample, Basel II I monitoring results show a shortfall(ie the difference between high-quality liquid assets and net cashoutflows) of1.8 trillion (which represents approximately 3% of the61.4trillion total assets of the aggregate sample) as of 31 December 2011, ifbanks were to make no changes whatsoever to their liquidity risk profile.

This number is only reflective of the aggregate shortfall for banks that arebelow the 100% requirement and does not reflect surplus liquid assets atbanks above the 100% requirement.



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Banks that are below the 100% required minimum have until 2015 to meetthe standard by scaling back business activities which are most vulnerableto a significant short term liquidity shock or by lengthening the term oftheir funding beyond 30 days.

Banks may also increase their holdings of liquid assets.

The key components of outflows and inflows are shown in Table 7.

Group 1 banks show a notably larger percentage of total outflows, when

compared to balance sheet liabilities, than Group 2 banks.

This can be explained by the relatively greater contribution of wholesalefunding activities and commitments within the Group 1 sample, whereas

Group 2 banks, as a whole, are less reliant on these types of activities.



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75% cap on total inflows

As at 31 December 2011, no Group 1 and 16 Group 2 banks reportedinflows that exceeded the cap, compared to 19 Group 2 banks as at 30June 2011.

Of the 16 Group 2 banks, three fail to meet the LCR, so the cap is bindingon them.

Of the banks impacted by the cap on inflows, 12 have inflows from otherfinancial institutions that are in excess of the excluded portion of inflows.



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Composition of high-quality liquid assets

The composition of high-quality liquid assets currently held at banks isdepicted in Chart 9.

The majority of Group 1 and Group 2 banksholdings, in aggregate, arecomprised of Level 1 assets; however the sample, on whole, showsdiversity in their holdings of eligible liquid assets.

Within Level 1 assets, 0% risk-weighted securities issued or guaranteedby sovereigns, central banks and PSEs, and cash and central bankreserves comprise the most significant portions of the qualifying pool,with the latter increasing its contribution to the overall composition to31.4% as at the end of December 2011 from 27.6% as at the end of

June 2011.

Comparatively, within the Level 2 asset class, the majority of holdings arecomprised of 20% risk-weighted securities issued or guaranteed bysovereigns, central banks or PSEs, and qualifying covered bonds.



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Cap on Level 2 assets

117 billion of Level 2 liquid assets were excluded because reported Level2 assets were in excess of the 40% cap as currently operationalised.

23 banks currently reported assets excluded, of which 16 (8% of the totalsample) had LCRs below 100%.

These results compare to121 billion of Level 2 liquid assets excluded by34 banks as at 30 June 2011, of which 24% (11% of the sample) had LCRsbelow 100%.

Chart 10 combines the above LCR components by comparing liquidityresources (buffer assets and inflows) to outflows.

Note that the710 billion difference between the amount of liquid assetsand inflows and the amount of outflows and impact of the cap displayedin the chart is smaller than the1.8 trillion gross shortfall noted above as itis assumed here that surpluses at one bank can offset shortfalls at otherbanks.

In practice the aggregate shortfall in the industry is likely to liesomewhere between these two numbers depending on how efficientlybanks redistribute liquidity around the system.



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Net stable funding ratio

The second standard is the net stable funding ratio (NSFR), alonger-term structural ratio to address liquidity mismatches and provide

incentives for banks to use stable sources to fund their activities.

102 Group 1 and 107 Group 2 banks provided sufficient data in the 31December 2011 Basel I I I monitoring exercise to calculate the NSFRaccording to the Basel II I liquidity framework.

51% of these banks already meet or exceed the minimum NSFRrequirement, compared to 46% at the end of June 2011, with 92% at an

NSFR of 75% or higher as at 31 December 2011.



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The weighted average NSFR for the Group 1 bank sample is 98% while itis 95% for the Group 2 sample, compared to 94% for each of the Group 1and Group 2 samples as at 30 June 2011.

Chart 11 shows the distribution of results for Group 1 and Group 2 banks;the thick red line indicates the 100% minimum requirement, the thin redhorizontal lines indicate the median for the respective bank group.



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The results show that banks in the sample had a shortfall of stablefunding of2.5 trillion at the end of December 2011, a decrease from 2.8trillion at the end of June 2011, if banks were to make no changeswhatsoever to their funding structure.

This number is only reflective of the aggregate shortfall for banks that arebelow the 100% NSFR requirement and does not reflect any surplus stablefunding at banks above the 100% requirement.

Banks that are below the 100% required minimum have until 2018 to meetthe standard and can take a number of measures to do so, including bylengthening the term of their funding or reducing maturity mismatch.

It should be noted that the shortfalls in the LCR and the NSFR are not

necessarily additive, as decreasing the shortfall in one standard may resultin a similar decrease in the shortfall of the other standard, depending onthe steps taken to decrease the shortfall.



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NUMBER 2

Financial Services Agency, TheJapanese Government

Recent Trend of Financial and Capital Markets,Regulatory and Supervisory ChallengesRyutaro Hatanaka



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NUMBER 3

Investor Protection through Audit

Oversight

Lewis H. Ferguson, Board Member

California State University 11th Annual SEC Financial ReportingConference, Irvine, CA

Thank you for inviting me to speak today. I am delighted to be here insunny Southern California to share some thoughts with you aboutdevelopments in auditor oversight, the part of the financial reportinguniverse in which I now spend my time.

Before I begin, I must tell you that the views I express today are my ownand do not necessarily reflect the views of the Public CompanyAccounting Oversight Board, any other Board member, or the staff of thePCAOB.

Anyone involved in the financial reporting process deals daily with thehard realities of complexity and rapid change -- whether you are apreparer of financial statements, a board or audit committee member, aninvestor, an independent or internal auditor, a counselor, or a regulator.

Commercial activity is increasingly global.

Some financial instruments and transactions are bafflingly complex withvalues that can only be estimated.

Standard setters in the United States and abroad are moving away fromhistorical cost accounting toward fair value accounting, requiring difficultestimates.

There is a plethora of new rules and requirements growing out of theDodd-Frank and JOBS actsin the United States, and all of this ishappening in what since 2008 has been the most difficult global economicenvironment since the Great Depression of the 1930s.



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Much as we struggle with these rapid changes and their complexity,regulatorsalso struggle to see around the curve, to be prepared for what iscoming tomorrow, and to have tools in their toolbox that will beappropriate for those challenges.

In the next session of todays conference, I will discuss a number ofspecific initiatives the PCAOB is undertaking to deal with some of thesechallenges, but in this address I want to focus on one specific area, thechallenge of globalization and cross-border financial reporting, auditingand audit oversight.

A bit of background may be useful here.

The PCAOB was created by the U.S. Congress in 2002, in response to acrisis stemming from the failures of enterprises like Enron, WorldCom,

Adelphia and others.

These cases all involved systemic and undetected financial andaccounting fraud.

Congress concluded that these cases demonstrated that the longestablished system of auditor quality oversight by the auditing professionitself, known as peer review, was irretrievably broken.

Accordingly, Congress created the PCAOB as an independent,not-for-profit body, whose five members are appointed by the United

States Securities and Exchange Commission, to oversee the audit ofpublic companies that are subject to the securities laws.

The Boardsmission is protect the interest of investors and further thepublic interest in the preparation of informative, accurate, andindependent audit reports for U.S. public companies.

From its establishment in 2002, the PCAOB has grown to be anorganization with a projected 800 employees by the end of this yearlocated in 16 offices throughout the United States, including in Irvine andLos Angeles.

To prevent capture by the accounting profession, Congress provided thatwhile two of the five PCAOB board members had to be CPAs, no morethan two could be.



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That leaves two of my fellow board members and me, including thePCAOBs chairman, who are lawyers by training and profession.

The PCAOB was assigned four principal functionsby the statute:

1.The first is tooversee and maintain the registration of all auditing firmswhether they are located here or abroad that file audit reports with theSEC or participate substantially in the audit of companies that file suchreports.

In 2010, the Dodd-Frank Act also gave the PCAOB jurisdiction overauditorsof registered brokers and dealers and required all such firms tobe registered.

Today, 2,380 auditing firms are registered with the PCAOB including 570firms that audit brokers and dealers.

Of the total, 1,465 firms are located in the United States and 915 firmsoutside the United States in 85 jurisdictions.

The largest number of foreign registered firms are in China with 100firms, including 52 in Hong Kong and 48 in the PeoplesRepublic ofChina, 66 in India, 64 in the U.K., 48 in Canada and 41 in Australia.

2.The second principal function of the PCAOB isperiodically to inspectregistered firmsthat file or participate in the preparation of audit reportsof public companies and securities brokers and dealers.

Any audit firm with more than 100 issuer audit clients must be inspectedannually and at least triennially if they regularly provide audit reports for100 or fewer issuers.

In 2012, there are currently 9 annually inspected auditing firms.

Our inspections are not randomly selected but are selected on the basis ofaudit risk, focusing on issues, industries, or firms where we believe thegreatest risk of audit failure may lie.

Since its inception, the PCAOB has conducted more than 1,950inspections and examined portions of over 8,200 individual audits.



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In 2011, for example, for the 10 firms subject to annual inspection in thatyear, the PCAOB inspectors looked at portions of approximately 340audits.

For the 203 firms inspected on a three-year cycle in 2011, portions of

approximately 485 audits were examined, including 42 non-U.S. auditfirms located in 15 jurisdictions.

We are scheduled to inspect approximately 80 non-U.S. firms in 2012.

As part of an interim program for the inspection of brokers and dealers, in2011 and early 2012, we inspected 10 audit firms, examining portions of 23separate audits and issued a public interim report on those inspections inAugust of this year.

3.Our third function is to set auditing and other professional standards.

We have an ambitious standard-setting agenda that tackles old and newissues in auditing, particularly issues that surfaced after the recentfinancial crisis from improving communications with audit committeesto reforming the auditors reporting model.

In the next session of this conference, I will discuss in more detail thePCAOBs standard-setting projects.

4.Our fourth and last principal function is to conduct investigations and

enforcement proceedings.

The Board has the authority to impose disciplinary sanctions, includingbarring auditors from public company auditing and imposing substantialmonetary penalties.

Since 2003, the PCAOB has taken 55 disciplinary actions against 42registered accounting firms and 56 persons associated with registeredfirms.

As part of these enforcement actions, the Board has revoked the

registration of 27 firms, barred 43 individuals, and suspended theregistration of five individuals and one firm.

These are ourfour core functions: registration, inspections, standardsetting, and investigation and enforcement.



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Everything the Board does is in support of these functions.

Other offices, particularly the Office of Research and Analysis, providesvaluable input.

ORAs staff of more than 30 economists and analysts study economictrends and the large bodies of confidenti

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Risk Management Presentation October 1 2012

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