Risk management presentation June 3 2013

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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.com
Top 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,
―During your workinglives,you will have to
reinvent yourselvesmanytimes.
Successand satisfactionwill not come from masteringa fixed body of
knowledgebut from constant adaptationand creativityin a rapidly
changingworld.‖
Whosaid that?
ChairmanBen S.Bernanke, at Bard College at Simon's Rock, Great
Barrington, Massachusetts.
What elsedid he say?
- Theword"graduate" comesfrom the Latin wordfor "step."
- Another prediction, just assafe, is that peoplewill nevertheless
continuetoforecast the end of innovation.
Agreat speech! Read moreat Number 1below.
At Number 7 …
… I enjoyed anotherspeech:
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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―I am very pleased tobe here among anaudience of professional
economists,whichiscertainlypreferabletoappearingbeforeanaudience
of unprofessional economists.‖
Whosaid that?
SarahBloom Raskin, Member of theBoard of Governorsof theFederal
ReserveSystem, at the Societyof Government Economistsand the
National EconomistsClub, Washington DC.
Well, Sarah… don‘t bebrutallyhonest, asprofessional economistscanbe
asrudeasunprofessional economists…
Shewasbrutallyhonest. She said:
―I like your kind!
Your talentsare needednow more than ever aswetry to put the toolsof
the economic professiontoworkfor thecommon good.
It's easyto be an economist wholooksback on crisesand crashesand
triestoexplain whythey happened, but much harder tobe an economist
whoseeffortsmanagetohelpstopthemfrom happeningin thefirstplace.
Economicpolicymaking, at itsbest, reflectsa continuousstruggleto
makesurethat dataandexplanationsofsuchdataareconsistent withreal
experience.
If we're to engagein thisstrugglehonestly, it's noeasytask.
It involvesunderstandingnot just thereliability and signal in various
data, but alsoquestioningwhetherthe data accordswith our
understandingof actual experience.
So, to get thisright requires many different perspectives, not just on the
data but on the underlying realitiesthe data are trying to capture.‖
Sara,I like your speech. I agree, to engagein this strugglehonestly, it's

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noeasytask. I enjoyed you told all theseto professional economists.
Read moreat Number 7below.
Welcometo the Top 10list.
BestRegards,
GeorgeLekatis
President of the IARCP
General Manager, ComplianceLLC
1200G Street NW Suite
800,Washington DC 20005,USA
Tel: (202) 449-9750
Email: lekatis@risk-compliance-association.com
Web: www.risk-compliance-association.comHQ:
1220N. Market Street Suite 804, Wilmington DE
19801,USA
Tel: (302) 342-8828

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ChairmanBen S.Bernanke
At Bard College at Simon's Rock, Great Barrington,
Massachusetts
Economic Prospects for the Long Run
―Graduationfrom college is onlyone step on a journey, but it is an
important one and well worthcelebrating.‖
ConsultationPaper
On Draft ImplementingTechnical Standards
On Additional Liquidity Monitoring MetricsunderArticle
403(2) of the draft Capital Requirements Regulation (CRR)
EXPLANATORY
MEMORANDUM TO
THE FINANCIAL CONGLOMERATES AND OTHER
FINANCIAL GROUPS (AMENDMENT) REGULATIONS
TheseRegulationsimplement, in part, Directive2011/ 89/ EU of the
EuropeanParliament andoftheCouncil amendingDirectives
98/78/EC, 2002/ 87/ EC, 2006/48/EC and 2009/ 138/ EC (OJL 326/113
8.12.2011)as
regards thesupplementarysupervision of financial entitiesin a financial
conglomerate.

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Whocallsthe shots?The problem of fiscal
dominance
Speechby Dr JensWeidmann, President of the
DeutscheBundesbank, at the4th Bank of France -
DeutscheBundesbank Macroeconomicsand
FinanceConference, Paris.
Solvency II update for all firms
As part of our commitment to sharingdevelopmentsin our approachto
theimplementationof SolvencyII, I thought it wouldbe helpful towrite
toall firms affectedby the Directiveto give an update on thecurrent
positionand what this meansfor thework that hastobe done in the
comingmonths.
As you know, there continuesto be significant uncertaintyover the
timetableand final shape of the SolvencyII regime.
Singapore – pursuing broader and deeper
economic integration with major economies
Openingkeynote speechbyMr Lim HngKiang,Minister
for Tradeand Industry and DeputyChairman of the
MonetaryAuthority of Singapore, at DeutscheBank
AccessAsia Conference2013,Singapore.
―In the last 10 years, thecentre of gravityof the world
economy hasbeenmoving awayfrom theUS and Europe

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toAsia.
Asia isexpected to continuetoprosper in the decadesahead asthe
middleclassexpandsin linewith strong economicgrowth.
China is set to be thelargest economy in the worldby 2030and isalready
creatingmegacitiesof over 10million at an averagerate of oneper year.
Besides China, Ind ia‘s midd le class is expectedtogrow to almost
600million peopleby 2025.
In Indonesia, almost 60per cent of Indonesianhouseholds, in a country
of 240million people, are expectedto reach middle-classstatusby 2020.‖
Prospects for a stronger recovery
Speechby Ms SarahBloom Raskin, Member of the
Board of Governorsof the Federal Reserve System, at
theSocietyof Government Economistsand the
National EconomistsClub, Washington DC.
Merely Cracking the Glass Ceiling isNot
Enough: CorporateAmerica NeedsMore than
Just AFew Women in Leadership
ByCommissionerLuisA. Aguilar, U.S. Securitiesand
ExchangeCommission, Women's ExecutiveCircleof
New York, The UniversityClub of New York, New
York, New York.

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TheSingleResolution Mechanism – whyit is
needed
Speechby Mr Benoît Coeuré, Member of the
ExecutiveBoard of theEuropean Central Bank, at
theICMAAnnual General Meetingand Conference
2013,organisedby the International Capital Market
Association, Copenhagen.
―Thefinancial crisis has highlightedtheweaknessesof the institutional
frameworkof Economic and MonetaryUnion.
Thenegative feedback loop betweenbanksand sovereignsaswell as
signsof market fragmentation made European leaderstakean
extraordinarydecision last summer, namelyto establish the European
BankingUnion.‖
The Important Role of Immigrants in
Our Economy
By CommissionerLuisA. Aguilar
U.S. Securitiesand ExchangeCommission
Remarksat the 2013Annual Gala
Georgia Hispanic Chamber of Commerce
Atlanta, Georgia

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ChairmanBen S.Bernanke
At Bard College at Simon's Rock, Great
Barrington, Massachusetts
Economic Prospects for the Long Run
Let me start bycongratulatingthegraduatesandtheir
parents.Theword"graduate" comesfrom theLatin
wordfor "step."
Graduation from collegeis onlyone step on a journey, but it isan
important one and well worthcelebrating.
I think everyone hereappreciateswhat aspecialprivilegeeachof you has
enjoyed in attendinga unique institutionlike Simon's Rock.
It is, tomy knowledge,the only"early college" in the United States;many
of you came here after the10th or 11th grade in searchof a different
educational experience.
And withonly about 400studentson campus, I am sure each of you has
felt yourself to be part of a close-knit community.
Most important, though, you have completeda curriculum that
emphasizescreativityand independent criticalthinking, habitsof mind
that I am sure will stay withyou.
What's soimportant about creativityand criticalthinking?
There aremany answers.
I am an economist, soI will answer by talkingfirst about our economic
future--oryour economicfuture, I should say, becauseeachof you will
havemanyyears, I hope,tocontributetoandbenefit fromanincreasingly
sophisticated, complex, and globalizedeconomy.

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My emphasistodaywill be on prospectsfor thelong run.
In particular, I will be lookingbeyond thevery real challengesof
economicrecovery that wefacetoday--challengesthat I have every
confidencewewill overcome--tospeak, for a change, about economic
growth asmeasured in decades,not monthsor quarters.
Many factorsaffect thedevelopment of the economy, notablyamong
them a nation'seconomic and politicalinstitutions,but over longperiods
probablythe most important factor is thepace of scientificand
technological progress.
Betweenthe daysof theRoman Empire and whenthe Industrial
Revolution took hold in Europe, thestandard of livingof the average
person throughout most of the worldchangedlittlefrom generation to
generation.
For centuries,many, if not most, peopleproducedmuch of what theyand
their familiesconsumed and never traveledfar from wheretheywere
born.
By themid-1700s, however, growingscientific and technical knowledge
wasbeginningto find commercial uses.
Sincethen, accordingto standard accounts,theworldhasexperienced at
least three major wavesof technological innovation and itsapplication.
Thefirst wavedrove thegrowth of the earlyindustrial era, which lasted
from themid-1700stothemid-1800s.
This period sawtheinvention of steam engines,cotton-spinning
machines,and railroads.
Theseinnovations,by introducingmechanization, specialization, and
massproduction, fundamentallychanged how and where goodswere
produced and, in theprocess,greatly increasedthe productivityof
workersand reduced thecost of basic consumer goods.

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Thesecond extended waveof inventioncoincidedwiththemodern
industrial era, whichlastedfrom the mid-1800swell intotheyears after
World War II.
This era featured multipleinnovationsthat radicallychanged everyday
life, such asindoorplumbing, theharnessingof electricityfor usein
homesand factories, the internal combustion
engine, antibiotics, poweredflight, telephones,radio, television, and
many more.
Thethird era, whoserootsgoback at leastto the1940sbut whichbegan
toenter thepopular consciousnessin the 1970sand 1980s,is definedby
theinformation technology(IT) revolution, aswell asfieldslike
biotechnologythat improvementsin computing helped make possible.
Of course,theIT revolutionisstill goingonandshapingourworldtoday.
Now here's a question--infact, a key question, I imagine, from your
perspective.
What doesthe futurehold for the workinglivesof today's graduates?
Theeconomicimplicationsof the first twowavesof innovation, from the
steam enginetotheBoeing 747, wereenormous.
Thesewavesvastlyexpandedthe rangeof availableproductsand the
efficiencywithwhichtheycould be produced.
Indeed, accordingtothebest availabledata, output per personin the
UnitedStatesincreasedbyapproximately30timesbetween1700and 1970
or so, growththat hasresultedin multipletransformationsof our
economy and society.
Historysuggeststhat economic prospectsduring thecoming decades
depend on whetherthe most recent revolution, the IT revolution, has
economiceffectsof similar scaleand scope astheprevioustwo.
But will it?

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I must report that not everyone thinksso.
Indeed, some knowledgeable observers have recently made the case that
the IT revolution, as important as it surely is, likely will not generate the
transformative economic effectsthat flowed from the earlier technological
revolutions.
As a result, theseobserversargue, economicgrowth and change in
comingdecadeslikelywill be noticeablyslowerthanthe paceto which
Americanshave becomeaccustomed.
Such an outcome wouldhaveimportant socialand political--aswell as
economic--consequencesfor our country and the world.
This provocativeassessment of our economic future hasattracted plenty
of attention among economistsand othersaswell.
Doesit make sense?
Here's one wayto think more concretely about theargument that the
pessimistsare making:
Fifty yearsago, in 1963, I wasa nine-year-old growingup in a
middle-classhome in a small town in South Carolina.
As a way of getting a handle on the recent pace of economic change, it's
interesting to ask how my family's everyday life back then differed from
that of a typical familytoday.
Well, if I think about it, I could quicklycome up withthe
Internet, cellphones,and microwaveovensasimportant conveniences
that most of your familieshavetoday that my family lacked50 years ago.
Health carehasimproved some sinceI wasyoung; indeed, life
expectancyat birth in the United Stateshasrisen from 70years in 1963to
78years today, although some of this improvement isprobablydueto
better nutrition and generallyhigher levelsof income rather than
advancesin medicinealone.

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Nevertheless,though my memorymaybeselective, it doesn't seem tome
that the differencesin daily life betweenthen and now are all that large.
Heating, air conditioning, cooking, and sanitation in my childhoodwere
not all that different from today.
We had a dishwasher, a washingmachine, and a dryer.
My familyowned a comfortable car with air conditioning and a radio, and
the experience of commercial flight was much like today but without the
longsecurity lines.
For entertainment, wedid not havethe Internet or videogames, asI
mentioned, but wehad plentyof books, radio, musical recordings,and a
color TV (although, I must acknowledge, thecolorsweregarishand there
weremany fewerchannelsto choosefrom).
Thecomparison of theworldof 1963withthat of todaysuggestsquite
substantial but perhapsnot transformativeeconomicchangesincethen.
But now let's run thisthought experiment back another 50 years, to 1913
(theyear theFederal Reserve wascreated by the Congress,by the
way), and compare how my grandparentsand your great-grandparents
lived with how my familylivedin 1963.
Lifein 1913wassimplymuch harder for most Americansthan it wouldbe
later in thecentury.
Many peopleworked longhoursat dangerous, dirty, and exhausting
jobs--upto 60hoursper week in manufacturing, for example, and even
more in agriculture.
Housework involved a great deal of drudgery;
refrigerators,freezers,vacuum cleaners,electric stoves, and washing
machineswerenot in general use, whichshould not be terribly
surprisingsincemost urban households, and virtuallyall rural
households, werenot yet wired for electricity.

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In the entertainment sphere,Americansdid not yet have accessto
commercial radio broadcastsand movieswouldbe silent for another
decadeand a half.
Somepeoplehad telephones,but nolong-distanceservice wasavailable.
In transportation, in 1913Henry Ford wasjustbeginning themass
production of the Model T automobile, railroadswerepoweredby steam,
and regular commercial air travel wasquitea few years away.
Importantly, life expectancyat birth in 1913wasonly53 years, reflecting
not onlythe stateof medical scienceat the time--infection-fighting
antibioticsandvaccinesformanydeadlydiseaseswouldnot bedeveloped
for several more decades--but alsodeficienciesin sanitationandnutrition.
Thiswasquiteadifferent worldthantheoneinwhichI grewupin1963or
in whichwelivetoday.
Thepurpose of these comparisonsisto make concretetheargument
madeby some economists,that theeconomic and technological
transformation of thepast 50years, whilesignificant, doesnot match the
changesof the 50years--or, for that matter, the 100years--before that.
Extrapolatingtothefuture, theconclusion some havedrawnisthat the
sustainablepace of economicgrowthand changeand the associated
improvement in livingstandardswill likely slowfurther, asour most
recent technological revolution, in computersand IT, will not transform
our livesasdramaticallyaspreviousrevolutionshave.
Well, that'ssort of depressing.
Is it true, then, asbaseball player Yogi Berra said, that the future ain't
what it used to be?Nobody reallyknows;asBerra alsoastutely
observed, it's tough to make predictions,especiallyabout thefuture.
But there are somegood argumentson the other side of this debate.

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First, innovation, almost by definition, involvesideasthat noonehasyet
had, which meansthat forecastsof future technological changecan
be, and often are, wildly wrong.
Asafeprediction, I think, isthat human innovation and creativitywill
continue;it ispart of our verynature.
Another prediction, just assafe, is that peoplewill neverthelesscontinue
toforecast theend of innovation.
ThefamousBritish economist John Maynard Keynesobserved asmuch
in themidst of the Great Depressionmore than 80years ago.
He wrotethen, "We are sufferingjustnow from a bad attack of economic
pessimism.
It is common to hear peoplesaythat theepoch of enormouseconomic
progresswhichcharacterisedthe19th century is over; that therapid
improvement in thestandard of life is now goingto slow down."
Sound familiar?
By theway, Keynesargued at that time that suchaview wasshortsighted
and, in characterizingwhat he called"theeconomic possibilitiesfor our
grandchildren," hepredictedthat income per person, adjusted for
inflation, could rise asmuch asfour toeight timesby 2030.
His guesslookspretty good; income per person in the United States
todayis roughly six timeswhat it wasin 1930.
Second, not onlyare scientific and technicalinnovation themselves
inherentlyhard to predict, soare thelong-run practicalconsequencesof
innovation for our economy and our daily lives.
Indeed, some wouldsaythat wearestill in the earlydays of theIT
revolution; after all, computing speedsand memory have increasedmany
timesover inthe30-plusyearssincethefirstpersonal computerscame on
themarket, and fieldslike biotechnologyare alsoadvancing rapidly.

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Moreover,even asthe basictechnologies improve, the commercial
applicationsof thesetechnologieshave arguablythusfar onlyscratched
thesurface.
Consider,for example, the potential for IT and biotechnologyto improve
health care, one of the largest and most important sectorsof oureconomy.
Astrong casecan be made that themodernizationof health-careIT
systemswouldleadtobetter-coordinated, more effective, and lesscostly
patient carethan wehave today, includinggreater responsivenessof
medical practiceto the latest research findings.
Robots, lasers, and other advanced technologies are improving surgical
outcomes, and artificial intelligence systems are being used to improve
diagnosesand chart coursesof treatment.
Perhapseven more revolutionaryis the trend toward so-called
personalizedmedicine, whichwouldtailor medical treatmentsfor each
patient based on informationdrawnfrom that individual's genetic code.
Taken together, such advancescould lead to another jump in life
expectancyand improved health at older ages.
Other promisingareasfor the applicationof new technologies include
thedevelopment of cleaner energy--for example, the harnessingof
wind, wave,and solar power and thedevelopment of electric and hybrid
vehicles--aswell aspotential further advancesin communicationsand
robotics.
I'm sure that I can't imagineall of the possibilities,but historiansof
sciencehave commented on our collectivetendencyto overestimatethe
short-term effectsof new technologies while underestimatingtheir
longer-term potential.
Finally, pessimistsmay bepaying toolittleattentionto the strength of the
underlying economicandsocial forcesthat generateinnovationin the
modern world.

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Invention wasoncethe provinceof the isolatedscientist or tinkerer.
Thetransmissionofnewideasandtheadaptationofthebestnewinsights
tocommercial useswereslowand erratic.
But all of that is changingradically.
We live on a planet that isbecoming richer and more populous,and in
whichnot onlythemost advanced economiesbut alsolargeemerging
market nationslike China and India increasinglyseetheir economic
futuresastied to technologicalinnovation.
In that context, the number of trainedscientistsand engineersis
increasingrapidly, asare theresourcesfor research beingprovidedby
universities,governments,and theprivate sector.
Moreover,becauseof the Internet and other advancesin
communications,collaboration and the exchangeof ideastake place at
high speed and withlittleregard for geographic distance.
For example, researchpapersare now disseminatedand critiqued almost
instantaneouslyrather than after publicationin a journal several years
after theyare written.
And, importantly, astrade and globalization increasethe size of the
potential market for new products, the possibleeconomicrewardsfor
beingfirst withan innovativeproduct or processare growingrapidly.
In short, both humanity's capacitytoinnovateand the incentivesto
innovatearegreater today than at any other time in history.
Well, what doesall thishave to dowithcreativityand critical
thinking, whichis whereI started?
Thehistory of technological innovationand economic development
teachesusthat changeis the only constant.

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During your workinglives,you will have to reinvent yourselves many
times.
Successand satisfactionwill not come from masteringa fixed body of
knowledgebut from constant adaptationand creativityin a rapidly
changingworld.
Engagingwithand applying new technologies will be a crucial part of
that adaptation.
Your work here at Simon's Rock, and the intellectual skills, creativity, and
imagination that that work has fostered, are the best possible preparation
for thesechallenges.
And while I have emphasized technologicaland scientificadvances
today, it is important to remember that the artsand humanitiesfacilitate
new and creativethinking aswell, whilehelpingustodraw meaningthat
goesbeyond thepurely material aspectsof our lives.
I wishyou thebest in facingthedifficult but excitingchallengesthat lie
ahead.
Congratulations.

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ConsultationPaper
On Draft ImplementingTechnical
Standards
On Additional Liquidity
Monitoring Metrics underArticle 403(2) of the draft Capital
RequirementsRegulation (CRR)
1.Responding to thisConsultation
TheEBA invitescommentsonall proposalsput forwardin thispaperand
in particular on the specificquestionssummarisedin 5.2. Commentsare
most helpful if they:
- respond tothequestionstated;
- indicatethespecific point towhicha comment relates;
- contain a clear rationale;
- provideevidencetosupport theviewsexpressed/ rationaleproposed;
and
-describeany alternativeregulatory choicesthe EBA should consider.
Pleasesend your commentsto theEBA by email to
EBA-CP-2013-18@eba.europa.eu by 14.08.2013,indicatingthereference
‗EBA/CP/2012/18‘on the subject field.
Pleasenotethat commentssubmitted after the deadline, or sent to
another e-mail addresswill not be processed.
Publication of responses

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All contributionsreceived will be publishedfollowingthe closeof the
consultation, unlessyou request otherwise.
Pleaseindicateclearlyand prominentlyin your submissionany part you
donot wishtobe publicly disclosed.
Astandard confidentiality statement in an e-mail messagewill not be
treatedasa request for non-disclosure.
Aconfidential responsemaybe requested from usin accordancewiththe
EBA‘s ruleson publicaccessto documents.
We may consult you if we receive such a request. Any decision we make
not to disclose the response is reviewable by the EBA‘s Board of Appeal
andtheEuropean Ombudsman.
Data protection
Informationondataprotectioncanbefoundat www.eba.europa.euunder
theheading ‗Legal Notice‘.
2. Executive Summary
Theproposed Capital RequirementsDirective/ Regulation(CRR/ CRD)
setsout requirementsconcerning liquiditywhichare expected to apply
from 1January 2014and mandatestheEBAto preparedraft regulatory
/ implementingtechnical standards(RTS/ITS) in this area.
The EBAhas developed these ITSproposals on the basis of the legislative
texts for the CRR agreed by the European Parliament and the Council in
April 2013, in accordance with the mandate contained in Articles403(2) of
thosetexts.
Thesetextswill besubject tolegal-linguisticreviewbeforebeingformally
adopted and the final text published in theOfficial Journal of the
European Union.

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The EBA will review the ITSproposals to ensure that theytake account of
any changes made in the final text of the CRR, as well as to take account
of anychangesarisingout of the consultationprocess.
Main featuresof the ITS
ThisCP containstheEBA proposal in relationtosupervisoryreportingof
additional monitoringmetricsfor liquidity.
In definingitsproposal,theEBAfollowedtheapproachdevelopedbythe
Basel Committeeon BankingSupervision(BCBS).
TheEBA‘s proposed metrics tobe covered bythis ITSincludethe
following:
- a maturityladder(templateand instructions). This issimilar tothe
contractual maturitymismatch put forwardby theBCBStext and
providesinsight intothe extent to whicha bank relieson maturity
transformation under itscurrent contracts.
It comprisestwoseparate templates(set out in twoworksheets), one
for contractual flowsand one for behavioural flows.
Thematurity of theoutflowsand inflowsto be reported in both
templatesrange from open maturity up togreater than 10 years (13
bucketsin total).
- someadditional monitoring tools(templatesand instructions) related
to:
oconcentrationof fundingby counterparty: This issimilar tothe
concentration of fundingmetricput forwardby the BCBS, and it allows
theidentification of thosesourcesof wholesaleand retail fundingof such
significancethat their withdrawalcould trigger liquidityproblems.
It is proposedthat institutionsreport thetop ten largest counterparties
from whichfundingobtainedexceedsathresholdof 1% oftotal
liabilities, together withinformation on thecounterparty
name, counterparty type

P a g e | 21
and location, product type, currency, amount received, weightedaverage
and residual maturity.
oconcentrationof fundingby product type: Thisseeksto collect
information about theinstitution's concentration of funding by product
type, broken down intodifferent fundingtypesrelated to retail and
wholesalefunding.
It isproposedthat institutionsreportthetotal amount offundingreceived
from each product category, whenit exceedsa threshold of 1% of total
liabilities.
o prices for various lengths of funding: This seeks to collect information
about the average transaction volume and prices paid by institutions for
fundingwithdifferent maturitiesranging from overnight to10years.
o rollover of funding: This seeks to collect information about the volume
of funds maturing and new funding obtained i.e. ‗roll-over of funding‘ on
a daily basisover a monthlytime horizon.
3. Background and rationale
Thenature of ITS under EU law
Thepresent draft ITSare produced in accordancewithArticle 15 of EBA
regulation. Paragraph 4 of that same articleprovidesthat ITSshall be
adopted by meansof an EU Regulationor Decision.
According to EU law, EU regulationsare binding in their entiretyand
directlyapplicablein all Member States.
Thismeansthat, onthe date of their entry intoforce, theybecomepart of
thenational law of theMember Statesand that their implementationinto
national law is not onlyunnecessarybut alsoprohibited by EU
law, except in sofar asthis is expresslyrequired by them.
Shapingtheserulesin theform of a Regulationwouldensurea
level-playing field by preventingdivergingnational requirementsand
wouldeasethecross-borderprovisionof services;currently, aninstitution

P a g e | 22
that wishesto take up operationsin another Member State hasto apply
different setsof rules.
Background and regulatory approach followed in the draft ITS
In January 2013, the Basel Committeeon BankingSupervision (BCBS)
publisheditsrevisedtext on the liquiditycoverage ratio (LCR) and
liquidityrisk monitoring tools.
Thesemonitoring tools, together withthe LCR standard, provide the
cornerstoneof informationthat aid supervisorsin assessingtheliquidity
risk of an institution, becausetheycan help competent authorities
identify potential liquiditydifficultiessignaledthrough a negativetrend
in themetricsor through an absoluteresult of the metrics.
The EBA will observe further work conducted by the BCBS in respect of
liquidity risk monitoring and consider amendments to its own proposals
asnecessary.
Onesuch topicmay be monitoring tools for intra-dayliquidity
management.
Withinthis context, theEBA may consider increasingfurther the
granularityof some of theproposed time bucketscoveringtheperiod of
thefirst 3months.
Input from theindustry on theselast aspectswouldbe welcome.
TheCRR provisionsrelated toliquidityreportingtranslatetheseBCBS
proposalsintoEU law.
Thus, in addition tothe LCR, institutionswill have to report totheir
competent authoritiesinformation related to additional metrics.
In this context, the CRR alsoprovides, inArticle 403(3)(b), that the EBA
shall develop draft ITStospecify the additional liquiditymonitoring
metricsrequired toallowcompetent authoritiesto obtain a

P a g e | 23
comprehensiveview of the liquidityrisk profile, proportionateto the
nature, scaleand complexityof an institution'sactivities.
ThisCP containstheEBA proposal in relationtosupervisoryreportingof
additional monitoringmetricsfor liquidity.
In definingitsproposal,theEBAfollowedtheapproachdevelopedbythe
BCBS.
TheEBA‘s proposed metricstobe covered bythis ITSincludethe
following:
- a maturityladder(templateand instructions)
osome additional monitoring tools(templatesand instructions)related
to:
oconcentrationof fundingby counterparty
oconcentrationof fundingby product type
opricesfor variouslengthsof funding
orollover of funding
Themetric relatedtothematurityladder is similar tothe contractual
maturitymismatch put forwardby the BCBStext.
Thetemplatedevelopedin theITSisdesignedtocapture thematurity
mismatchof an institution's balancesheet, and assuch, is referredtoas
the‗maturityladder‘.
Thesematurity mismatchesindicatehow much liquiditya bank would
potentiallyneed toraise in each of different time bandsif all outflows
occurred at theearliestpossibledate.
This metric providesinsight intothe extent towhichthe bank relies on
maturitytransformation under itscurrent contracts.

P a g e | 24
Thematurityladderformspart ofthepackageof‗monitoringtools‘which
theEBA hasdesigned.
Thematurity ladder is a monitoring tool whichcomprisestwoseparate
templates(whichareset out in twoworksheets),onefor contractual flows
and one for behavioural flows(inflowsand outflows).
Thecontractual flowsresultingfrom legallybindingagreementsshould
bereported accordingto theprovisionsof these agreements, while the
behaviouralflowsshould be based upon a base-caseeconomicscenario
used by the reportinginstitutionin itscurrent businessplanning(the
scenariothat theinstitutionexpectstohappen, asopposedtopre-defined
stressed conditions).
Thematurity of theoutflowsand inflowsto be reportedboth in the
contractual templateand thebehavioural template range from open
maturityup to greater than 10 years (13bucketsin total), which allowsall
relevant maturitiestobe captured.
Themetrics related to the additional monitoring toolsare designed to
monitor an institution's liquidityrisk that fallsoutsidethe scope of the
reportson LiquidityCoverage and StableFunding.
Thetemplateon concentration of funding by counterparty, similar to the
concentration of fundingmetricput forwardby the BCBStext, allowsthe
identificationof thosesourcesof wholesaleand retail fundingof such
significancethat their withdrawalcould trigger liquidityproblems.
Excessiverelianceon individual counterpartiescould lead to the
crystallisation of liquidityrisk, wherethefundingrelationship to cease
during a stressscenario.
It isthereforeimportant toprovidetemplatesforreportingonthese
items,soasto help institutionsto identify these risksearlyand seek
fundingfrom a widerangeof counterparties.
For thepurposeof thisITS,it isproposedthat institutionsarerequiredto
report thetop ten largest counterpartiesfrom whichfunding obtained

P a g e | 25
exceedsa threshold of 1%of total liabilities,together withinformationon
thecounterpartyname, counterpartytype and location, product
type, currency, amount received, weightedaverage and residual maturity.
Thetemplateon fundingby product type seekstocollect information
about theinstitution's concentration of funding by product type, broken
downintodifferent funding types relatedto retail and wholesalefunding.
Excessiverelianceon specific product types could lead to the
crystallisation of liquidityrisk, werethespecific product typesproven to
besubject to high outflowsduring a stressscenario.
It isthereforeimportant toprovidetemplatesforreportingonthese
items,soasto help institutionsto identify these risksearlyand seek
fundingfrom a widerangeof product types.
For thepurposeof completingthe ITStemplates,it is proposedthat
institutionsreport thetotal amount of funding received from each
product category, whenit exceedsa threshold of 1% of total liabilities.
With regard to the counterbalancing capacity on the assets side, the EBA
is considering integrating into the final ITSthe template and instructions
shownin theappendix of thisconsultationpaper.
Thispart of thereportingaimsat capturingconcentrationsof assetsused
tocounterbalanceoutflowsand wouldcollect informationabout the ten
largest holdingsin thoseassetsissuedby a singlename.
It is clearthat high concentrationsmay represent a risk of overestimation
of the counterbalancingcapacityif the marketsfor the variousfinancial
instrumentsissued by a specificindividual issuer fall dry.
Additional information onthe issuer/ counterparty locationmay add
insight on interconnectedness.
As part of the total, the template seeksalsoinformation on receivedstand-
byliquidityfacilitieswhichareseenaspart of thecounterbalancing
capacityby the institution.

P a g e | 26
Insight in thesespecific types of concentrations cannot sufficientlybe
obtainedfrom other templates.
Thetemplateon pricesfor variouslengthsof funding seekstocollect
information about theaveragetransactionvolume and pricespaid by
institutionsfor fundingwithdifferent maturities ranging from overnight
to10 years.
Finally, the templateon theroll-over of funding seeksto collect
information about thevolume of fundsmaturing and new funding
obtainedi.e. ‗roll-over of funding‘on a daily basisover a monthlytime
horizon.
As a reminder, please note that Article 403(2) of the draft CRR stipulates
that an institution shall report separately to the competent authorities of
the home Member State the items subject to liquidity risk reporting in a
currencywhenit has
(i)aggregateliabilitiesin that currency, different from thesinglecurrency
used for reporting, amounting toor exceeding5 % of the institution‘sor
thesingleliquiditysub-group‘stotal liabilities;or
(ii)a significant branch asdefined inArticle 52of theCRD in a host
MemberStateusinga currencydifferent from thereportingcurrency.
Thepresent ITShave been developed to provide competent authorities
with harmonisedinformation on institutions‘liquidityrisk profile, taking
intoaccount thenature, scaleand complexityof institutions' activities.
As the ITSon additional liquidity monitoring metricswill become part of
the general supervisory reporting framework requirements, following the
introduction of liquidity requirements, formats have been developed with
theaim of ensuringconsistencywhereallowedbytheCRR proposedtext.
Scope/ level of application and frequency

P a g e | 27
Thescope and level of applicationof theseITSseek tobe consistent with
thescope and level of application of theCRR and of theprudential
reporting requirements(COREP), i.e. it applies:
-on a consolidatedbasis(Article 10(3) of the CRR): to EU parent credit
institutionsand investment firms and tocredit institutionsand
investment firmscontrolledby an EU parent financial holding company
or by anEU parent mixed financial holdingcompany;
-onan individual basis(Article 5(4) of theCRR) : toall credit institutions
and investment firmsthat are authorisedto providethe investment
serviceslisted in points3 and 6 of sectionAofAnnex I to Directive
2004/ 39/ EC.
However,accordingtoArticle 7(1) of theproposed CRR text, competent
authoritieswillbeallowedtowaivein full orin part theapplicationofPart
Six oftheCRR (Liquidityrequirements)toainstitutionandtoall orsome
of itssubsidiaries, if they fulfill a set a predefined conditions,including if
theparent institutioncomplieson a consolidatedbasiswiththeobligation
set forth inArticle 401and 403.
Thereporting frequencywill bemonthlyforall monitoringmetrics.
Under specific clear and factual criteria, dulyframed in the
ITS,proportionateto the nature, scaleand complexityof an
institution'sactivities, the reportingfrequency can be
reduced, respectivelyto a quarterly basis.
Thesespecificcriteriarelatetotheexistenceofcross-borderactivitiesand
sizeof the institution‘sbalancesheet.
It shall be noted that Article64of the CRD related tosupervisorypowers
allowscompetent authoritiesto imposeadditional or more frequent
reporting requirements, includingreportingon liquiditypositions.
For examplein periodsof stresscompetent authoritiescould impose
some reportingwitha daily frequency.

P a g e | 28
Timing of ITSdevelopment and application date
Consideringthat theEBA is consultingon this reporting for additional
metricsat alaterstagethanfortheotherreportingrequirements,theEBA
may consider further the appropriateapplicationdatecompared tothe
applicationdate of other reporting requirements(in particular the
reporting requirementsfor liquiditycoverageand stablefunding).
According to the draft CRR, the EBAis expectedtosubmit theseITSto
theEuropean Commission (EC) by 1January 2014.
Thedata point model related tothe reportingon additional monitoring
metricswill be publishedfor consultationin the courseof 2013.
4. Draft implementing technical standardsonAdditional
Liquidity Monitoring Metrics under the Capital Requirements
Regulation (CRR)
THE EUROPEAN COMMISSION,
Having regard to theTreaty on the Functioningof theEuropean
Union, HavingregardtoRegulationxx/ XX/ EU oftheEuropean
Parliamentand of the Council of [dd mmmm yyyy] on prudential
requirementsfor credit institutionsand investment firms [CRR], and in
particulartoArticles
......and403(3)(b) thereof,[ADDENDUM TO THE LEGAL BASESAS
PRESENTED IN CP50AND SUBSEQUENT CPsON VARIOUS
ASPECTSOF REPORTING]
Whereas:
...[ADDENDUM TO THE RECITALSAS PRESENTED IN CP50AND
SUBSEQUENT CPsON VARIOUSASPECTSOF REPORTING]
(xx)
(xx) Reportingforadditionalmetricsrelatingtoliquidityshouldcomprise
a maturityladder,because this is what wouldallowthematurity

P a g e | 29
mismatchof an institution's balancesheet to be captured; metrics based
on theconcentrationof funding by counterparty and product
type, becausethesemetricsidentify counterparties and instrumentsthat
are of such relevance that withdrawalof fundsor decliningmarket
liquiditycould trigger liquidityproblems;metricsbased on the pricesfor
variouslengthsof funding and the rollover of funding becausesuch
information will become valuableover timeassupervisorswouldbe made
awareof changesin funding spreads, volumesand tenors.
(xx) Given that articles5 to 9 of Regulationxx/ xxx [CRR] specify the
level of applicationof the liquiditycoverage, the level and scope of the
reporting of that liquiditycoverageand on the additional monitoring
metricsshould be aligned with that, and thereforethe reportingon these
additional monitoringmetricsshouldberequired only at the level of
consolidationat whichreportingon liquiditycoverageis required
accordingtoArticle 403(3)(a).

P a g e | 30
EXPLANATORY
MEMORANDUM TO
THE FINANCIAL CONGLOMERATES AND OTHER
FINANCIAL GROUPS (AMENDMENT) REGULATIONS
This explanatorymemorandum hasbeen prepared by HM Treasuryand
is laid beforeParliament by Command of Her Majesty.
Purposeof the instrument
TheseRegulationsimplement, in part, Directive2011/ 89/ EU of the
EuropeanParliament andoftheCouncil amendingDirectives
98/78/EC, 2002/ 87/ EC, 2006/48/EC and 2009/ 138/ EC (OJ L 326/113
8.12.2011)as
regards thesupplementarysupervision of financial entitiesin a financial
conglomerate.
ThePrudential RegulationAuthority(―PRA‖) and theFinancialConduct
Authority (―FCA‖) are responsiblefor implementingthemajority of the
provisionsof this Directive.
TheRegulationsmake a limitednumber of technical and definitional
amendmentstoexistingsecondary legislationwhichimposesobligations
on the PRA and FCAwith regard totheir supervisoryfunctions,in
particular concerninginformation sharingand consultationrequirements.
Legislative Context
TheFinancial ConglomeratesDirective2002 (Directive
2002/ 87/EC), providesthe framework for the prudential supervision of
financial conglomeratesinvolved in both banking and insurance
activities, supplementingthe relevant banking and insurance sectoral
directivesbyproviding additional supervision at thegroup level.

P a g e | 31
TheFinancial ConglomeratesDirective2002wasimplemented in theUK
mainlyby rulesmade by the Financial ServicesAuthority (―FSA‖ – the
predecessortothe PRA and FCA) under the Financial Servicesand
MarketsAct 2000(―FSMA‖), but certainprovisionswhich imposed
obligationson the supervisory authority, weretransposed by theFinancial
Conglomeratesand Other Financial GroupsRegulations2004(S.I.
2004/1862).
Directive2011/ 89/ EU is the result of a technical review of the2002
Directivewhichwascommenced by theEuropean Commissionin 2008
andmakes changestothe Financial ConglomeratesDirective2002and
therelevant sectoraldirectivesto improve theeffectivenessof thecurrent
rules.
TheseRegulationstransposethoseaspectsof Directive2011/ 89/ EU
whichrequire amendmentsto be madetoexistingsecondary
legislation, notablythe Financial Conglomeratesand Other Financial
GroupsRegulations2004and theCapital RequirementsRegulations2006
(S.I. 2006/ 3221), by thetranspositiondeadlineof 10 June 2013.
Most of theDirective provisionsarebeingtransposed by rulesmade by
thePRA and FCA.
Thoseprovisionsof the Directive whichrelate to alternativeinvestment
fund managers, and which alsorequire amendmentsto the Financial
Conglomeratesand Other Financial GroupsRegulations2004, but have a
later transpositiondeadlineof 22July2013,will be transposed bywayof a
separateset of Regulationswhich is duetobe made for the purposesof
transposingtheAlternative Investment Fund ManagersDirective
(Directive2011/ 61/EU) by that deadline.
TheseRegulationsalsoupdatecertain cross-referencesin theFinancial
Conglomeratesand Other Financial GroupsRegulations2004to
provisionsin Part 12of FSMA, whichwereamendedby the Financial
Servicesand MarketsAct 2000(Controllers) Regulations2009(S.I.
2009/ 534)aspart oftheexerciseoftransposingtheAcquisitionsDirective
(Directive2007/44/EC).

P a g e | 32
Policy background - What is being done and why
Theaim of Directive2011/ 89/ EU is toact asa quick fix in responseto
gapsinconglomeratesupervisionthat werehighlightedbytheexperience
of the financial crisisand identifiedin thereview of the Financial
ConglomeratesDirective2002carried out by theEuropean Commission
in 2008/2009.
Thechangesareexpectedtoeliminatetheunintendedconsequencesand
technicalomissionsin the relevant sectoral directives(coveringthe
supervision of banking and insuranceinstitutions), and improve the
consistencyof supervision of group risks.
Thechangesincludeamendmentstothecapitalcalculationmethodology
for conglomerates, a requirement toincludeasset management
companies and alternativeinvestment fund managersin the
conglomeratesidentificationprocess, and amendmentsto the
identificationthreshold triggers,aswellasprovidingfor conglomerate
stresstesting.
Most of thesesubstantivechangeswill be implementedby amendments
to PRAand FCArules.
However,a limitednumber of amendmentsare required to existing
secondarylegislationwhichimposesobligationson the PRAand FCA
with regard totheir supervisoryfunctionsin relationtoconglomerates.
Thesemainlyconcern consequential amendmentsto consultation and
information sharing requirements.
Amore fundamental review of theFinancial ConglomeratesDirective
2002 iscurrentlyunderway.
Theaim of thisis toprovide a wider-rangingassessment of thethe
financial crisis.
TheEuropean Commission published aprogressupdate report on this
review in December 2012.

P a g e | 33
This noted theimportanceof taking intoaccount the recent and pending
changestosectoral legislation– such asSolvencyII and theCapital
Re qu iremen ts Direct ive (―CRD 4‖) – aswell asthe
implicationsof Banking Union proposalsfor conglomerate
supervision.
Asaresult, thereport statedthattheCommissiondoesnot intendtobring
forwardlegislativeproposalsin 2013,but will keepthe situationunder
review to determinethe appropriatetimingfor the revision.
Consolidation
There arenocurrent plans toconsolidatetheamendmentstothe
Financial Conglomeratesand Other Financial GroupsRegulations2004
or the Capital RequirementsRegulations2006.
However,the 2004Regulationsare likelytobe amended again following
thecurrent more fundamental review of theFinancial Conglomerates
Directive2002,at whichstage further consideration will be given to
consolidation.
TheCapital RequirementsRegulations2006are expectedtobe further
amendedorreplacedaspart oftheexerciseoftransposingCRD4 whichis
duetobe adoptedlater this year.
Consultation outcome
TheEuropean Commission undertook a targeted pre-legislative
consultation on itsreview of the Financial ConglomeratesDirectivein
November 2009, prior toissuingits formal proposal in August 2010.
We understand that a UK stakeholderrespondedbut theresponsewas
not made public.
Details of theconsultation, includingpublished responses,are available
at:
http:/ / ec.europa.eu/ internal_market/ consultations/2009/fcd_review_e
n.htm

P a g e | 34
Adraft of these Regulationswassubject toa public consultation in the
document CP12/40: Financial ConglomeratesDirective– Technical
reviewamendments, a joint FSA-HM Treasuryconsultation, whichwas
publishedon the FSAwebsiteon 21December 2012,and is availableat:
http:/ / www.fsa.gov.uk /static/ pubs/cp/ cp12-40.pdf.
Theconsultationclosedon21March2013andnoresponseswerereceived
concerningtheTreasury‘sdraft Regulations.
The Treasury also consulted the FSAand itssuccessor authorities prior to
making these Regulations, which impose obligations directly on the PRA
and FCA, and theFSAwascontent withthedraft Regulations.
Guidance
TheTreasuryisnot planningtoissueanyguidanceonthese
Regulations,whichdo not imposeobligationsdirectlyon business.
ThePRAand the FCAaredue to issuepolicy statementsdetailing their
final rules implementingother partsof Directive2011/ 89/ EU.
TRANSPOSITION NOTE FOR DIRECTIVE 2011/ 89/EU
This transpositionnote setsout the legislationwhichtransposesintoUK
law Directive2011/ 89/EU of theEuropean Parliament and of theCouncil
amendingDirectives98/78/ EC, 2002/87/EC, 2006/48/ EC and
2009/ 138/ EC asregards the supplementarysupervision of financial
entitiesin a financial conglomerate.
This Directive makestechnical amendmentsto the Financial
ConglomeratesDirective2002(Directive2002/ 87/ EC), whichdealswith
the supplementarysupervision of financial conglomerates,whichare
groupswhichcarry out significant activities in both thebanking
/ investment servicesand insurancesectors.
It alsomakesconsequential amendmentsto the relevant sectoral
directivesdealing withthe regulationof banks/investment firms and
insurancefirms.

P a g e | 35
TheFinancial ConglomeratesDirective2002wasoriginallytransposed
mainlyby wayof rulesmade by theFinancial ServicesAuthority (the
―FSA‖) under the Financial Servicesand MarketsAct 2000, and alsoin
part bythe Financial Conglomeratesand Other Financial Groups
Regulations2004(SI 2004/ 1862)madeby the Treasury.
Thenew Directivemakes technical changestothe Financial
ConglomeratesDirective2002, includingchangesto theconglomerate
capital calculationsmethodology, changesto includeasset management
companies and alternativeinvestment fund managerswithintheprocess
foridentifyingafinancialconglomerate,andchangestotheapplicationof
identificationthreshold triggers.
Thenew Directiveisbeingtransposedmainlybythewayof amendments
beingmade to therulesof thePrudential RegulationAuthority (the
―PRA‖) and (wherenecessary) theFinancial Conduct Authority (the
―FCA‖), which wereestablishedin placeof the FSAwitheffect from 1
April 2013(whentheFinancial ServicesAct 2012came intoforce).
Theserulescontinueto bemade under the Financial Servicesand
MarketsAct 2000(asamendedby the Financial ServicesAct 2012).
Thenew Directive includesamendmentsto Directive 2009/138/EC
(―SolvencyII‖), whosetranspositiondateis currentlydelayed.
TheFSAhasconsultedon proposed amendmentsarising from thenew
Directivetothe draft PRAprudential sourcebook(SOLPRU) which
will, in due course, transposeaspectsof SolvencyII.
Referencesto thesedraft PRAHandbook rules are shownin this
TranspositionNotealthough SOLPRU will not be made until the
transpositionof SolvencyII takesplace.
TheDirectiveis alsobeingtransposed in part by wayof amendments
beingmade by the Treasury tothe Financial Conglomeratesand Other
Financial GroupsRegulations2004and the Capital Requirements
Regulations2006(SI 2006/ 3221), together withconsequential
amendmentsbeing made to other legislation.

P a g e | 36
MostoftheprovisionsofthisDirectiveareduetoapplyfrom10June2013.
Amendmentsto theFinancial Conglomeratesand Other Financial
GroupsRegulations2004relatingto alternativeinvestment fund managers
(whichapplyfrom 22July2013) will bemadeseparatelybywayof the
RegulationsbeingmadetotransposetheAlternative Investment
Fund ManagersDirective(Directive 2011/61/EU).

P a g e | 37
Whocallsthe shots?The problem
of fiscal dominance
Speechby Dr Jens
Weidmann, President of theDeutsche
Bundesbank, at the 4th Bank of France
- DeutscheBundesbank
Macroeconomicsand Finance
Conference, Paris.
1. Introduction
Ladies and gentlemen,
I wouldlike tothank you for theopportunity tospeak here today.
Indeed, in springtimethereis no better placeto be than Paris.
As Henry Millerput it:―God knows, when spring comesto
Paris the humblest mortal alivemust feel that hedwellsin Paradise‖.
However,other partsof Europe are currentlya long wayfrom Paradise.
Numerouscountriesare experiencinga severe crisis, and many people
are goingthrough a time of great hardship.
Thus, our most important challengeis toovercome thecrisis,restore
growth and lead Europeback to prosperity– without endangeringprice
stability.
Toachieve thisobjectivemany difficult and far-reachingdecisionshave
tobe taken.
Against this backdrop, conferencessuch asthis one are essential. After
all, scientific researchis a central pillar of good decision-making.

P a g e | 38
Thus, I wouldlike tothank the Banquede Francefor hostingthis event.
This sessionof the conferenceistitled:―FiscalPolicyin a Monetary
Union‖.
What is a central banker‘srolein sucha discussion?
Well, Mervyn King oncesaid: ―Central banksareoften accused of being
obsessedwithinflation. This isuntrue. If theyare obsessedwith
anything, it is withfiscalpolicy.‖
As sooften, Mervyn King wasright, wecentral bankersare indeed
obsessed withfiscal policy – and German onesquiteprobablysomewhat
more sothan those of a different nationality.
This obsession is drivenby twointerrelatedobservations:
First, high levelsof public debt harbour the riskof higher inflation.
Second, sooner or later high levelsof public debt are bound tohurt
economicgrowth.
Given the high levelsof public debt in manyEuropean countries, one
wouldexpect a broad consensusin favour of consolidation– and not just
amongfixated central bankers.
However,the reality is a bit more complex than I just implied.
There aredifferent viewson thedangersand meritsof public debt.
In fact, wearecurrentlyobserving a changeof mood that hasbeen
dubbedthe ―austeritybacklash‖.
Some politicians claim that their countries are dying from mere austerity
on its own; others convey the impression that the policy of consolidation
hasreached itslimits.
Consequently, theycall for it to be postponed.

P a g e | 39
These―backlashers‖ argue that in the current economicsituation
inflationarypressure is only of limited concern.
Along the same linesthey arguethat consolidationrather than debt hurts
growththe most – at least in the short run.
In my speechI wouldlike to discussthesetwoissues:first, the
relationship betweenpublic debt and inflationand second, the question
of consolidation and growth.
2. Sound public finances asa prerequisite for monetary policy
Publicdebt and inflationare related on account of monetarypolicy‘s
powertoaccommodate high levelsof public debt.
Thus, thehigher public debt becomes, the greater thepressure that can
beput upon monetary policy torespond accordingly.
Suddenlyit might befiscalpolicythat callstheshots–monetarypolicyno
longer followsthe objectiveof price stability but rather the concernsof
fiscalpolicy.
Astateof fiscal dominancehasbeen reached.
Technically, fiscaldominancereferstoa regime wheremonetary policy
ensuresthesolvencyof the government.
Thetraditional rolesare reversed: monetary policy stabilisesreal
government debt while inflationis determinedby theneedsof fiscal
policy.
In the conventional view, fiscaldominanceentails thefamous
―unpleasant monetarist arithmetic‖.
In the wordsof Sargent and Wallace: ―…themonetary authority… must
try tofinancewithseigniorageanydiscrepancybetween therevenue
demanded by the fiscal authorityand theamountsof bondsthat can be
soldtothepublic.‖

P a g e | 40
In their setup, fiscalpolicy runsachronicprimarydeficit whichleadstoa
correspondingincreasein themoney supply.
As a simplemoneydemand holdsin themodel, thepricelevel adjuststo
establishequilibrium in themoney market.
Put more bluntly: thecentral bank financesgovernment deficitsthrough
theprinting press.
Recently, however,anotherconcept offiscaldominancehasgainedmuch
attention in the academic literature:thefiscal theory of theprice level.
According to this theory, fiscal policy can affect inflation even if it does
not monetisepublic debt along the linesof Sargent and Wallace.
In the wordsof Woodford: ―Fiscal dominancemanifestsitself through
pressure on the central bank tousemonetary policy tomaintain the
market value of government debt.‖
Themain pillar of thefiscal theory restson the fact that bondsare claims
tonominal payoffs.
Now, if governmentsare unabletoraisesufficient real resources, a new
direct link arisesbetweencurrent and expected deficitsand inflation.
Intuitively, the logic of the fiscal theory can be described asfollows:Let us
assumeadditional expenditure,forinstancehighertransfers,whicharenot
financed by additional taxesbut by issuingadditionalbonds.
Consequentlythevalueof real debt is now higher than thepresent value
of future tax payments.
Householdsfeel richer and thusconsumemore, causing output and
inflationto increase.
Monetarypolicyhastostabilise real debt toavoid aninflationspiral, with
theresult that it respondsat a rate of lessthan 1to 1to inflation, thereby
violatingthe Taylor principle.

P a g e | 41
Thus, higher inflation reducesdebt in real terms and lowerreal interest
ratesreducethe real debt serviceburden of existinggovernment debt.
In each of thetwocases,a regime of fiscal dominanceis characterisedby
higher inflation and probablyalsomore volatileinflation.
Monetarypolicyis nolonger ableto control the inflation rate, and
thereforewelfarelosseswill occur.
However,the story doesnot end here.
Remainingwithin the worldof theory, wecan continue asfollows:
becauseeconomicagentsareforward-looking, it isquitepossiblethat the
consequencesI have just described could manifest themselvesbeforethe
economyhasentered theregimeof fiscal dominance.
Looking ahead, public debt cannot be accumulatedforever.
Sooner or later, governmentsthat run largedeficitsfor a longperiod of
timerisk hittingafiscallimit – apoint at whichgovernment revenuescan
nolonger be increasedto stabilise government debt.
This inabilitytoraiserevenuesmight have economicreasons, such asa
crossingof the peak of the Laffer curve.
But there might alsobe political reasonsthat make it infeasibleto raise
taxes.
Certainly, the actual fiscal limit ishighlyuncertain in many ways:it is a
probabilitydistributionrather than a point and dependson
expectations,shocksand policy measurestaken.
And forward-lookingagentsknow:oncethe government hitsthefiscal
limit, either an adjustment of fiscal spendingor an adjustment of
monetarypolicy needsto occur.
Otherwisedebt cannot be stabilised.

P a g e | 42
And asa consequence, monetary policy might come under pressureto
step in and stabilisegovernment debt.
Thus, even if fiscal policy hasnot yet reached itslimit, theeconomic
mechanismsattached to the fiscal theory of theprice level might already
swinginto action.
Tobe specific: let usassume that agentsexpect, withsome
probability, that monetary policywill bear the burden of adjustment and
stabilisereal government debt through higher inflation.
Onceinflationexpectationsstart rising, thesamemight happenwith
inflationaswell.
Thus, even if the fiscal limit hasnot been reached, it may still affect
inflation.
In other words,how policy makersare expected to cope withthe fiscal
limit, includingtheir effortsto consolidate,not onlyaffectsexpectations
concerningfuture policy regimesbut can alsoaffect today‘swelfare.
Against thebackdrop of this theoretical analysis, onething should be
madeclear from a monetary policyperspective:policymakers should not
assume that theyare on safeground just becauseinflationexpectations
are firmly anchored.
Onlyif agentsexpect deviationsfrom a ―virtuousregime‖ of monetary
dominancetobe short-lived– say, becausepolicymakers still enjoy high
credibility– will inflationexpectationsremain well anchored.
However,if agentslearnthat thedeviationis goingtolast for longer than
initiallyexpected, their inflation expectationswill change.
And thismight happen very suddenly.
3. Hence, the case for consolidation
What conclusion can wedraw from thistheoreticalanalysis?

P a g e | 43
Well, the right conclusion is that fiscal consolidation is crucially
important tokeep inflationexpectationsanchored.
On thisbasis, one could make a solid casefor consolidation.
For it is incumbent on governmentstoreducethelevel of public debt.
Indeed, theyhave to do this topromote economic growth and to ensure
price stability.
As Olivier Blanchard put it: wehavetoget out of the danger zone.
Certainly, over thepast three years manycountrieshave made great
effortsto consolidatetheir public finances.
However,the main driver of theseeffortswasnot academictheory but
profanemarket pressure.
As Simon Nixon recentlywrote in the Wall Street Journal:
―For euro-zonecountriesfacinghigh borrowingcostsor reliant on
international aid tofund their budget deficits,fiscal consolidation wasn‘t
a choicebut a necessity.‖
And it still is.
Even so, now that market pressure haseasedsomewhat, sohasthe
politicalwill to consolidate.
Many argue that consolidationhasgonetoofar and that it will impede
growth given the current stateof the economy.
But is that a tenableargument against theneed to reducepublic debt, to
get out of the danger zone?
Let ustake a closer look at the relationship betweenconsolidation and
growth.

P a g e | 44
4. But will consolidation hurt growth?
Toput my view in a nutshell:I seenoconflict betweenconsolidationand
growth.
And, indeed, there is not much controversyregardingthe long-term
relationship betweenconsolidation and growth.
Variousstudieshave confirmedthat, in the longrun, solid public finances
haveabeneficialeffectongrowth– andI am not justreferringtothe
Reinhart- Rogoff study that hasreceivedsome criticism recently.
Cecchetti and others, for instance, alsofind that high debt levelsinhibit
potential growth.
Nevertheless, theshort-term relationshipbetweenconsolidationand
growth ishotlydebated.
And this debate iscurrentlyobscuringthe consensuson thelonger-term
effectsof consolidation.
This is becausethedebate relatesdirectlyto policydecisionsand totheir
short-term effectson whichpoliticiansare very strongly focused.
Morespecifically, the debate is focusingon theappropriate pace of
consolidationin the current circumstances.
Thediscussion, therefore, is revolving around the size of thefiscal
multiplier.
Thelargerthemultiplier, thegreater thenegativeeffect consolidationhas
on short-term growth.
In general, thesize of themultiplier dependson anumber of factors.
It dependson thespecific fiscal and economic situation of the relevant
country, includingthesize of theexport sector,theexchangerate regime,

P a g e | 45
trust in fiscalsustainabilityand the concretedesignof the consolidation
measures.
Recent researchhashighlightedthefact that themultiplier might alsobe
state-dependent.
This would implythepossibilitythat themultiplier is larger in a crisis.
Onereason for this could be that monetary policy isconstrainedby the
zero lowerbound.
Another reasoncould bethat the number of liquidity-constrained
householdsisincreasing.
Empirical studiestend tofind that multipliersare indeed larger in
recessionsand in situationswhereconsolidationtakesplaceduring a
financial crisis.
However,many of thesestudies suffer from a lack of data asdeep
recessionstend to be quite rare events.
Moreover,the wayin whichsuch studiesare set up isoften rather basic
and fraught with estimationchallenges.
Finally, there are alsostudies which implythat thefiscal multiplier might
besmaller whenpublic debt ratiosare high and thesustainability of
public financesis in doubt.
Now, what doesall this tell us about thecurrent situation and the
appropriatepaceof consolidation?
Blanchardand Leigh, in a recent workingpaper, suggest that the fiscal
multiplier iscurrentlylarger than previouslythought.
Therefore, theyconcludethat consolidationwouldcurrentlybe rather
costlyin terms of growthand more ―backloading‖ wouldbedesirable.
However,the data set from whichtheseresultshave been obtained is

P a g e | 46
rather small.
Onceother control variables areincluded and variation of thecountry
sampleis taken intoaccount, theresultsare nolonger robust.
All things considered, the size of fiscal multipliers seems to be subject to
considerable uncertainty – both in general and with regard to the current
situation.
Consequently, I think weshouldlookbeyond the size of theshort-term
fiscalmultiplier whendiscussingconsolidation.
In general, if consolidationisachievedby reducingpublic spending, for
instance,it will enhancepotential growth.
In addition, consolidationwill foster fiscalsustainability.
In this regard, it isimportant to consider how financial marketsjudgea
country‘sfiscalsituationand translatetheresultsintheir riskassessment.
There is widespreadagreement that the influenceof country-specific
fiscalcharacteristicshasrisen over the courseof the crisis.
Thecurrent crisisis, to a largeextent, a crisisof confidence– financial
marketshavelost their confidencein thesustainability of public finances.
Against thisbackdrop, sustainedandcredibleconsolidationwouldsenda
clear signal.
Also, with regard to political acceptance, I doubt that turning deferment
of consolidation into a never-ending story will find more public support
than a fairlyswift correction.
And this iswhyI believethat determinedconsolidationwouldhelp
convincethemarketsthat the future fiscal position is going tobe sound.

P a g e | 47
This, in turn, wouldbring down long-term interest ratesor ensure that
theyremain at a low level, which wouldbe beneficial for economic
growth.
By delaying consolidation, on theother hand, governmentswouldrisk an
increasein market uncertainty.
As a consequence, sovereignbond spreadswouldremain high or go up
even further.
5. Conclusion
Ladies and gentlemenHigh levelsof public debt are one of the major
economicpolicychallengesof our times– especiallyfrom a central
banker‘spoint of view.
Sustainablepublic financesarea necessary prerequisite for a stable
currency– a prerequisitethat monetarypolicy itselfcannot create.
Giventhat highlevelsofpublic debt alsohurt economicgrowth, thereisa
solidcasefor consolidation.
True, in theshort run, consolidationcan dampen growth;that is
undisputed.
Nevertheless, a crediblecommitment to soundpublic financeswill also
inspire confidence.
And confidenceis what islackingin theeuro area.
Thank you.

P a g e | 48
Solvency II update for all
firms
As part of our commitment to sharingdevelopmentsin our approachto
theimplementationof SolvencyII, I thought it wouldbe helpful towrite
toall firms affectedby the Directiveto give an update on thecurrent
positionand what this meansfor thework that hastobe done in the
comingmonths.
As you know, there continuesto be significant uncertaintyover the
timetableand final shape of the SolvencyII regime.
We are very consciousof the implicationsfor the industry of the
continuing delaysin terms of complexityand cost.
Wecannot yet providethecleartimetablebut weareactingintwowaysto
help theUK industry, both in theEuropean negotiation and in our
approachto implementationfor UK firms.
I willtake each of thesepointsin turn.
European timetable
We are actively engagingwithEuropean colleaguestosupport the timely
resolutionof policy issues.
Earlier this year weinvited firms totake part in thelong-term guarantees
assessment and wesubmitted data to theEuropean Insuranceand
Occupational PensionsAuthority (EIOPA) at theend ofApril.
EIOPA is currentlyanalysing data from Member Stateswitha view to
preparinga report for European co-legislatorsin June.
This is expected to be followedby a report from the European
Commission whichwill inform thedevelopment of the OmnibusII

P a g e | 49
Directivewhichis currentlyscheduled for a vote in theEuropean
Parliament on 22October 2013.
On 27 March2013,EIOPA published itsconsultationson preparatory
guidelinesfor SolvencyII.
Theguidelinescover areasthat EIOPAconsidersto be themost stable
and fundamental to ensure effectivepreparationby MemberStates
startingfrom 1January 2014.
It is important to note that the guidelinesfocuson preparednessrather
than bringingforwardelementsof SolvencyII early.
Thefour areasare:
i)systems of governance;
ii)forward-lookingassessment of the undertaking‘sown risks(based on
theORSAprinciples);
iii) submissionof information(reporting);and
iv) pre-applicationfor internal models.
We are very much awareof the concernsraised by industry, in
particular,with regardstothecost of potential duplicationof workand
parallelrunningstemmingfrom thereportingguidelines.
TheEIOPAposition onthe reportingguidelineswill be clearer towards
theend of the year, and wevery muchsupport thereview clausein
EIOPA‘scover notetotheconsultationsdesignedtoremovethepotential
for an extended period of parallel running.
We will be respondingto EIOPA‘s consultationsbythe deadlineof 19
June,andI wouldliketothank firmsfortheirattendanceandconstructive
input which will inform our response.

P a g e | 50
EIOPA will consider all responsesto theconsultationswitha view to
producingfinal guidelinesin theautumn; and National Competent
Authorities(NCAs), includingthe PRA, will have twomonthsto respond
asto whethertheywill complyor intend tocomplywith each of the
guidelines,and/ orgive reasonsfor non-compliancewhereneeded.
We appreciatethat the timingis difficult asit leaveslittletimefor usand
for you toprepare.
We will provideasmuch information to the UK industry assoonaswe
can.
Theworkon the long-term guaranteesassessment, theOmnibusII
Directiveand theEIOPApreparatoryguidelinesshould cometogether in
theautumn.
Thereis,therefore,unlikelytobeanycertaintyabout thetimetablebefore
then.
Approach to implementation
In October 2012 I acknowledged the EU delay to the implementation of
Solvency II and set out a new planning horizon of 31 December 2015 for
UK firms.
We have rephased and scaledback our plansfor future workon Solvency
II and webelievethat theaction wehave taken is both sensibleand
pragmatic.
It hasreduced considerably thecost to industry under the special project
feesthis year.
Sincemy lettertofirmsabout ‗ICAS+‘ in Januarythis year, wehave
receivedrequestsfrom just under half of the firmsin our internal model
approval process(IMAP) that wishtoleveragetheinvestment in their
SolvencyII internal models to meet thecurrent regulatory requirements.

P a g e | 51
We have startedtodeliver the new approach withthe first firms in the
process.
It is too earlyto share learningsfrom ICAS+ asweare still at a
preliminarystage, but weplan to dosoassoon aswecan, particularly
developmentsused by firms in their modellingtechniques.
As I have said previously, given the complexityinherent in modelled
approaches,wecontinueto believein the importanceof non-modelled
crosschecks.
Tothat end, wehavebeen developingearlywarningindicators(EWIs) to
monitor thecontinuing appropriatenessof the firm‘sinternal model to
deliverthe SolvencyII calibrationrequirement (i.e. 99.5%over a one-year
period).
I am sendinga separateletter toIM AP firms todayon theintroductionof
thoseindicatorswewill use in the ICAS regime to inform and assist our
supervision, and test the calibrationsof theEWIs in the run up to
SolvencyII.
For standard formula firms, weare currentlyconsideringa number of
areasand circumstancesin which the standard formula may not be
appropriate;for example, in capturing pensionrisk.
Thedatasubmittedbyfirmslastyear hasinformedourapproachtogether
with our assessment of firms‘preparednessfor SolvencyII.
Our conclusionswill alsodepend on thefinalised standard formula
calibrationsin the Level 2 text.
Our eventual approachwill needtobe consistent with thePRA‘s
approachtosupervision and reflect our responseto EIOPA‘s guidelines
on preparingfor SolvencyII.
We will update the industry more fullyon our approachwhenwehave
greater certaintyof theEuropean timetablelater this year.

P a g e | 52
In the meantime, firmsshould continuetoensure that their chosen
method to calculatetheir SolvencyII SolvencyCapital Requirement
(SCR) issuitable,and wherenecessary, considerwhetherit isappropriate
touseundertakingspecificparameters,or a partial internal model, where
thestandard formula doesnot adequatelyreflect the firm‘s riskprofile.
Finally, at theendof thismonth wewill bewritingtoanumber of life and
generalinsurancefirmswithdatarequestsfortheir responsesbyendJuly.
The requestswill include a comparison of ICAS to the standard formula
SCR and internal model SCR, a credit benchmark portfolio survey and a
requestfor standardisedrisk information.
This will allowustoidentify trendsand outliers,and weneed your input
tomake our reviewsefficient and up todate acrossthe sector.
It is essential for us, and theindustry, that the data is consistent.
Ultimately, these numbersare critical in our judgements.
Details of thedata collectionexercise,includingthe scope, purposeand
firmsaffected, areavailableat the PRA‘s SolvencyII webpages.
Wewillcontinuetogiveasmuchfeedbackasweareableat both firm and
industrylevel.
Next steps
We remain committedto updating you of developmentsin our approach
toimplementation of the SolvencyII Directive, and sharing early
developmentsand feedback from our work asfar aspossible.
We are lookingto hold an industrybriefing later this year, and will
providefurther informationin September.
I attachatimetable,basedon informationavailableat thetimeof
writing, that wehope you will find useful.

P a g e | 53
Pleasecontinuetoraise issuesand questionswithyour usual supervisory
contact sothat wecan consider them in the planningof our future
communications.
Yourssincerely
Julian

P a g e | 54

P a g e | 55
Dear Firm
Monitoring levelsof capital and early warning indicators
I wrote to you in June and again in September last year outliningour
intentionto monitor the on-going appropriatenessof SolvencyII internal
modelspost approval through theuseof earlywarningindicators(EWIs).
Thesewouldact asa non-modelled crosscheck to ensure firms‘models
continueto meet the SolvencyII calibrationrequirement (i.e. 99.5% over
a one-year period).
I am writingto you now toset out our implementationplan.
We propose to usethe period beforethe formal implementationof
SolvencyII to trial the useof EWIsin theICAS regimefor all firms using
an internal model for regulatorycapital assessment.
This will meet twoobjectives.
It will:
assist our supervisiontomonitor any downwarddrift in capital;and
inform our use and test the calibrationsof the EWIs.
Basedon analysis of thedata returnedbyfirmsin responsetoour request
in Q3 2012and feedback from the industry tomy lettersin 2012,wehave
developed separateindicatorsfor life (excludingwith-profits),
with-profitsfunds,andgeneralinsurancebusiness, incl. Londonmarkets.
Life and general insurance business, excluding with-profits
We consider the ratiobetweenthe modelledSolvencyCapital
Requirement (SCR) and theSolvencyII pre-corridorMinimum Capital

P a g e | 56
Requirement (pMCR) to be an appropriate EWI for life (excluding
withprofits)and general insurers.
In the interim period wewill use firms‘Individual Capital Guidance(ICG)
asthe capitalrequirement, and the pMCR will be calculatedusingthe
long-term guaranteesassessment specificationspublishedby EIOPAin
January2013.
Basedon further analysisof data providedby firms, the ICG to pMCR
indicatorthreshold hasbeen set at:
300% for life business(excludingwith-profits);and
175% for general insurancebusiness, includingLondonmarkets.
Thesethresholdshave been set at a level whichshould mean that
approximately10%of firmswill fall below them.
This will allowthe PRA tounderstand better thebehaviour of the EWIs.
With-profitsbusiness
Thedatasubmittedbyfirmsbased on a2011year endand responsesfrom
firmsto my previouslettershave suggestedthat thesimplepMCR may
not be appropriate for with-profitsfundsasit doesnot accuratelytakeinto
account theeconomic cost of contractual guaranteesor thenatureand
compositionof freeassetsor non-profits businesscontainedwithinthe
fund.
In addition to the simple ICG to pMCR ratio, we will therefore also use
the interim period to test an alternative modified indicator that reflects
thesefactors.
At theend of thisperiod wewill assesswhetherthe additional complexity
in thewith-profitsEWI is warranted.

P a g e | 57
I attacha technicalnote withthedetails of the modifiedindicatorwhich
you may wishtoshare with others asappropriate.
Basedon analysisof data provided by firms, the with-profitsindicator
thresholdshavebeen set at:
125% for the original (ICG topMCR) ratio for with-profitsbusiness;
and
200% for thealternativemodified indicator.
Next steps
From September 2013onwardsweexpect you tobe awareof the
performanceof your internal model againstthe EWIs and to be prepared
todiscussit with your supervisor.
You should alsobepreparedto discussreasonsfor anysignificant actual
or projectedchange in positionand the causesof those
changes,especiallyany actual or projectedfall below thethresholds.
Forthefirst calculationweplantousetheinformationcontainedinadata
requestbeingsent toa number of life and general insurancefirmson 31
May 2013.
In future wewill need to request a small amount of relevant data to
calculate the EWI but wewill seektorationalisethis aspart of other
requests.
In additiontothe six monthly reviewsacrosssectors,weplan to usethe
indicatorasan input to ICAS or ICAS+ review panels.
However,wedo not intendfundamentallyto alter the wayin whichthe
PRAsetsICG.

P a g e | 58
EIOPA is alsoconsideringearlywarningindicatorsaspart of thetoolsto
bedeveloped to monitor the ongoing appropriatenessof internal models
post approval in a SolvencyII regime.
We are contributingto this work.
Pleasecontinuetodiscussyour developinginternal model, and any
questionsyou may have, withyour usual supervisorycontact.
Yourssincerely

P a g e | 59
Technical note to the alternative with-profits indicator
We want toinvestigate whethera more reliable EWI can be constructed
for with-profitsfunds.
Tothisend, weareproposingtotestanalternativeindicatorbasedonthe
followingthreekey factorsthat contributeto the variability in the
economiccapital positionof with-profitsfunds:
1.thecost of contractual guaranteeswithin thefund;
2. thelevel of free assets;and
3. theamount of non-profit businesswrittenin the fund.
Our analysisshowsthat variability in thesethree factorsacross
with-profits fundscaused highlydispersed resultsagainst theoriginal
pMCR-basedEWI indicatingthat thismay not be a sufficientlyreliable
indicatorfor our purpose.
1. Economic cost of contractual guarantees
Thecost ofguaranteesisthekeydriverofrisk-basedcapitalrequirements
for with-profitsfunds.
In stressed economicconditions, decliningasset valuesin awith-profits
fund lead toa reduction in policyholders‘discretionarybenefits.
Theextent towhichthisreduction impactsthe cost of guarantees
andhencethe capital requirement dependson whether theguarantees
bite, i.e. whetherthe guarantees are in themoney or not.
We believethat the reliabilityof the EWI could be improved if an
approximateallowancewasmade for both the cost of the guaranteesand
theextent to whichtheyare in the money.

P a g e | 60
Management actionscan be takentoreducethe capital impact of the
stressscenario on with-profitsbusinessin both the ICAand the realistic
balancesheet and can differ betweentheseassessments.
For EWI purposesnoadjustmentsshould be made to themanagement
actionsassumed under either assessment.
2. The level of free assets
For assetsthat back policyholder liabilities,in stressedeconomic
conditions,generallythefall in asset valuesisoffset in part by a fall in
liabilities(thedifferencebroadlybeing the capital requirement).
For ‗free assets‘there are no associatedpolicyholder liabilitiesand hence
theimpact of economic stressesflowsstraight through tocapital
requirements.
Our analysisshowsthat an allowancefor thelevel of freeassetscould
enhancethe reliabilityof the EWI for with-profitsfunds.
It is worthclarifying thetreatment of thelevel of free assetsin respect of
closedwith-profitsfunds.
For such funds, freeassetsare included in realistic balancesheetsas
―plannedenhancements‖ rather than excesscapital.
ForthealternativeEWI, suchplannedenhancementsshouldbetreatedin
thesamewayasexcesscapital in the fund.
3.Non-profit business
Non-profit businesswithinthe with-profitsfund isusuallybackedby
assetsthat are wellmatched to the liabilitiessoitscontribution to the
capital requirementsis often comparatively modestcompared to the size
of the business.

P a g e | 61
Despitethis,wefeel that due to the widerangeof theproportion of
non-profit businesswrittenin with-profitsfunds,an allowancefor the
level of non-profit businessimprovesthe reliabilityof the EWI for
with-profits funds.
The alternative with-profitsEWI formula
In order toreflect thesefactorscontributingto capital requirementsin
with-profitsfunds,thealternativeEWI formulahasbeendevelopedasthe
ratio of the capital requirement to:
15%x Cost of guarantees+10% x sizeof thefreeassets+ 2% x Non-Profit
Liabilities
Moneynessof guarantees
As withour other EWIs, theICG will bethe capital requirement for the
interim EWI.
Thepercentageweights(15%, 10% and 2%) havebeen chosento reflect
therelativeimportanceof thedata item asdescribed above in its
contributiontothe overall capital requirement and the sensitivitiesto
changesin stressscenarios.
Thepercentageswerederivedsothat EWI factor calculatedfor most
withprofitsfundslayin the range1to 5.
Thefactor whichattemptstocapture theextent to which guaranteesare
in themoney is calculated asthe formula in the tablebelow.
This is an approximate formula to represent the averagemoneynessof
guaranteesof the different types and generationsof with-profitsbusiness
in thewith-profitsfund.
For clarification, thesourceof thedataand their descriptionsare given in
thetablebelow.

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Data collection exercisesin 2013
We have consideredtechniquesand toolsthat are informative, cost
effectiveand straightforwardtoimplement for usand firms whenweare
assessingmodels and model output.
Thetechniquesand toolsare alsodesignedto gather and usedata
efficientlyto perform industry analysis, and tousethat information for
firm-specific reviewsasappropriate.
We havedeveloped thefollowingquantitativetechniquesand
tools, which apply tolife and general insurancefirms.
These tools are very similar to those used previously in 2011 and 2012
when information was gathered and analysed in the third and fourth
quarters.
Theanalysis of the information wasparticularlyuseful and it helped
inform and focusour discussionswithfirms.
We recognise that firms‘ internal modelsand calibration workhave
developed further sincethen.
Assuch, wesetout our intentiontorepeat theanalysisandextendvarious
toolstocover more firms.

P a g e | 63
Minor changeshavebeen madetothesetoolstoincreasetheir usefulness
in 2013.
We may repeat someor all of theseinformation requestsin thefuture.
What weare asking you to do
On Friday 31 May 2013, we will send two emails to firms affected by the
data collection exercises – one to life insurance firms and one to general
insurancefirms– requestingresponsesby cob Wednesday 31July2013.
If thefirm hasbothlife andgeneralinsuranceoperations,theywillreceive
twoemails withsupportingmaterials.
We will collate all responsesand perform our analysisin Q3 and Q4 2013.
Theresultswill allowefficient industry analysisand will assist our
discussionswithfirms during ICAS and ICAS+ reviews(includingICG
assessments), and both thepre-applicationand submission phasesof
IM AP.
Fortheseexercises,weareaskingforinformationasat 31December2012.
Wherethisis not possiblethen a suitabledate should bechosenthat is as
near to31December 2012aspossible.
It is imperativethat data at the same valuationdate is used for all
templates.
Life insurance firms
Comparison of ICAS, standard formula Solvency Capital
Requirement (SCR) and internal model SCR
Wewill askall life IMAP firmstoprovideuswiththecapitalrequirements
from their ICAS, standard formula SCR and internalmodel SCR
calculations(based on thetechnical specificationspublishedby EIOPA
on 28January2013aspart of the long-term guaranteesassessment, with

P a g e | 64
liabilitiescalculatedusing the scenario 1matchingadjustment and zero
Counter-Cyclical Premium), split by riskfactor, alongwithan
explanation of the material differences.
This will help ustoidentify assumptions, methodologiesor other areas
for potential further review during both thepre-applicationand
submission phasesof IM AP.
In addition weare seekingindicativeinformationon capital resources
(ownfunds), and thedifferencein asset and liabilityvaluesbetweenthe
internalmodel and ICA.
This will help ustounderstand the changesin capital requirements.
We will alsobeusing this information to support our ongoing
development and monitoring of earlywarningindicators(EWIs).
Standardised risk information
This request will ask all life IMAP firms toprovideinformation (e.g.
percentilesofdistributions)forkeyriskvariables inastandardisedformat
for their UK sololife entities.
Credit benchmark portfolio survey
Therequest will askfirmsto disclosetheimpact (i.e. the fall in asset
value) of specifiedstresseson a benchmark portfolio of corporate bond
assets.This isan extensionof a pilot study conducted earlier this year to
all Category1and 2life IMAP firms withmaterial credit risk exposure.
Stochastic simulations survey
We will alsoincludea request toCategory1and 2 life IMAP firms with
stochastic internalmodels,askingthem to providethe stochastic
simulation files used to calculatetheir capital requirements,including
additional standardisedrisk variables.

P a g e | 65
This is an extension of a pilot studyconductedearlier thisyear.
General insurance firms
Comparison of ICAS, standard formula SCR and internal model
SCR
As for life IMAP firms, wewill askall general insuranceIMAP firms to
giveusthecapital requirementsfrom their ICAS, standard formula SCR
based and internal model SCR calculations(based on the technical
specificationspublishedby EIOPAon 28January 2013aspart of thelong-
term guaranteesassessment, with liabilitiescalculatedusing thescenario
1matchingadjustment and zero Counter-Cyclical Premium), split by risk
factor,along withan explanation of the material differences.
This will help ustoidentify assumptions, methodologiesor other areas
during both the pre-applicationand submission phasesof IM AP.
In addition weare seekingindicativeinformationon capital resources
(ownfunds), and thedifferencein asset and liabilityvaluesbetweenthe
internalmodel and ICA.
This will help ustounderstand the changesin capital requirements.
We will alsobeusing this information to support our ongoing
development and monitoring of EWIs.
Standardised risk information
As part of firms‘ICAsubmissions, wehave previouslyrequired firms to
providea standard templateof percentilesof claim distributions.
We have found this information veryuseful and have now decidedto
request this information from general insurancefirms(IM AP and
non-IMAP) at a common date, i.e. year end 31December 2012.

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Singapore – pursuing broader and deeper
economic integration with major
economies
Openingkeynote speechby Mr Lim Hng
Kiang, Minister for Tradeand Industryand
DeputyChairman of the MonetaryAuthority of
Singapore, at DeutscheBank AccessAsia
Conference2013,Singapore.
Distinguishedguests, Ladies and gentlemen, A
very good morningtoall of you.
It is my pleasure tojoin you at DeutscheBank‘s
AccessAsia Conference2013.
Let me first thank Deutsche Bank for theinvitation to speak at your
conference.
Thisisthelargestevent hostedbyDeutscheBank eachyear globally, and
a huge turnout is a clear indicator of thestrong corporateand investor
interest in Asia.
In the last 10years, thecentre of gravityof the worldeconomyhasbeen
moving awayfrom the USand EuropetoAsia.
Asia isexpected to continuetoprosper in thedecadesahead asthe
middleclassexpandsin linewith strong economicgrowth.
China is set to be thelargest economy in theworldby2030and isalready
creatingmegacitiesof over 10million at an averagerate of oneper year.
Besides China, Ind ia‘s midd le class is ex pected to grow to
almost 600million peopleby 2025.

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In Indonesia, almost 60per cent of Indonesianhouseholds, in a country
of 240million people, are expectedto reach middle-classstatusby 2020.
Beinga very small state, Singaporehas and will continuetomaintain an
open economy.
We will participateactivelytopropagate freeand open tradingalliances
asAsia growsand becomesmore economicallyintegrated.
In this way, wehelp to unlockthe value, spin off new opportunitiesand
creategood jobsfor Singaporeans.
ASEAN and AEC 2015
Onekeymarket for Singapore isASEAN.
ASEAN isagrowingregionandhasacombinedpopulationof600million
people.
ASEAN alsohas a GDP that is thethird largest inAsia, after China and
Japan.
In recent years,ASEAN hasembarked on an enterprise to integrate our
economiesintoa regional bloc.
ASEAN today, through initiativeslike theASEAN Free TradeArea, has
resultedin virtuallynotariffsfor flowsof goodsbetween our countries.
Going forward,ASEAN is making good progresstowardsbecoming the
singlemarket and product baseenvisionedin theASEAN Economic
Community(AEC).
Therealisation of theAEC by 2015will result in an even more tightly
integratedregion, and thishasopened up more opportunitiesfor
corporatesaswell asinvestors.
Akey principleunderpinningtheAEC 2015is thefree flowof
goods,servicesand investment withintheregion by 2015.

P a g e | 68
Let me updateyou on theprogresssofar.
•On tradein goods, virtuallyall goodsin ASEAN alreadymove
throughout the region tariff-free.
We are now workingon reducing non-tariff barriers.
•On services,ASEAN MemberStateshaverecentlycompletedtheeighth
packageof commitmentsunder theASEAN FrameworkAgreement on
Services.
What this meansis that wecan expect thereductionof servicesbarriers,
such asforeign equitylimitsin theASEAN countries.
•On investment, theASEAN Comprehensive Investment Agreement
enteredintoforce in Marchlast year.
This agreement hasestablishedstronger, pro-businessrules, with
enhancedinvestment protectionforbothASEAN-ownedinvestmentsand
alsoforeign-ownedinvestmentsbased inASEAN.
Singapore‘s multilateral agreements
However,to enablebusinessestoaccessmajor marketsmore easily,
Singaporehasalsobroadenedour engagement withAsia Pacific beyond
ASEAN.
By doing so, weaim to reducetradingcosts.
Tothis end, Singaporeactively participatesin negotiationsof several
multilateral tradeagreements.
Oneexampleof such a multilateral tradeagreement isthe Regional
ComprehensiveEconomic Partnership, or RCEP, which is a partnership
betweenASEAN andsixothercountries, namelyAustralia, NewZealand,
China, Japan, India and South Korea.

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Regional Comprehensive Economic Partnership (RCEP) and
Renminbi (RMB) Internationalisation
This agreement buildsupon theexistingASEAN+1 free trade
agreements(FTAs) FTAs by bringing togetherASEAN‘sexistingFTAs
with itskey partnersintoa singlecomprehensiveagreement.
RCEP will be one of thebiggest FTAs in the world, covering3 billion
peopleand accountingfor one-third of the world‘sGDP.
RCEP isa significant agreement forASEAN.
It isanambitiousattempt todeepenregionaleconomicintegrationandto
link ASEAN‘s varioustrading partners,many of whom donot have
existingtrade agreementswithone another.
Onekeypartner forASEAN in RCEP is China.
China will continuetoplay an increasinglyimportant role in trade with
ASEAN, and thiswill grow even further with itsparticipationin RCEP.
In 2012,ASEAN-China trade volumesreached a record high of US$400
billion,andby2015,ASEAN isexpectedtobeChina‘stoptradingpartner.
As a result, in thenext few years, wecanexpect a greater acceptanceand
useof theRenminbi (RMB) asa trade settlement currency, especiallyin
ASEAN.
What doesthis mean for us?
China hasalreadysignedbilateral currencyswaparrangementswith key
ASEAN countries,such asSingapore, Malaysiaand Indonesia.
Corporates,investorsandfinancialinstitutionsneedtobepreparedif they
are tocapitaliseon the opportunitiesbrought on by theincreasing
internationalisationof theRMB.

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In February thisyear, Singaporebecame thefirst country outsideGreater
China tohavea Renminbi clearingbank whenthe Singaporebranch of
theIndustrial and Commercial Bank of China (ICBC) wasdesignatedas
such.
This wasfollowedby MASand the People‘sBank of China signingan
enhancedbilateral currencyswap agreement inApril.
Theappointment of a Renminbi clearingbank in Singaporebrings new
functionalityto theSingaporefinancial system.
Thebuild-up of Renminbi liquidityin Singaporewill encourage financial
institutionsin Singaporeto develop and offer a widerrangeof Renminbi
productsand services.
This will help meet the financing, investment, and risk management
needsof the market.
It will alsostrengthen the roleof Singapore asa leading global financial
centre that servesAsia and beyond.
Trans-Pacific Partnership (TPP)
Besides theRCEP, Singapore isalsoactively engaged in the
Trans-Pacific Partnership, or the TPP.
TheTPP negotiationscurrentlyinvolve 11countries:
Australia, Brunei, Canada, Chile, Malaysia, Mexico, New
Zealand, Peru, Singapore, Vietnam and the United States.
It aims tobringcomprehensiveduty-free market accessaswell as
reduced restrictionson services, investment and government
procurement.
It alsoseeksto enhanceregional connectivityby reducing
behind-the-bordernon-tariff tradebarriersand promoting consistencyin
regulation acrossall themember countries.

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Singapore views the TPP, along with the RCEP, as complementary tracks
that will lead towards increased regional integration, and eventually, to a
Free TradeAgreement of theAsia Pacific.
Therecent decisionby Japantojoin the TPP will further reinforcethe
TPP asa platform for broader economic integrationacrossthePacific.
With Japan‘sinclusion, the TPP‘s membership hasnow expanded to12
countries.
This representsnearly40per cent of the global economyand one-third of
worldtrade.
As you all know, joiningthe TPP isa keyelement of thethree-arrow
strategyembodied inAbenomics.
Theprognosisfor Japanhasimproved considerablycompared to six
monthsago.
After stagnating for much of last year, the Japanese economy rebounded
strongly in the first quarter of this year, with GDP growth of 3.5 per cent
on a pick-up in consumer spending.
Growthforecast for thewholeof this year has been progressively
raised, with room for further upward revision.
Sentimentshave improved strongly sincethe announcementsof
aggressivemonetary and fiscal policy measuresto revive the Japanese
economy.
Thesharp depreciationof theYen hasalsohelped toboost expectations
for GDP growth and corporateprofits.
Oneexampleof thisis Toyota Motor.
It hasreportedconsolidatedoperatingprofit of 1.3trillion yen for the2012
businessyear, about 3.7timesthat of thepreviousyear.

Risk management presentation June 3 2013

Risk management presentation June 3 2013

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Risk management presentation June 3 2013