Monday October 15, 2012 - Top 10 Risk Management News

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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,
The National Institute of Standards and
Technology (NIST) announced the winner
of its five-year competition to select a new
cryptographic hash algorithm, one of the
fundamental tools of modern information security.
The winning algorithm, Keccak (pronounced
“catch-ack”), was created by Guido Bertoni,
Joan Daemen and Gilles Van Assche of
STMicroelectronics and Michaël Peeters of
NXP Semiconductors.
Keccak will now become NIST’s SHA-3 hash
algorithm.
Hash algorithms are used widely for
cryptographic applications that ensure the
authenticity of digital documents, such as digital signatures and message
authentication codes.
These algorithms take an electronic file and generate a short "digest," a
sort of digital fingerprint of the content.
Read more at Number 3 below.
Welcome to the Top 10 list.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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New Bank Liquidity Rules: Dangers
Ahead
A Position Paper by EBA’s Banking
Stakeholder Group

The EBA’s Banking Stakeholder Group is composed of 30 members
appointed to represent in balanced proportions credit and investment
institutions operating in the Union, their employees’ representatives as
well as consumers, users of financial services and representatives of
SMEs.

Governor Elizabeth A. Duke, at the Federal Reserve
Bank of New York, New York, New York
Addressing Long-Term Vacant Properties to
Support Neighborhood Stabilization

NIST Selects Winner of Secure Hash
Algorithm (SHA-3) Competition
The National Institute of Standards and
Technology (NIST) announced the winner of
its five-year competition to select a new
cryptographic hash algorithm, one of the
fundamental tools of modern information
security.

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UK FSA
Financial Crime newsletter
Issue 16 of the Financial Crime newsletter.
So far, 2012 has been particularly busy.

EBA Work Programme 2013

The annual work programme describes
and summarises the main objectives and deliverables of the EBA in the
forthcoming year derived from the tasks specified in the Regulation and
from the relevant EU banking sector legislation.

Introductory Remarks at SEC’s Market
Technology Roundtable
By Chairman Mary L. Schapiro, U.S. Securities and
Exchange Commission, Washington, D.C.
“Thanks to technology, our securities markets are
more efficient and accessible than ever before.
But we also know that technology has pitfalls. And
when it doesn’t work quite right, the consequences
can be severe”.

Why we should be interested in the
history of currencies
Address by Ernst Baltensperger Presentation
of “Der Schweizer Franken – eine Erfolgsgeschichte”
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High-level Expert group on reforming
the structure of the EU banking sector
presents its report
The Commission has received the report
prepared by the High-level Expert Group on
reforming the structure of the EU banking sector (MEMO/12/129). The
Group chaired by Erkki Liikanen presented the main findings to Michel
Barnier, Commissioner for internal market and services.

A Statement by His Excellency the Governor of Saudi Arabian
Monetary Agency, Dr. Fahad bin Abdullah Almubarak
On the occasion of the National Day of the Kingdom of Saudi Arabia

German banks
successfully complete
EU-wide recapitalisation exercise
After deduction of the "sovereign capital buffer", all 12 German
institutions in the sample achieved the minimum core tier 1 capital ratio
of 9% as at 30 June 2012.

The average ratio is 10.7%, which means all institutions taken together
exceed the EBA minimum capital requirement by €15.5 billion.

The five banks which were found to need an additional €12.9 billion as at
30 September 2011 have covered this requirement.

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NUMBER 1

New Bank Liquidity Rules: Dangers
Ahead
A Position Paper by EBA’s Banking
Stakeholder Group

Note:

The EBA’s Banking Stakeholder Group is composed of 30 members
appointed to represent in balanced proportions credit and investment
institutions operating in the Union, their employees’ representatives as
well as consumers, users of financial services and representatives of
SMEs.

The Group’s role is to help facilitate consultation with stakeholders in
areas relevant to the tasks of the EBA.

In particular, the Group shall be consulted on actions concerning
regulatory technical standards and implementing technical standards
and, guidelines and recommendations, to the extent that these do not
concern individual financial institutions.

The Group may also submit opinions and advice to the Authority on any
issue related to the tasks of the Authority, with particular focus on
common supervisory culture, peer reviews of competent authorities and
assessment of market developments.

The Group may also submit a request to the Authority, as appropriate, to
investigate the alleged breach or non-application of Union law.

1 Overview and Key Issues
1.1 Liquidity rules and the role of EBA

Credit institutions across Europe face an unprecedented amount of
regulatory reforms, originating from the 2009 De-Larosière Report and
the third release of the Basel Accord (“Basel 3”) in 2010.
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The new Capital Requirements Directive (CRD4) and Regulation (CRR),
that the European Union is currently debating, will create a common sine
qua non for institutions throughout the European Union.

The CRR will establish a consistent and integrated regulatory framework
for many aspects of bank management – including liquidity – providing a
homogeneous standard under a unified set of prudential rules.

In relation to liquidity, two new requirements have been proposed by
Basel 3 to ensure that financial institutions are more stable and will
require them to hold more liquid assets and issue more long-term debt.

The Liquidity Coverage Ratio (LCR) is aimed at ensuring short-term
resilience of financial institutions.

They will be required to hold at all times liquid assets, the total value of
which equals, or is greater than, the net liquidity outflows which might be
experienced under stressed conditions over a short period of time (30
days).

Net cash outflows are to be computed on the basis of a number of
assumptions concerning run-off and draw-down rates.

The LCR will be monitored in the EU after January 2013 and the
European Banking Authority (EBA) will test various eligibility criteria for
liquid assets.

Calibration will also be undertaken regarding net cash outflows.

This fine-tuning will provide input for the level-two regulations to be
introduced by the European Commission before January 2015, when the
LCR will become binding for all credit institutions in the EU.

The Net Stable Funding Requirement (NSFR) requires that available
stable funding (equity and liability financing expected to remain stable
over a one-year time horizon) at least equals the matching assets, i.e.
illiquid assets which cannot be easily turned into cash over the following
12 months.
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In the European Union the components of the NSFR will be monitored
from 2013 with a view to introducing a binding requirement in 2018.

The CRR – while setting a clear and comprehensive framework for the
measurement and control of bank liquidity – leaves many details open for
calibration, impact assessment and review.

As mentioned above, the EBA has been assigned a key role in the
implementation of the new regulatory framework; it is required to provide
supervisors and European institutions with criteria, standards and
technical advice on a wide-ranging set of issues.

1.2 The LCR: expected impact and scope for calibration

As it will be phased in first, the case for calibration and careful
implementation of the LCR is stronger.

Similar attention will be required for the NSFR once a full consensus on
the its structure has been achieved.

Accordingly, although this report covers all liquidity rules introduced by
the CRR, the LCR has been the main the focus of the contributions.

Based on the latest impact studies, the LCR shortfall of EU banks (that is,
the absolute amount of extra liquid assets needed for all banks to comply
with the ratio) currently exceeds 1 trillion euros.

Between 2009 and 2011, this shortfall has not improved.

Actually, it has deteriorated from €1tn to €1.15tn, with a 15% increase in
the (almost overwhelming) amount that EU banks would need to invest
in liquid assets in order to be compliant.

This clear risk or threat is that European banks may channel new funding
towards LCReligible assets rather than to loans and other “illiquid”
assets. E.g., European banks could increase their liquidity buffer through
additional deposits with central banks (which play no role in financing

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the real economy and which, in 2011, already amounted to about €850
million for large EU banks).

Essentially the LCR would have the effect of crowding out productive
investments and sterilize €1 trillion of liquidity out of the real European
economy.

In other words, unless the funding base available to European banks can
quickly be increased (which appears quite unlikely in the current
macroeconomic scenario), the LCR might lead to €1trillion loan
deleveraging process by December 2014.

Such a risk would become especially acute if a narrow definition of
LCR-eligible assets were enacted, which would deny adequate
recognition to some financial instruments supporting the financing of
companies and individuals, like corporate bonds, covered bonds or asset
backed securities.

While, in principle, capital markets may provide a substitute for reduced
bank funding, this looks improbable given the limited development of
corporate debt markets in many European countries and the high degree
of risk aversion currently shown by investors.

All the above provides a strong incentive for a rigorous calibration of the
LCR.

There are indeed, a number of steps in the computation of the ratio which
could be reconsidered, in order to make it closer to market practices and
to reduce the foreseeable burden for banks and the European economy.

Any ratio is made up of two components.

One can look at the LCR numerator, and consider ways to enhance the
set of assets eligible as liquidity buffer.

By allowing banks to use, for example corporate bonds and asset-backed
securities as liquid assets, regulators would greatly support the
development of those asset classes throughout Europe, and thus help the
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European capital market absorb the loans that banks will no longer be
able to provide.

Alternatively (or, rather, jointly) one can look at the denominator and
carefully revise the assumptions on runoff/drawdown/rollover factors
underlying the computation of the net cash flows.

The definition of liquid assets in the LCR will affect the behaviour of
market participants, hence the liquidity of different asset classes.

Banks will prioritise “liquid assets” as defined in LCR and
“down-prioritise” other assets, which will alter the demand for different
securities.

Additionally, during a crisis banks while trying to comply with the LCR
will generate liquidity in the first place by selling assets which are not
eligible for the ratio.

The definition of liquid assets in the CRR will not just depend on the
current market conditions, but rather will drive behaviours affecting the
future liquidity of different security types.

If such definitions were to prove inadequate, unintended consequences
could build up through a snowball effect.

Assumptions on cash flows (including run-off, draw-down and roll-over
factors) will also have a dramatic impact on the underlying bank
products, and may shift funds across business lines and different
categories of bank stakeholders.

E.g., limited recognition for the benefits of self-liquidating facilities
(including trade finance) may increase their cost and ultimately
undermine the economic viability of some lending activities.

Credit provided to SMEs might become unduly expensive.

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Interbank lines of credit – a key tool to improve bank resilience to
liquidity shocks – may prove less and less attractive due to
over-conservative rules.

1.3 This report

This position paper was produced by the Banking Stakeholder Group to
provide the EBA and European policy makers with a technical discussion
of several areas where the new rules risk to have unintended effects unless
properly calibrated and carefully implemented.

Its structure is the following.

Part 1 provides a general framework to introduce the calibrations in liquid
assets and net cash flows that will be discussed in the following sections.

We highlight the main implications of the new liquidity ratios for banks
and for the European real economy; we then go back to the rationale of
the liquidity requirements and discuss whether their anticipated costs are
consistent with expected benefits.

The next contribution surveys national regulations on liquidity – prior to
and after the 2008-2009 financial crisis – and finds that the provisions in
the CRR appear comparatively stricter than most pre-existing
requirements.

Finally, we discuss how the new liquidity-related ratios could modify the
accounting choices of banks.

Part 2 focuses on caveats and possible adjustments concerning the
numerator of the LCR, that is, liquid assets that banks are allowed to use
to meet their liquidity buffer.

We review the eligibility criteria set out by the CRR for high quality liquid
assets, highlighting why they may prove inadequate in capturing
systematic liquidity risk.

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We then discuss the appropriateness of such criteria for Europe, to find
that, unless appropriately calibrated, they may prove a major source of
disadvantage compared to the US.

Subsequently, we address the link between liquidity ratios and possible
changes in credit risk weights for government debt, to conclude that a
more risk-sensitive approach to sovereign risk weights could introduce a
pronounced “cliff edge” effect into the LCR and reduce the demand by
banks for government debt.

Finally, we look at a specific asset class, notably covered bonds, whose
full eligibility as a liquid asset may help incentivise portfolio
diversification and keep credit flowing to European consumers.

Part 3 discusses a number of potential calibrations which may be
introduced in the computation of the LCR’s denominator, i.e., the net
cash outflows experienced by a bank under a 30-day distressed scenario.

This includes customer deposits (where the new liquidity rules may
unduly penalise retail and commercial banks), credit and liquidity
facilities (where banks would be discouraged from holding liquidity lines
with other institutions, a key tool that can be used to ease liquidity
pressures) and trade finance (where the parameters of the LCR could
prove detrimental for a low-risk industry that underpins global economic
growth).

1.4 Time to sound the alarm

As the CRR, and therefore the liquidity rules, are about to enter
implementation stage, a number of hot spots must be clearly identified to
stimulate further debate and highlight the risk of unintended
consequences.

The first issue is the definition of liquid assets in the LCR and whether
this risks being too prescriptive and rigid.

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The Eurozone sovereign crisis has shown that liquid assets can become
illiquid quickly, so flexibility is needed to accommodate different market
conditions and the changing economic environment.

The changing risk profile of government bonds has shown how important
it is to create incentives for portfolio diversification.

Another area for further consideration is the link between LCR-eligibility
and central bank eligibility.

The CRR requires that liquid assets be central-bank eligible, but states
that not all central bank collateral will be acceptable for the LCR.

During a crisis, central bank eligibility is crucial in facilitating the
provision of liquidity to cash-strapped institutions and markets.

The definition of liquid assets and the rules on central bank collateral
need to be looked at the same time – they cannot be regarded as two
separate issues.

Furthermore, liquidity is an elusive concept, which fluctuates over time
and cannot be predicted in infinitum.

Hence, supervisors should resist the temptation to draw up lists and to
create parameters that will stay unchanged over time.

Any “black and white” approach to liquid assets’ definition will prove
increasingly unhelpful.

Developing criteria that are granular enough to accommodate many
different scenarios would be better to provide for a smooth transition of
asset classes between different liquidity grades.

Conversely, a liquidity scale which has only one or two levels is most
likely to prompt cliff effects when changes occur in the perceived
characteristics of specific eligible assets.

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Overlooking the different degrees of liquidity provided by a wide range of
investable assets, could result in regulators setting the threshold too high
and consequently focusing on many fewer asset classes.

The wish to “err on the safe side” would ultimately lead to investment
concentration and higher risk.

As concerns cash flows, no set of rules, no matter how conservative, will
ever isolate a bank from systemic risk.

E.g., assuming that all liquidity and credit lines that an institution has
secured on the wholesale market will suddenly become unavailable in a
crisis could give a false sense of security, while increasing banks’ costs
and creating wrong incentives.

The potential for dirigisme in the new rules should not be
underestimated, as minor changes in the factors imposed to banks
(including drawdown, rollover and runoff coefficients) may cause huge
shifts of funds across business lines in a way which interferes with the free
interplay of demand and supply.

It is important to remember that the aim of the LCR is not to enable
banks to withstand liquidity pressures on their own and to survive
through stressed scenarios without supervisory support.

Rather, it is to buy time and make sure that supervisors can rescue ailing
institutions – and possibly wind them down – without the impending
threat of a disordered meltdown and its potentially unmanageable
systemic costs.

There is a fundamental difference between liquidity as a micro and macro
phenomenon.

Many assets might well be liquid if one single bank needs to sell them,
but can quickly become illiquid if all banks want to get cash out of them.

The quest for assets which stay liquid “at all times” might prove
frustrating, since under severe systemic scenarios liquidity can only be
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ensured by monetary authorities.

Accordingly, prudential rules should not be carried too far, as providing
banks with a bulletproof jacket in times of distress may, in fact, lead to
imposing a straightjacket on the everyday business of financial
institutions and their customers.

Increasing compliance costs may not only make credit more expensive
and undermine growth; it may also move intermediation towards shadow
banking, channelling money through weakly-regulated schemes which
rely significantly on wholesale funding and may prove strongly
pro-cyclical.

The calibrations mentioned above should be carried out by the regulators
and policy makers with representatives of the financial industry, users of
financial services and banking scholars.

The availability of reliable data sources is a major bottleneck for any effort
to investigate funding and market liquidity risk; databases should be
shared loyally and transparently.

Any rule developed without a thorough involvement of banks and other
stakeholders is bound to prove both short-lived and short-sighted.

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NUMBER 2

Governor Elizabeth A. Duke, at the Federal Reserve
Bank of New York, New York, New York
Addressing Long-Term Vacant Properties to
Support Neighborhood Stabilization
Good afternoon. I want to thank the Federal Reserve
Bank of New York and the Rockefeller Institute for inviting me to
participate in this important
discussion of distressed
residential real estate.
The boom and bust in housing
that is a hallmark of the recent
economic cycle has resulted in an
unprecedented volume of
foreclosures that has, in turn, left
us with an extraordinary level of
vacant and distressed properties.
Even after the official end of the
recession, home sales and house
prices continued to decline for
several years, and residential
investment languished.
All of this has resulted in a slow
recovery in housing, which is one
of the primary reasons why our
overall economic recovery has
been so sluggish.
In order to see the robust economic recovery we all want, we need to deal
effectively with the large volume of vacant and distressed properties
throughout the country.
Our housing crisis has many dimensions and will require a full spectrum
of policy actions to restore health to the housing market, our economy,
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and most importantly, to neighborhoods and communities across the
country.
The Federal Reserve System has been active in studying various aspects
of the crisis, bringing together community leaders and market
participants to share experiences in forums such as this, and using data to
identify areas of particular need.
I have spoken in the past about credit availability, preventing
foreclosures, converting foreclosed properties to rental properties, and
strategies for neighborhood stabilization.
Today, I would like to focus on the problems posed by an elevated level of
vacant properties. I plan to draw on research conducted by Federal
Reserve Board staff and would especially like to thank Raven Molloy, an
economist in our macroeconomic analysis group, for her work in this
area.
As I will discuss later in my remarks, the effective use of data is a common
theme among success stories in neighborhood stabilization.
In the hope that the census tract data referenced in this speech might be
helpful to others working to address vacancy problems, I plan to post our
data on the Federal Reserve website along with this speech.
Level and Distribution of Vacant Housing
Since the beginning of this year, there have been signs of improvement in
aggregate housing market conditions nationally.
Sales of new and existing homes have risen and home prices have turned
upward.
So far this year, house prices have risen sufficiently to move a noticeable
number of underwater households--that is, those who owe more on their
mortgages than the market value of their homes--from negative equity to
positive equity.
However, housing markets differ greatly both across regions and within
metropolitan areas, and the positive signs in the aggregate data do not
apply to all neighborhoods equally.

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For example, even within those metropolitan areas that have experienced
rising average prices over the past year, one-fourth of ZIP codes saw a
decrease in prices over the same period.
Moreover, those ZIP codes with falling prices have also experienced
rising vacancy rates more often than in other ZIP codes.
These struggling high-vacancy areas provide evidence of the hard work
that remains even as housing markets show signs of improvement.
Although many of these areas share a high level of vacancy, they differ
significantly in other characteristics: the concentration of vacancies, age
of the housing stock, cause of the problem, and even the demographics of
the residents.
By looking more closely at the differences, we will gain a better
understanding of these markets and of the policies or program solutions
that will address their vacancy issues most effectively.
One measure that is frequently cited when describing recent
improvements in the national housing market is the inventory of vacant
homes for sale.
This measure had fallen to 1.6 million units in the second quarter of 2012,
substantially below its peak of about 2 million units in 2010 and the first
half of 2011.
However, many vacant homes are not on the market at all. These vacant
units include properties that are in the foreclosure process, bank-owned
properties that are not yet for sale, as well as properties for which the
cause of vacancy has no connection to the foreclosure process.
Indeed, the stock of non-seasonal homes held off market is nearly two
and a half times as large as the for-sale vacant stock.
But unlike the inventory of vacant homes for sale, this stock remains
stubbornly elevated relative to pre-crisis numbers, and has not gone down
at all over the past year.
Moreover, vacant units are not evenly distributed throughout the United
States.

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Some neighborhoods suffer disproportionate numbers of them.
Specifically, one-tenth of all census tracts account for nearly 40 percent of
the entire vacant housing stock.
By comparison, the overall housing market is only half as concentrated
with only 20 percent of the aggregate housing stock found in the 10
percent of census tracts with the largest total number of housing units.
Problems Posed by Vacant Properties
Why focus on vacant homes?
Vacant homes can be more than just an eye sore; they can have
substantial negative impacts on the surrounding community, impacts
that are felt most acutely by the neighbors and communities that must
cope with the dangers and costs of vacant buildings.
Since vacant properties tend to be concentrated in a relatively few number
of neighborhoods, some communities are adversely affected much more
than others.
Homes that have been vacant for a long time tend to fall into severe
disrepair.
Such physical blight can invite more property crime, as vacant houses are
an appealing hide-out and target for criminals, and the absence of
residents can mean fewer eyes in the neighborhood to look out for
suspicious activity.
In fact, counties that experience a large increase in the number of
long-term vacant homes tend to see an increase in burglary in the
following year.
This correlation holds even after controlling for other county
characteristics, such as changes in unemployment, changes in
population, and changes in violent crime.8
In turn, blight and crime make these neighborhoods less attractive to
potential buyers, renters, and businesses.

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Calculations by Board staff indicate that ZIP codes with a larger increase
in long-term vacancy experience smaller increases--or larger
decreases--in house prices in the next year.
Falling home prices can harm both neighboring homeowners as well as
local municipalities that are dependent on property tax revenue.
Research conducted by the Federal Reserve Bank of Cleveland has shown
that a home that is simply foreclosed, but not vacant, lowers neighboring
property values by up to 3.9 percent.
However, if a home is foreclosed, tax delinquent, and vacant, it can lower
neighboring property values by nearly two and a half times that amount.
Moreover, properties that have been vacant for a substantial period of
time can impose even larger costs on the community, and all too often,
the private market is not likely to solve the problem on its own.
In such cases, government authorities and public resources may be
required.
Of course, not all vacant properties pose a problem for the local
community, as some homes become briefly vacant during the usual
process of changes in ownership.
But the longer a home stands vacant, the greater likelihood that poor
maintenance and the associated problems that result can become serious
issues for the surrounding community.
Statistics from the American Housing Survey show that properties that
have been vacant for longer than two years are much more likely to have
severe problems, such as cracked floors or walls, broken or boarded up
windows, and a roof or foundation in disrepair, that make these properties
harder to rehabilitate and less appealing to prospective buyers.
Segmenting the Inventory of Long-Term Vacancies
Analysis by Federal Reserve Board staff has calculated the fraction of
housing units in each census tract that has been vacant for at least two
years--which I will refer to as "long-term" vacancy--and categorized
tracts that appear in the top 10 percent of this distribution into three types.

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The first category of high long-term vacancy census tract is an area where
a large percentage of housing units were built post-2000, and that
therefore can be thought of as "housing boom" tracts.
These locations also have a higher median income, higher median house
value, and a larger fraction of residents with at least a college degree than
other high long-term vacancy census tracts.
Examples of metropolitan areas with a large number of tracts in this
category are Denver, Colorado; Orlando, Florida; Las Vegas, Nevada; and
Phoenix, Arizona.
The second category of high long-term vacancy census tract has a large
share of older housing stock built before 1960, low median income, a high
poverty rate, a high unemployment rate, and a large share of residents
with less than a high school degree.
These tracts can be called "low demand" locations because these
characteristics are frequently associated with areas suffering from
persistent job loss and a decline in housing demand.
Metropolitan areas with a large number of tracts in this category include
Detroit, Michigan; Cleveland, Ohio; St. Louis, Missouri; and Baltimore,
Maryland.
The third and final category of high long-term vacancy census tract has a
low density of housing units per square mile, high shares of
owner-occupied and single-family housing units, and a high fraction of
white non-Hispanic residents.
We can think of these neighborhoods as "traditional suburban" areas.
Examples of metropolitan areas with a large number of tracts in this
category are Charleston, West Virginia; Des Moines, Iowa; Peoria,
Illinois; and Oklahoma City, Oklahoma--locations not often mentioned in
national media coverage about the housing crisis.
Matching Solutions to Neighborhood Characteristics
As I mentioned earlier, we should endeavor to achieve full recovery in all
of the many diverse housing markets around the country.

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The private market will likely drive recovery in many locations and, in
those locations, the appropriate role of government may be to monitor
local activity and ensure that the actions of the private markets improve
neighborhoods and provide opportunity for all families, regardless of
income, race, ethnicity, or housing tenure.
However, some neighborhoods likely will not recover without the
assistance of government, and in this time of scarce resources, it is critical
that the public sector has the information and tools necessary to ensure
that any assistance that is provided is effective and efficient.
Doubtless there will be costs associated with solving these problems, but
it is important to also consider the costs of doing nothing.
For example, it costs local taxpayers to let vacant buildings decline, it
costs money to tear them down, and it costs money to convert them to a
better use.
Ultimately, a policy of neglect will be just as--or even more--costly than
finding and implementing constructive solutions to the vacancy issue.
We must ask ourselves, can we create policies that fairly distribute those
costs?
What are the limitations?
What innovations can create more effective, scalable solutions? With
funding scarce, how can we identify solutions that will ultimately be most
cost effective?
To begin to answer some of these questions, I return to the typology of
vacant properties introduced earlier.
"Housing Boom" Locations
The first type, "housing boom" areas, has relatively high median incomes
and new housing stock.
These characteristics are attractive to investors, and many investors are
reportedly purchasing vacant homes and converting them to rental.

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Given the recent tightening of the rental market, such a strategy could be
a win-win scenario for communities that need more affordable rental
homes and suffer from an excess of single-family vacant units.
In fact, in January, the Federal Reserve released a staff paper on housing
issues12 that went into some detail about the potential benefits of
converting foreclosed properties to rental, and in April, the Board released
a policy statement that outlines supervisory expectations for residential
rental activities for certain banking organizations.
Phoenix, Arizona, is a good example of an area with many census tracts
that fit into the "housing boom" typology.
Phoenix was one of the areas hit hard during the housing bust, with a
peak-to-trough decline in prices of more than 50 percent.
More recently, however, prices in Phoenix have rebounded with a
double-digit increase over the 12 months ending in July.
Reportedly, much of this demand is driven by investors who are
converting vacant homes into rental properties.
Direct statistical evidence on investor activity at the local level is not
available.
However, since investors tend to finance their purchases with cash or
other non-mortgage financing, the level of cash purchases can provide an
indicator of investor activity.
In the past two years, the fraction of home purchases financed with cash
in the Phoenix area was much higher than the national average.
This is an example of the private market stepping in to purchase vacant
units and in turn increasing housing values.
As encouraging as this trend may be, it is not a panacea. For example, it is
possible that aggressive investor activity could crowd out potential
homeowners, especially low- to moderate-income households.
In addition, investors are not interested in all markets; therefore, there
will still be some areas where private investment will not step in to curb
the problems associated with vacant properties.
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The problem of investors crowding out local homebuyers could be
addressed through "first look" programs that provide a window, usually
15 days, during which time only prospective homebuyers and nonprofits
may bid on a property.
In Phoenix, non-profit organizations and local government officials used
Neighborhood Stabilization Program (NSP) funding and enlisted local
real estate professionals to match vacant homes with eligible
homebuyers.
These are important programs. Community leaders, banks, and real
estate professionals should continue to collaborate to ensure that
prospective homeowners are given a fair chance to bid on available
properties.
However, most prospective homebuyers and local nonprofits cannot bid
on a property if they cannot access mortgage credit. Results from the
Federal Reserve's Senior Loan Officer Opinion Survey suggest that banks
are less willing to provide mortgage credit now than in 2006 to borrowers
with lower credit scores or smaller down payments.
We hear much the same story from community groups and housing
counselors who report that low- and moderate- income and first-time
homebuyers, especially, are finding it increasingly difficult to meet the
requirements for a home purchase loan due to limited funds for a down
payment or weaker credit scores.
While prudent lending may warrant tighter underwriting standards
relative to pre-crisis levels, it is also important to ensure that tight credit
does not unnecessarily dampen the housing recovery and
disproportionately affect creditworthy low-income and minority
homebuyers. And without the participation of owner-occupants, it will be
difficult for many housing markets to recover.
Like Phoenix, Oakland, California is also reportedly experiencing a
significant amount of investor activity that may be crowding out
purchases by prospective homebuyers and nonprofits.
We hear complaints that many of these investors are not based in
Oakland, causing residents to express concern about external ownership

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of their neighborhoods and the long-term implications of absentee
landlords.
In an attempt to address these concerns and provide more
homeownership opportunities to low- and moderate-income Oakland
residents, a national nonprofit, Enterprise Community Partners, is
working with a private real estate fund to direct some of the private dollars
seeking investment properties in Oakland.
The nonprofit partnership is using a complex data-driven platform to
identify targeted low- and moderate-income neighborhoods in the city,
purchasing vacant properties, rehabilitating them through a local
workforce development program, and converting them to rental.
The ultimate goal is to ensure that the properties remain local
neighborhood assets.
To achieve this, the partnership is prioritizing rentals and sales to
qualified local residents or nonprofits.
Such an innovative strategy seeks to complement local government and
investor activity so that residents can share in the benefits of a housing
recovery.
"Low Demand" Locations
Not all markets are equally attractive to private investors, so some
governments are developing programs to attract private capital to "low
demand," high-vacancy neighborhoods.
The city of Baltimore, Maryland provides a good example of such a
program.
Baltimore is burdened with approximately 16,000 vacant and abandoned
buildings, about a quarter of which are owned by the city.
Much of this vacancy has been caused by population loss and suburban
flight--Baltimore City has lost nearly one-third of its population over the
last 50 years.
However, not all parts of Baltimore have a significant number of vacant
properties.
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In fact, only 5 percent of census tracts in the Baltimore metropolitan area
have a long-term vacancy rate in the top decile of the national
distribution.
The city of Baltimore has recognized these micro-market distinctions and
initiated an innovative data-driven program to identify areas with a high
concentration of vacant properties and turn these properties into valuable
assets.
This initiative, called "Vacants to Value," uses data and targeted housing
code enforcement to foster redevelopment in areas where there is modest
private investment interest.
Using a variety of real-time data sources, this program has developed
market typologies down to the census block-group level so that it can
accurately determine the needs of specific neighborhoods and apply
targeted programs to best meet those needs.
For example, the city is targeting approximately 700 vacant properties in
weak market areas where large-scale investment--encompassing at least a
city block--is necessary to catalyze private investment.
In healthier neighborhoods, the city believes that increased code
enforcement and homebuyer or developer incentives should be enough to
reduce vacancy and stabilize neighborhoods.
Lastly, in Baltimore's hardest hit neighborhoods, the city is demolishing,
holding, or maintaining properties that are unlikely to attract any private
investment in the near future.
Unfortunately, in some cases, vacant homes are beyond repair and will
never be habitable again.
In these instances, demolition is often the best solution, and land banks
can be a good way to hold the property until it can be converted to a better
use.
A land bank is a governmental or nongovernmental nonprofit entity
established, at least in part, to assemble, temporarily manage, and
dispose of vacant land for the purpose of stabilizing neighborhoods and
encouraging re-use or redevelopment of urban property.
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Land banks have been around since the early 1970s, but the recent
foreclosure crisis has stimulated the creation of several new land banking
programs, including in New York State and Kansas City, Missouri.
A key characteristic of the new generation of land banks is that they often
include mechanisms to self-finance over time, including the ability to
recapture a portion of the property taxes for a fixed period of time after the
property is put back to productive use.
As encouraging as these new self-financing features are, land banks and
municipalities are still struggling with the high costs of demolition.
For example, in Cuyahoga County, home to Cleveland, Ohio, about 80
percent of the approximately 100 properties per month that the land bank
acquires need demolition, but at $10,000 in average costs per demolition,
the Cuyahoga Land Bank is struggling to find the resources to fund this
activity.
The state of Ohio recently dedicated $75 million of its direct payments
from the Attorneys' General (AG) National Mortgage Settlement to fund a
new grant program for demolition of abandoned and vacant properties
statewide.
This $75 million still will not solve all of Ohio's demolition needs, but
leveraging public and private funds like the AG settlement or developing
new national sources of bond financing could help address this local
problem.23
"Traditional Suburban" Locations
The last category of high-vacancy areas in the typology that I discussed
earlier is "traditional suburban" neighborhoods.
In contrast to the other two types of high-vacancy census tracts, these
neighborhoods are more evenly spread across many metropolitan areas,
illustrating that vacancy can be a problem in any community.
Furthermore, ZIP codes in the "traditional suburban" tracts do not tend
to have a higher share of property vacancies resulting from foreclosure
than other ZIP codes, which demonstrates that some neighborhoods are

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struggling with long-term vacancy issues even though they did not
experience large numbers of foreclosures.
While the vacancies faced by these suburban areas might not have been
caused by foreclosure problems, the costs to neighborhoods are every bit
as real. Such areas represent additional opportunities to use the lessons of
the recent crisis as local leaders strive to better understand the root cause
of high vacancy levels and to target limited resources.
Consider the situation faced by Oklahoma City.
Oklahoma City estimates that 8,000 urban properties have been vacant for
more than three years, and that the number of vacancies is increasing.
The city's historically high housing vacancies mostly stem from cultural
and demographic changes that have occurred over decades, as well as
inadequate building code laws and enforcement.
Interestingly, the area did not experience the housing boom and bust that
occurred in much of the nation.
Whereas national house prices rose by 89 percent between 2000 and 2006,
prices in Oklahoma City rose by only 35 percent.
In addition, house prices in Oklahoma City have been flat since 2006, a
sharp contrast to the large drop in national home prices.
But even though the vacancy rates in Oklahoma City are not a direct
result of the housing boom and bust, it may be that newer solutions
developed for "housing boom" and "low demand" areas can be
combined with traditional community development policy tools to help
solve a problem that developed over decades.
Indeed, city planners recently concluded that the city could not tackle
neighborhood revitalization without addressing vacancies.
Increasing costs for needed city services, reduced revenues, and barriers
to growth resulting from deteriorating infrastructure all combined to lend
urgency to these efforts.
As has been the case in other cities, officials in Oklahoma City realized
that gathering data was a necessary first step. Starting earlier this year,
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they embarked on an ambitious study to determine the total cost resulting
from vacancies.
The city will then use the findings from the study to support enactment of
tougher code enforcement to recover lost revenue, including assessment
of fines against owners who fail to maintain their properties.
This combination of new measurements and old tools to develop
solutions should serve as an example to many "traditional suburban"
areas around the country that have experienced, and will continue to
experience, vacancy issues.
Conclusion
The potential fallout of high rates of vacancy--blight, crime, lowered
home values, and decreased property tax revenue--is the same for every
neighborhood and community.
But there is no one-size-fits-all solution to the vacancy problem.
I've used some examples of communities around the country that are
facing high vacancy rates in order to illustrate their different
characteristics and the different origins of their vacancy problems.
Taking account of such differences will be important in crafting solutions
to the problems caused by those vacancies.
Hopefully, these examples and other ideas that have been shared
throughout this conference will inspire new and creative solutions to the
difficult issues faced by communities.
Certainly, different housing markets will recover in different ways and at
different paces. In some areas, the private market will lead the way, while
in others, government will have to use precious resources wisely to
catalyze recovery.
The examples I've discussed also illustrate the value of using data to
understand vacancy issues, to determine which neighborhoods are
experiencing which challenges, and to design appropriate policy
solutions.

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Solving the problems of long-term vacancies will require the best efforts
of public, private, and non-profit leaders locally and across the country.
I can assure you the Federal Reserve System will continue to support
recovery through the use of all its policy tools and research capacity.
Thank you.

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NUMBER 3
NIST Selects Winner of Secure
Hash Algorithm (SHA-3)
Competition
The National Institute of Standards
and Technology (NIST) announced
the winner of its five-year competition
to select a new cryptographic hash
algorithm, one of the fundamental
tools of modern information security.
The winning algorithm, Keccak
(pronounced “catch-ack”), was created by Guido Bertoni, Joan Daemen
and Gilles Van Assche of STMicroelectronics and Michaël Peeters of
NXP Semiconductors.
The team’s entry beat out 63 other submissions that NIST received after
its open call for candidate algorithms in 2007, when it was thought that
SHA-2, the standard secure hash algorithm, might be threatened.
Keccak will now become NIST’s SHA-3 hash algorithm.
Hash algorithms are used widely for cryptographic applications that
ensure the authenticity of digital documents, such as digital signatures
and message authentication codes.
These algorithms take an electronic file and generate a short "digest," a
sort of digital fingerprint of the content.
A good hash algorithm has a few vital characteristics.
Any change in the original message, however small, must cause a change
in the digest, and for any given file and digest, it must be infeasible for a
forger to create a different file with the same digest.
The NIST team praised the Keccak algorithm for its many admirable
qualities, including its elegant design and its ability to run well on many
different computing devices.

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The clarity of Keccak’s construction lends itself to easy analysis (during
the competition all submitted algorithms were made available for public
examination and criticism), and Keccak has higher performance in
hardware implementations than SHA-2 or any of the other finalists.
“Keccak has the added advantage of not being vulnerable in the same
ways SHA-2 might be,” says NIST computer security expert Tim Polk.
“An attack that could work on SHA-2 most likely would not work on
Keccak because the two algorithms are designed so differently.”
Polk says that the two algorithms will offer security designers more
flexibility. Despite the attacks that broke other somewhat similar but
simpler hash algorithms in 2005 and 2006, SHA-2 has held up well and
NIST considers SHA-2 to be secure and suitable for general use.
What then will SHA-3 be good for?
While Polk says it may take years to identify all the possibilities for
Keccak, it immediately provides an essential insurance policy in case
SHA-2 is ever broken.
He also speculates that the relatively compact nature of Keccak may
make it useful for so-called “embedded” or smart devices that connect to
electronic networks but are not themselves full-fledged computers.
Examples include sensors in a building-wide security system and home
appliances that can be controlled remotely.
“The Internet as we know it is expanding to link devices that many
people do not ordinarily think of as being part of a network,” Polk says.
“SHA-3 provides a new security tool for system and protocol designers,
and that may create opportunities for security in networks that did not
exist before.”
Note
Keccak was designed by a team of cryptographers from Belgium and
Italy, they are:
Guido Bertoni (Italy) of STMicroelectronics,
Joan Daemen (Belgium) of STMicroelectronics,
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Michaël Peeters (Belgium) of NXP Semiconductors, and
Gilles Van Assche (Belgium) of STMicroelectronics.
Note

NIST announced a public competition in a Federal Register Notice on
November 2, 2007 to develop a new cryptographic hash algorithm called
SHA-3.

The competition is NIST’s response to advances made in the
cryptanalysis of hash algorithms.

A cryptographic hash algorithm is a widely-used tool that creates a
“fingerprint”, or a “message digest” of a file, message or block of data
that can be used for digital signatures, message authentication codes, and
many other security applications in the information infrastructure.

The winning SHA-3 algorithm will augment the hash algorithms
currently specified in FIPS 180-4, Secure Hash Standard.

NIST received sixty-four entries from cryptographers around the world by
October 31, 2008, and selected fifty-one first-round candidates in
December 2008, and fourteen second-round candidates in July 2009.

On December 9, 2010, NIST announced five third-round candidates –
BLAKE, Grøstl, JH, Keccak and Skein, to enter the final round of the
competition.

The cryptographic community has provided an enormous amount of
feedback throughout the competition.

Most of the comments were sent to NIST and a public hash forum; in
addition, many of the cryptanalysis and performance studies were
published as papers in major cryptographic conferences or leading
cryptographic journals.

NIST also hosted three SHA-3 candidate conferences to obtain public
feedback. Based on the public comments and internal review of the
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candidates, NIST announced Keccak as the winner of the SHA-3
Cryptographic Hash Algorithm Competition on October 2, 2012, and
ended the five-year competition.

Further details of the competition are available at the specific sites
indicated in the menu on the left.

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NUMBER 4

UK FSA
Financial Crime newsletter

Welcome to Issue 16 of our Financial Crime
newsletter. So far, 2012 has been particularly busy for
us.

We have published the findings of two significant
pieces of thematic work, contacted over 75,000
potential victims of boiler room scams, and
continued with our credible deterrence strategy,
taking regulatory action against three financial
institutions for financial crime failings and securing
numerous criminal convictions for insider dealing.

Throughout the remaining life of the FSA, and continuing into the
Financial Conduct Authority (FCA), we will focus on tackling key
financial crime risks to our objectives.

This newsletter confirms that we will be taking forward our intensive and
intrusive work on anti-money laundering (AML), sanctions,
counter-terrorist financing and anti-bribery and corruption (ABC)
systems and controls in a number of very large banks.

We also give more detail about our recent thematic reviews and
enforcement cases.

Finally, it is vital during periods of change that we remain focused and
committed in the fight against financial crime.

I am delighted to be given the opportunity to lead our work in this area as
director of the Enforcement and Financial Crime Division.

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I am also delighted to introduce the new Head of Department for our
Financial Crime and Intelligence Department, Sharon Campbell. Sharon
has been at the FSA for over seven years. Before this she was Head of
Department in our Authorisation Division and she has over 20 years of
industry experience.

Sharon replaces Bob Ferguson, who has made a real contribution to
countering financial crime and will be missed. He will be taking a few
months career leave and returns in March to take up a new position in the
FSA. Bob goes with all our thanks for his hard work over the years.

Tracey McDermott
Director, Enforcement and Financial Crime
Anti-bribery and corruption systems and controls in investment
banks
In March 2012 we published a report on how investment banks and
similar firms are managing the bribery and corruption risk in their
business.
We found that, although some had started work to identify and assess
their bribery and corruption risks and factor them into their ABC controls,
including policies, procedures and training and monitoring programmes,
most had more work to do.
In particular:
- most firms had not properly taken account of our rules covering
bribery and corruption, either before the implementation of the
Bribery Act 2010 or after;
- nearly half the firms in our sample did not have an adequate ABC risk
assessment;
- management information on ABC was poor, making it difficult for us
to see how firms’ senior management could provide effective
oversight;

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- only two firms had either started or carried out specific ABC internal
audits;
- there were significant weaknesses in firms’ dealings with third parties
used to win or retain business; and
- many firms had recently tightened up their gifts, hospitality and
expenses policies, but few had processes to ensure gifts and expenses
in relation to particular clients/ projects were reasonable.

We were pleased to see, however, that most firms used senior committees
to drive the ABC agenda, and generally there was an appropriate level of
senior management involvement in decision-making about new
third-party relationships or transactions.

Overall, the report concluded that the investment banking sector has
been too slow and reactive in identifying, assessing and managing their
bribery and corruption risk.

In particular, the introduction of the Bribery Act and our visits were the
main triggers for many firms in our sample to review, or consider for the
first time, their approach to ABC.

Banks’ defences against investment fraud

In June 2012 we published our report on banks’ defences against
investment fraud.

Our review found individual staff members had a strong commitment to
protecting customers, but we saw little governance of the specific issue of
investment fraud.

We also found that:
Resource allocation was not based on risk assessments that
explicitly considered the risk of investment fraud, so resources available
were not the result of informed decision-making by senior management;

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It was not clear to us that the banks we visited had fulfilled their
regulatory obligation to assess investment fraud risks appropriately and
counter the risk that the bank might be used to further financial crime;

Banks’ ability to detect where their customers might be complicit
in investment fraud was disappointing; and

Ongoing monitoring of customers was often the responsibility of
customer-facing staff with many other responsibilities, who often lacked
the experience or knowledge to identify investment fraud.

More positively, we saw a range of transaction-monitoring technologies.
Some banks had used these successfully to prevent customers falling
victim to investment fraud.

We also saw good examples of banks maintaining intelligence on
investment fraudsters, although measures were not consistent across the
industry.

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NUMBER 5

EBA Work Programme 2013
1. Introduction
In accordance with Regulation (EU) No 1093/2010 of the European
Parliament and of the Council of 24 November 2010 establishing the
European Banking Authority (EBA), the annual work programme
describes and summarises the main objectives and deliverables of the
EBA in the forthcoming year derived from the tasks specified in the
Regulation and from the relevant EU banking sector legislation.

Following a discussion of a draft version by the EBA Board of Supervisors
in summer 2012, and by the Banking Stakeholder Group, the Work
Programme was reviewed by the Management Board who proposed its
adoption.

Based on this proposal the Board of Supervisors adopted the 2013 work
programme at its meeting held on 25-26 September 2012.

The work programme aims to define the main objectives and
corresponding priorities of the EBA for 2013 in fulfilment of its overall
mandate.

The fundamental objective for the EBA in the regulatory policy area will
be to play a central role in the development of the single rule book, with
the aim to contribute to achievement of a level playing field for financial
institutions as well as to raise the quality of financial regulation and the
overall functioning of the Single Market.

The EBA’s work in this area relates in particular to the CRDIV/CRR
legislative framework, including liquidity and remuneration, as well as to
the crisis recovery and resolution legislative framework.

The EBA’s oversight activities will focus on identifying, analysing and
addressing key risks in the EU banking sector, including analysing the
consistency of outcomes in risk weighted assets (RWAs), the

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sustainability of banks business models and reviews of banks’ asset
quality, promoting supervisory cooperation and convergence and
continuing its work in colleges of supervisors to strengthen European
supervision of cross-border banking groups.

Last but not least, the EBA is committed to enhance the consumer
protection and promote transparency, simplicity and fairness for
consumer financial products and services across the Single Market, and
as such will focus its consumer protection activities on developing
guidelines on responsible mortgage lending, and on arrears handling and
forbearance in the mortgage market, and regulatory technical standards
on Professional Indemnity Insurance.

The above three areas - Regulation, Oversight, and Consumer Protection
- are representing the core functions of the EBA that are laid down in the
EBA regulation.

For these, a detailed list of tasks including a breakdown of deliverables is
also provided. Further, a separate horizontal unit, Policy Analysis and
Coordination, provides the internal and external policy coordination
between the core functions of the EBA and external stakeholders, as well
as provides the legal review and assesses the impact of the EBA’s policy
proposals.

The support functions summarised as Operations are playing a critical
role in ensuring that the EBA can perform its core functions, and thus,
their main working objectives are also summarised.
The year of 2013 will be the third year of operation for the EBA as a
fully-fledged EU Authority in the new European System of Financial
Supervision (ESFS).
Therefore, emphasis continues to be on the continuing development and
strengthening of the EBA’s institutional capabilities.
In addition, there are significant new legislative proposals in European
banking regulation and supervisory architecture, including the Banking
Union and the Recovery and Resolution proposals, on the EU’s agenda,
some of which have already been published but not yet adopted, and

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some are expected to be published in the near future, but all having a
major impact on the amount and priorities of specific tasks of the EBA in
2013 and thereafter.
The Banking Union will have important repercussions on the mandate of
the EBA, as it will call on the Union for an even stronger commitment to
the single rule book and unified supervisory methodologies, with a view
to avoid polarisation of the Single Market between the euro area, and its
application of single supervisory rules and practices, and the rest of the
Union.
A detailed list of the EBA’s tasks is presented in the Annex with attached
priorities.

Generally, tasks deriving from a legislative proposal with a deadline
falling in 2013 are assigned priority 1; priority 2 tasks will only be
accomplished in as far these do not constrain the priority 1 tasks.

Due to the high number of priority 1 tasks in 2013, significant increase in
human resources is needed to allow the EBA to fully address priority 2
tasks. Priority 3 tasks will most probably not be accomplished in 2013.

Please note that some of the items attributed to European Commission
(EC)’s legislative proposals might change given these proposals are
currently under discussion.

In order to enable EBA to deliver its 2013 work programme, EBA will
need to increase its staffing levels and budget accordingly.

In 2013 staff numbers are expected to grow from 68 in 2012 to 93
Temporary Agents, in line with the approved Establishment Plan and the
budget from €20.7 million in 2012 to €25 million.

EBA will continue to be funded by the EC and the National Competent
Authorities.

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2. Regulatory work

The main objective of the EBA in the regulatory policy area is to play a
leading role in the creation of the single rule book for the EU banking
system.

The main focus of the EBA’s regulatory work in the coming years will be
in two major areas in line with the EU legislative agenda.

Tasks that are outside of these two areas have also been identified and
listed in detail in the Annex.

Firstly, and most importantly the ongoing financial crisis has shown
deficiencies in the prudential rules regulating banks which have resulted
in adverse consequences to the financial soundness of individual
institutions and to the international financial system.

An agreement has been reached at global level to repair the regulatory
shortcomings leading to the recent set of prudential rules under the
umbrella of the Basel III agreement.

The EU is committed to introducing this prudential framework
throughout the Single Market, and are due to adopt by end 2012 EU
legislation/regulation that aim to implement Basel III in the EU on 1st
January 2013.

The EBA is to play a crucial role in the technical implementation and
application of this new set of regulatory rules, and will therefore focus its
work in this context on accomplishing the drafting of binding technical
standards under the new CRDIV/CRR framework.

Given these legislative proposals are still to be adopted, and hence their
final details remain unknown, this presents significant uncertainty in
EBA’s work programme at this juncture, together with planning and
resource complexity to the EBA’s organisation given their
implementation remains to be from 1 January 2013.

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On the expected CRR/CRDIV related tasks the EBA has taken a
pragmatic approach and considered as a basis the Council’s proposal of
May 2012.
The EBA has not included any additions or deletions proposed by the EU
Parliament although it has considered a few additional tasks in the
Council’s proposal that are likely to be deleted.
In addition, those deliverables with deadline of January 2013 or December
2012 that EBA expect to deliver to the EU Commission, or publish before
the end of this year, have not been included.
As a result about 164 deliverables are expected from the EBA.
The majority of these products relate to the development of more detailed
technical rules mostly via the development of binding regulatory or
implementing technical standards.
Other types of deliverables include guidelines, reports, opinions,
mediation activities, or the receipt and processing of notifications.
A summary is shown in the table below, and a detailed breakdown in the
Annex.
It should be noted that this part of the work programme will need to be
updated after the final text of the CRR/CRDIV becomes available.

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In addition to the high number of deliverables in relation to the CRR/
CRDIV proposals, the timing of these products is very concentrated as
the implementation schedule needs to remain consistent.

Most products are expected to be finalised by 2013-2014, thus, the
concentration of the EBA’s regulatory work will be very high in the course
of 2013.

The sheer number of tasks as well as the concentration in their timing
underlines the importance of prioritisation.

Based upon the capacity available at both the EBA and at the national
authorities, it is expected that not all activities can be undertaken as
currently proposed without additional human resources at the EBA.

Given the need for a strict prioritisation, the following policy areas have
been identified where the EBA can provide the highest added value via
extended technical rule making:

Capital: better quality capital is one of the key characteristics of the new
capital framework.

Following the EBA consulting on many proposals for technical standards
on own funds in 2012; this area will remain of priority for EBA in 2013,
with a focus in 2013 on the permanent monitoring of the quality of capital
instruments.

Liquidity: the crisis has shown how important it is for banks to have
sufficient liquidity available, both for the short and longer term.

The CRR/CRDIV will adopt the basic framework in the form of a
Liquidity Coverage Ratio and a Net Stable Funding Ratio which have
been agreed upon globally.

This gives the EBA the task of preparing the calibration of the ratio
components including assessing the consequences and impact of
introducing these liquidity measures.

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Remuneration: the crisis has shown that adverse personal incentives
could lead to risk prone behaviour.

Therefore, specific rules on remuneration have been established.

Based on EBA Guidelines already published EBA will undertake some
data exercises to benchmark trends in remuneration at Union level, and in
relation to disclosure on information on High-earners.

Further EBA will develop Technical Standards in relation to the criteria
for the identification of risk takers, and the determination of the variable
and fixed aspects of the remuneration.

Leverage ratio: the leverage ratio is intended as a back stop for
institutions that are excessively leveraged, as excessive leverage is
generally considered to have played a major part in the financial crisis.

Based on the leverage ratio reporting, the impact of introducing the
leverage ratio has to be assessed by the EBA.

This activity will therefore build on the leverage ratio reporting
framework developed at the EBA and continue in 2013, with deliverables
expected from 2014 and onwards.

Given EBA’s mission is to develop practical instruments and convergence
tools to promote common supervisory approaches, the EBA will also take
due care of implementation issues when entering the transitional phase of
new legislation.

In particular EBA will provide explanations when it comes to the
implementation of the CRDIV/CRR and develop specific tools and
policy to answer questions.

In addition to its mandated regulatory technical contribution, the EBA is
providing technical input to help framing targeted provisions on
supervisory matters.

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Moreover, the small and medium enterprises (SMEs) sector retains a
particular attention.

The crisis has shown that many SMEs have difficulty to access finance,
and this is viewed as an obstacle to the recovery in the European economy
and has triggered several calls for action, also in the area of banking
regulation.

The EBA is working on a review of the prudential framework for SME
lending as a contribution to legislative proposals.

Secondly, the crisis has shown a need for more advanced and coordinated
crisis prevention and crisis resolution arrangements and tools, so as to be
able to detect a crisis event earlier, intervene more adequately and resolve
troubled financial institutions more efficiently.

In June 2012, the EU Commission published its legislative proposals on
an EU framework for recovery and resolution of credit institutions and
investment firms, which provide a key role for the EBA, both in setting
further technical standards and guidelines, including in relation to the
content and assessment of recovery and resolution plans; the application
of early intervention measures; preventative (structural) measures to
ensure resolvability; application of specific resolution powers in respect to
specific resolution tools; recognition of third country resolution
proceedings, and provide a role for EBA in the coordination and
participation in cross border crisis events through its participation in the
resolution colleges.

3. Oversight work

The EBA’s oversight activities in 2013 will focus on identifying, analysing
and addressing key risks in the EU banking sector.

After a successful recapitalisation programme in 2012, the EBA will
continue to monitor capital levels and banks capital plans to strengthen
their capital position further, as they move towards the implementation of
CRD IV.

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The next EBA EU wide stress test, planned for 2013, will be a key
component in assessing such plans.

The EBA will also continue to work with relevant competent authorities
to understand the impact of deteriorating asset quality on banks’ balance
sheet and to promote the ongoing process of balance sheet repair and
banks’ efforts to restore sustainable funding structures will be a focus of
analysis.

The EBA will continue its regular thematic analysis on a number of areas
including the consistency of outcomes in risk weighted assets (RWAs),
the sustainability of banks business models and reviews of banks’ asset
quality.

Regular products will include frequent funding and liquidity updates
drawing on supervisory and market intelligence, semi-annual banking
sector reports to the Board of Supervisors, to the Economic and Finance
Committee (EFC) - Financial Stability Table (FST), and quarterly
updates to the ESRB.

In the area of reporting and transparency the highest priority will be the
implementation of the common reporting framework, COREP and
FINREP, and providing assistance with any implementation issues as
well as further assessing and strengthening transparency across the EU
banking sector.

In turn the EBA will use supervisory data along with market intelligence
and input from colleges to prepare risk assessment reports for the
European Parliament, the Commission and the ESRB.

Cross sectoral risk reports will continue to be prepared in collaboration
with the Joint Committee, and will be sent to the EFC-FST.

The EBA will also maintain and further develop its key risk indicators and
its suite of risk dashboards, including internal EBA bank level
dashboards, peer group dashboards to be shared with supervisory
colleges/NSAs and a sectoral dashboard for EBA and ESRB discussions.

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The EBA will also continue to promote the convergence of supervisory
practices across the Single Market, by contributing to the development of
the single rule book and also to the development of the supervisory
handbook.

This objective will be pursued through effective bilateral and multilateral
exchange of information between competent authorities as well as more
structured stock-takes of supervisory practices in specific areas, such as
frameworks for the analysis of risks, ICAAP assessments and Pillar 2
decisions.

As the result of these activities, papers summarising the best practices
and guidelines will be drafted.

The organisation of technical training for the supervisory staff of
competent authorities will contribute to foster a common supervisory
culture in the EU.
The EBA will continue its work in colleges of supervisors to strengthen
European supervision of cross-border banking groups.
EBA staff will participate, support and monitor colleges.
Higher quality, more detailed feedback and advice on the functioning of
colleges will be focused on a prioritised set of 40 banking groups.
The EBA will, where appropriate, apply its role in binding mediation, and
actively facilitate and, where deemed necessary, coordinate any actions
undertaken by the relevant national competent supervisory authorities, in
case of adverse developments/crisis situations.

In crisis management, in addition to its extensive regulatory role, the
EBA will have a significant role in engaging in, and assisting, the
discussions and agreement on recovery and resolution plans between
relevant competent authorities, including in resolution colleges.

Where disagreements arise, the EBA will play a role in settling them.
Based on these priority tasks the EBA aims to achieve its objectives to

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P a g e | 48

(i) deliver independent and high quality analysis of EU banks and the EU
banking sector, in coordination with the work of Competent Supervisory
Authorities, the ESRB and EU policy making bodies, and leading to
concerted policy responses

(ii) ensure relevant and sound data is available for effective supervisory
oversight and market discipline to

(iii) further promote supervisory convergence and the building of a
common supervisory culture across the single market

(iv) assist and monitor Competent Supervisory Authorities in building
college structures that are efficient and substantive.

4. Consumer Protection work

In the area of consumer protection, the EBA has an EU-wide
responsibility and is fully committed to promoting transparency,
simplicity and fairness in the market for consumer financial products or
services across the Single Market.
The EBA has established an independent organisational unit for
consumer protection.
In 2013 the Unit will continue to collect, analyse and report on consumer
trends and analysis of banks' activities in structured products and the
retailisation thereof.
Further, guidelines on responsible mortgage lending, and on arrears
handling and forbearance in the mortgage market, and regulatory
technical standards on Professional Indemnity Insurance will be finalised
- subject to the proposed Mortgage Credit Directive.
In addition, analysis of consumer detriment issues in the area of
non-mortgage credit and potentially the development of guidelines on
specific risks will be performed.

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P a g e | 49

The Unit will continue monitoring new and existing financial innovation
with a view to promoting the safety and soundness of markets and
convergence of regulatory practice.
Finally, a Consumer Day will be organised in 2013 jointly with the
consumer units of ESMA and EIOPA, following on from the EBA Day on
Consumer Protection on 25 October 2012.
5. Policy Analysis and Coordination
The main objectives of the EBA’s Policy Analysis and Coordination Unit
will be to provide the legal analysis of the policy and supervisory
documents prepared by the regulation and the oversight clusters
(technical standards, guidelines, opinions, supervisory recommendations,
dispute resolution, peer review etc), the impact assessment of the same
documents/actions when needed, and the internal and external
coordination of the EBA’s policy and supervisory work when needed
between clusters/units and with external bodies, such as BCBS and IMF,
and institutions, including the EU Commission, the Council (and its EFC
and FSC), and the EU Parliament (and its ECON Committee), and the
EBA's contribution to the review of the ESFS.
This Unit’s work also includes the coordination of the EBA’s supervisory
training activities offered to NSAs, and providing support to the EBA’s
Banking Stakeholder Group, to the EBA’s Review Panel and to the ESAs’
Board of Appeal.

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P a g e | 50

6
. Operations and institutional capabilities
The overall objective of the institutional development of the EBA in 2013
will be the maintenance and further enhancement of the internal control
environment in a period of intensive build-up and growth of the recently
established EU institution.

The EBA has adopted and implemented the most important EU HR
regulations and procedures and continues to operate under the general
EU HR rules.

In light of the expanding workload arising from the EBA’s core functions,
recruitment and integration of new staff will continue to be a key priority
in 2013.

Detailed staffing plans for 2013 will be finalised as soon as the 2013 annual
budget of the EBA is approved.

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P a g e | 51

Due to the significantly higher than expected workload resulting from the
tasks related to the CRDIV /CRR and Bank recovery and resolution
proposals, additional human resources have been requested compared to
the establishment plan of the organisation, the approval of which is still
pending.

Significant new technical skills will need to be built up in the organisation
in 2013 such as broadening and deepening the technical knowledge and
experience of EBA’s experts.

Therefore, in addition to the careful recruitment of new staff, the rollout
out of the recently launched staff training program shall contribute to
developing EBA staff.

The EBA is expected to implement a long term solution for its office
needs, after an approval in the second half of 2012.

A key operational priority for 2013 will be the approval and
implementation of the EBA’s medium and long term IT strategy, in line
with the expanding IT requirements that are defined by the widened
scope and depth of the EBA’s core functional tasks.

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P a g e | 52

NUMBER 6

Introductory Remarks at
SEC’s Market
Technology Roundtable
By Chairman Mary L.
Schapiro, U.S. Securities and
Exchange Commission
Washington, D.C.
Good morning. Thank you to
all of the panelists for taking
time to share your thoughts with us on market technology. And thank you
to those who have already written in with your comments. You have given
us a number of very thoughtful
recommendations.
To an extraordinary extent, the stability of
our securities markets is tied to the
technological infrastructure of those
markets.
As with virtually every industry, technology
brings many benefits. And our markets are
no different.
Thanks to technology, our securities
markets are more efficient and accessible
than ever before.
But we also know that technology has pitfalls. And when it doesn’t work
quite right, the consequences can be severe.
Just imagine what can happen:
If an automated traffic light flashes green, rather than red.
If a wing flap on a plane goes up rather than down.

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P a g e | 53

If railroad track switches and sends the train right, rather than left.
Similarly, there can be significant consequences for technological errors
in our markets as well — trading can be disrupted, investors can suffer
financial loss, firms can be imperiled, and confidence in our markets
broadly can erode.
Today’s roundtable will help us think through the issues and the steps we
need to take to ensure that our markets remain the most robust, efficient,
and stable in the world.
There are two basic concerns we need to focus on that are highly
interrelated — these are:
First, the structure of our markets, such as multiple execution venues, the
presence of high frequency trading, dark pools, and the like.
Second, the infrastructure of our markets, as in the technology that
undergirds trading activity.
Market Structure
To provide some perspective — in January 2010, I asked the staff to begin
a comprehensive review of the equity market structure.
It was a review that included getting views on everything from the impact
of high frequency trading, to the continued rise of dark pools, to the
complexities of a multi-venue market system.
The focus was not so much on the infrastructure of our markets but on
the way the markets and market participants operate and behave.
Four months later, when disorderly trading activities in the S&P e-mini
market spread to the equities market, causing what is now known as the
Flash Crash, we — as an agency — were well-positioned to respond.
Working with the exchanges, we quickly put in place a series of measures
that have since helped to reduce the likelihood of another event like that
from occurring.
Within days of that event, I summoned the heads of every exchange to the
SEC to hammer out common-sense approaches to bolster our markets.
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P a g e | 54

And as a result of our efforts:
- We now have in place single-stock circuit breakers to prevent stocks
from falling too far, too fast, and we have approved a more advanced
limit up/limit down mechanism to limit excessive volatility.
- We now have in place a ban on stub-quotes and rules clearly defining
when a trade can be broken so as to help avoid circumstances that can
lead to disorderly trading.
- We now have in place rules banning naked access and requiring
rigorous pre-trade risk controls designed to help mitigate disruptive
trading at the source.
- And we now have rules requiring large traders, many of whom use
high frequency trading strategies, to identify themselves so that the
Commission can better monitor and analyze their trades — a process
that other regulators overseas are beginning to emulate.
Additionally, and perhaps most importantly, we have adopted a rule that
requires SROs to develop plans for the first ever consolidated audit trail
— a feature that will allow regulators to surveil and reconstruct trading
across platforms.
But there are issues around market structure and the conduct of market
participants that we should further examine, including the high volume of
cancellations, a proliferation of order types, transparency, high frequency
trading generally, potentially manipulative trading strategies, and data
latencies for public investors — to name a few.
These issues still require attention and we are committed to addressing
them.
Market Infrastructure
But today’s roundtable will focus more specifically on infrastructure not
only because of its importance, but also because I worry that this issue is
at risk of being lost and subsumed by the broader debates regarding
market structure.

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P a g e | 55

After all, issues that get lost often do not get resolved. And these matters
of infrastructure are essential to any holistic approach to improving how
our markets operate.
IPOs
Consider for a moment the IPO of BATS on its own exchange, and the
IPO of Facebook on the NASDAQ exchange.
Though there are many views regarding the fragmented nature of
simultaneous trading across multiple venues, I believe these IPO events
evidence a very different set of concerns.
Both events involved one of the few single-exchange processes that
remain in an otherwise fragmented market — namely, building a single
order book and crossing trades at a single price to open trading for a new
public company.
In the case of BATS, it was a flaw in new software code designed to
conduct a corporate IPO auction.
That mistake caused the matching engine for tickers in a certain range to
enter into an infinite loop, making these tickers, which included the
symbol for BATS itself, inaccessible on BATS.
In the case of NASDAQ, the IPO software was designed to accept
cancellations submitted while the final IPO price — or the Cross — is
being calculated.
Cancellations received during this time changed the order book. By
design, the system recalculated the final IPO price to factor in the new
state of the book.
But again, changes were received before the system could print the
opening trade, which resulted in additional re-calculations. This
condition persisted, resulting in further delay of the opening print.
These single-exchange problems are not a result of complexities or
fragmented markets, but rather a result of more basic technology 101
issues.

_____________________________________________________________

Monday October 15, 2012 - Top 10 Risk Management News

Monday October 15, 2012 - Top 10 Risk Management News

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