Monday November 26 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,

“Finance is an industry that sells nothing
physical, nothing that you can kick: it sells
promises: promises to pay, promises you are
asking your customers to trust.

But the perception in the minds of many members of the public –
including many of your potential and current clients – is that the financial
industry lacks integrity, and this view is not aided by some of the more
torrid stories from this summer – headlines about rate-rigging, Mexican
drug lords, and Iranian weapons proliferators will not have helped rebuild
trust in the financial sector collectively.”
Who said that?
Tracey McDermott, director of the Enforcement and Financial Crime
Division (FSA UK)

Read more at Number 7 of our list.

Also:

“On August 21, 2012, a whistleblower who had helped the Commission
stop an ongoing multi-million dollar fraud received an award of 30
percent -- the maximum percentage payout allowed by law -- of the
amount collected in the Commission’s enforcement action against the
perpetrators of the scheme.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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The award recipient in this matter submitted a tip concerning the fraud
and then provided documents and other significant information that
allowed the Commission’s investigation to move at an accelerated pace
and ultimately led to the filing of an emergency action in federal court to
prevent the defendants from ensnaring additional victims and further
dissipating investor funds.

The whistleblower’s assistance led to the court ordering more than $1
million in sanctions, of which approximately $150,000 had been collected
by the end of the fiscal year.

In accordance with the 30 percent award determination, on August 21,
2012, the whistleblower was paid nearly $50,000.”

Who said that?
We can read it at the Annual Report on the Dodd-Frank Whistleblower
Program, from the staff of the U.S. Securities and Exchange Commission

Read more at Number 1.

Also, at Number 8 you can read a really interesting speech from Jaseem
Ahmed, Secretary General, Islamic Financial Services Board (IFSB).

Although I confess I did not fully understand his first sentence
“Assalamu’alaikum warahmatullahi wabarakatuh and a very good
morning to all of you”, I found the content very interesting.

For example: “Islamic finance offers a major opportunity for diversifying
the investor base, and raising investor interest in Africa.”

Also, “following the pioneering efforts of countries such as Sudan,
Bahrain and Malaysia, governments are integrating Islamic finance
instruments into their public finance and expenditure frameworks
through sovereign Sukūk issuance programmes”

Welcome to the Top 10 list.

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U.S. Securities and Exchange Commission
Annual Report on the Dodd-Frank
Whistleblower Program, Fiscal Year 2012

This is a Report of the Staff of the U.S. Securities
and Exchange Commission. The Commission has expressed no view
regarding the analysis, findings, or conclusions contained herein.

Current focus of the Basel Committee:
Raising the bar
Remarks by Mr Stefan Ingves, Governor of
Sveriges Riksbank and Chairman of the Basel
Committee on Banking Supervision
(At the 7th High-Level Meeting jointly organised by the Association of
Supervisors of Banks of the Americas, the Basel Committee on Banking
Supervision and the Financial Stability Institute, Panama City, Panama)

Challenges in housing and mortgage markets

Speech by Mr Ben S Bernanke, Chairman of the Board
of Governors of the Federal Reserve System, at the
Operation HOPE Global Financial Dignity Summit,
Atlanta, Georgia.

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Gerri Walsh
Statement for the Record for Senate Special Committee on
Aging Hearing

Guidelines on Complaints-Handling
by Insurance Undertakings

EIOPA Guidelines on Complaints -
Handling by Insurance Undertakings
translated into all the official EU
languages

International monetary policy interactions:
challenges and prospects
Speech by Jaime Caruana
General Manager, Bank for International Settlements

To the CEMLA-SEACEN conference on “The role of
central banks in macroeconomic and financial
stability: the challenges in an uncertain and volatile world” Punta del
Este, Uruguay

Combating Financial Crime: Key themes and Priorities for 2013
Speech by Tracey McDermott, director of the
Enforcement and Financial Crime Division at the
APCIMS Conference

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Islamic Finance Prospects
in Africa: Speech
Islamic Banking Summit Africa | Republic of Djibouti
Speaker : Jaseem Ahmed, Secretary General, IFSB

Kiyohiko G Nishimura: Ageing, finance and
regulations

Keynote address by Mr Kiyohiko G Nishimura, Deputy
Governor of the Bank of Japan, at the
Joint Forum Meeting, Tokyo

William C Dudley: Solving the too big to fail
problem

Remarks by Mr William C Dudley, President and Chief
Executive Officer of the Federal Reserve Bank of New
York and President of the Committee on the Global
Financial System (CGFS), at the Clearing House’s
Second Annual Business Meeting and Conference, New
York City

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U.S. Securities and Exchange
Commission
Annual Report on the Dodd-Frank
Whistleblower Program
Fiscal Year 2012

This is a Report of the Staff of the U.S. Securities and Exchange
Commission. The Commission has expressed no view regarding
the analysis, findings, or conclusions contained herein.

Introduction
Section 922 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), amended the Securities
Exchange Act of 1934 (the “Exchange Act”) by, among other things,
adding Section 21F, entitled “Securities Whistleblower Incentives and
Protection.”

Section 21F directs the Commission to make monetary awards to eligible
individuals who voluntarily provide original information that leads to
successful Commission enforcement actions resulting in the imposition
of monetary sanctions over $1,000,000, and certain successful related
actions.

Awards are required to be made in the amount of 10% to 30% of the
monetary sanctions collected.

Awards will be paid from the Commission’s Investor Protection Fund (the
“Fund”).

In addition, § 924(d) of the Dodd-Frank Act directs the Commission to
establish a separate office within the Commission to administer and to
effectuate the whistleblower program.

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Section 924(d) of the Dodd-Frank Act requires the Commission’s Office
of the Whistleblower (the “Office” or “OWB”) to report annually to
Congress on OWB’s activities, whistleblower complaints, and the
response of the Commission to such complaints.

In addition, Exchange Act § 21F(g)(5) requires the Commission to
submit an annual report to Congress that addresses the following
subjects:

• The whistleblower award program, including a description of the
number of awards granted and the types of cases in which awards were
granted during the preceding fiscal year;

• The balance of the Fund at the beginning of the preceding fiscal year;

• The amounts deposited into or credited to the Fund during the
preceding fiscal year;

• The amount of earnings on investments made under Section 21F(g)(4)
during the preceding fiscal year;

• The amount paid from the Fund during the preceding fiscal year to
whistleblowers pursuant to Section 21F(b);

• The balance of the Fund at the end of the preceding fiscal year; and

• A complete set of audited financial statements, including a balance
sheet, income statement and cash flow analysis.

This report has been prepared by OWB to satisfy the reporting
obligations of Dodd-Frank Act § 924(d) and Exchange Act § 21F(g)(5).

Activities of The Office of The Whistleblower

Section 924(d) of the Dodd-Frank Act directs the Commission to establish
a separate office within the Commission to administer and to enforce the
provisions of Exchange Act § 21F.

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On February 18, 2011, the Commission announced the appointment of
Sean X. McKessy to head OWB in the Division of Enforcement
(“Enforcement”).

On January 17, 2012, the Commission named Jane A. Norberg as the
Office’s Deputy Chief.

In addition to Mr. McKessy and Ms. Norberg, the Office is currently
staffed by eight attorneys, three paralegals, and one program support
specialist.

Since its establishment, OWB has focused primarily on establishing the
office and implementing the whistleblower program.

During Fiscal Year 2012, the Office’s activities included the following:

• Communicating with whistleblowers who have sent tips, additional
information, claims for awards, and other correspondence to OWB.

OWB also meets with whistleblowers, potential whistleblowers and their
counsel, and consults with the staff in Enforcement to provide guidance
to whistleblowers and their counsel concerning expectations and follow
up;

• Reviewing and processing applications for awards;

• Working with staff in Enforcement to identify and track all enforcement
cases potentially involving a whistleblower to assist in the documentation
of the whistleblower’s information and cooperation in anticipation of an
eventual claim for award;

• Maintaining and updating the OWB website to better inform the public
about the whistleblower program (www.sec.gov/whistleblower).

The website includes two videos by Mr. McKessy providing an overview
of the program and information about how tips, complaints and referrals
are handled.

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The website also contains detailed information about the program, copies
of the forms required to submit a tip or claim an award, notices of covered
actions, links to helpful resources, and answers to frequently asked
questions;

• Supporting the initiative of the Residential Mortgage Backed Securities
(RMBS) Fraud Working Group, a working group of the Financial Fraud
Enforcement Task Force established by President Obama in November
2009, by establishing an online link to the OWB website from the member
agencies of the RMBS Fraud Working Group for the public to submit tips
and complaints about possible illegal activity in the offering and sale of
residential mortgage-backed securities.

The OWB website was also updated in connection with this initiative to
include a page providing an overview of the RMBS Fraud Working Group
and a direct link to report RMBS fraud.

OWB further supported the initiative by helping to implement
procedures, consistent with the confidentiality requirements of Exchange
Act § 21F(h)(2), to permit the Enforcement staff to share whistleblower
tips with the member agencies of the RMBS Fraud Working Group;

• Providing extensive training on the Dodd-Frank Act and the
Commission’s implementing rules (the “Final Rules”) to the
Commission’s staff.

This included in-person training and educational sessions in seven of the
eleven Regional Offices, video-linked training to the entire Enforcement
staff, as well as training in the Home Office;

• Establishing and implementing internal policies, procedures, and
protocols;

• Manning a publicly-available whistleblower hotline for members of the
public to call with questions about the program.

OWB attorneys return all calls within 24 business hours.

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During the 2012 fiscal year, the Office returned over 3,050 phone calls
from members of the public;

• Reviewing and entering whistleblower tips received by mail and fax into
the Commission’s Tips, Complaints, and Referrals System (the “TCR
System”);

• Conferring with regulators from other agencies’ whistleblower offices,
including the Internal Revenue Service, Commodity Futures Trading
Commission, Department of Justice, and Department of Labor (OSHA),
to discuss best practices and experiences;

• Publicizing the program actively through participation in webinars,
media interviews, presentations, press releases, and other public
communications; and

• Providing ongoing guidance to Commission staff regarding various
aspects of the program, including the development of internal policies for
the handling of confidential whistleblower identifying information.

Whistleblower Tips Received During Fiscal Year 2012

The Final Rules specify that individuals who would like to be considered
for a whistleblower award must submit their tip to OWB on Form-TCR
either via facsimile or mail or via the Commission’s online TCR
questionnaire portal.

All whistleblower tips received by the Commission are entered into the
TCR System, the Commission’s centralized database for the
prioritization, assignment, and tracking of TCRs received from the
public.

In Fiscal Year 2012, 3,001 whistleblower TCRs were received.

The most common complaint categories reported by whistleblowers were
Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%),
and Manipulation (15.2%).

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The Commission received whistleblower submissions from individuals in
all 50 states, the District of Columbia and the U.S. territory of Puerto Rico,
as well as 49 countries outside the United States.

Processing of Whistleblower Tips During Fiscal Year 2012

OWB currently leverages the resources and expertise of the Commission’s
Office of Market Intelligence (“OMI”) to evaluate incoming
whistleblower TCRs and to assign specific, timely, and credible TCRs to
members of the Enforcement staff for further investigation.

During the evaluation process, both staff and supervisors in OMI
examine each tip to identify those that are sufficiently specific, timely,
and credible to warrant the further allocation of Commission resources.

Tips that relate to an existing investigation are generally forwarded to the
staff working the existing matter.

Tips that could benefit from the specific expertise of another
Division or Office within the Commission are generally forwarded to staff
in that Division or Office for further analysis.

When appropriate, tips that fall within the jurisdiction of another federal
or state agency are forwarded to the Commission contact at that agency,
provided this can be done consistent with the confidentiality
requirements of Exchange Act § 21F(h)(2).

Tips that relate to the financial affairs of an individual investor or a
discrete investor group, and that are determined not to be strong
candidates for further expenditure of the Commission’s investigative
resources, are usually forwarded to the Office of Investor Education and
Advocacy (“OIEA”).

Comments or questions about agency practice or the federal securities
laws are also forwarded to OIEA.

OWB supports the tip allocation and investigative processes in several
ways.
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When whistleblowers submit tips on Form TCR in hard copy via mail or
fax, OWB enters this information into the TCR System so it can be
evaluated.

During the evaluation process, OWB may assist by contacting the
whistleblower to obtain additional information, or may participate in the
qualitative assessment of the best course of action to take in response to a
whistleblower tip.

During an investigation, OWB is available as needed to serve as a liaison
between the whistleblower (and his or her counsel) and investigative staff.

On occasion, OWB arranges meetings between whistleblowers and
subject matter experts on the Enforcement staff to assist in better
understanding the whistleblowers’ submissions and developing the facts
of specific cases.

OWB staff also communicates frequently with Enforcement staff with
respect to the timely documentation of information regarding the staff’s
interactions with whistleblowers, the value of the information provided by
whistleblowers, and the assistance provided by whistleblowers as the
potential securities law violation is being investigated.

Whistleblower Incentive Awards Made During Fiscal Year 2012

OWB posts a Notice of Covered Action for each Commission
enforcement action where a final judgment or order, by itself or together
with other prior judgments or orders in the same action issued after July
21, 2010, results in monetary sanctions exceeding $1 million.

Once a Notice of Covered Action is posted, individuals have 90 calendar
days to apply for an award by submitting a completed Form WB-APP to
OWB by the claim due date listed for that action.

Timely submitted applications are reviewed by the staff designated by the
Director of Enforcement (“Claims Review Staff”) in accordance with the
criteria set forth in the Dodd-Frank Act and Final Rules.

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The Claims Review Staff is currently comprised of four senior officers in
Enforcement and a senior attorney in the Office of the General Counsel.

To assist the Claims Review Staff in its review, OWB prepares a binder of
relevant documents and a recommendation concerning the appropriate
disposition of the award claim.

The Claims Review Staff then makes a Preliminary Determination setting
forth its assessment as to whether the claim should be allowed or denied
and, if allowed, setting forth the proposed award percentage amount.

If a claim is denied and the applicant does not object, then the
Preliminary Determination of the Claims Review Staff becomes the Final
Order of the Commission.

However, an applicant can ask for reconsideration of the Preliminary
Determination, in which event the Claims Review Staff considers the
issues and grounds advanced in the applicant’s response, along with any
supporting documentation provided.

After this additional review, the Claims Review Staff issues a Proposed
Final Determination, and the matter is forwarded to the Commission for
its decision.

In addition, all Preliminary Determinations of the Claims Review Staff
that involve an award of money are forwarded to the Commission as
Proposed Final Determinations irrespective of whether the applicant
objected to the Preliminary Determination.

These procedures ensure that all claims for which a monetary award is
recommended and all preliminary denials of claims to which the
applicant objects are put before the Commission for final decision.

Within 30 days of receiving notice of the Proposed Final Determination,
any Commissioner may request that the Proposed Final Determination
be reviewed by the full Commission.

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If no Commissioner requests such a review within the 30-day period, then
the Proposed Final Determination will become the Final Order of the
Commission.

In the event a Commissioner requests a review, the Commission reviews
the record that the Claims Review Staff relied upon in making its
determinations and issues its Final Order.

During Fiscal Year 2012, the Commission made its first award under the
whistleblower program.

On August 21, 2012, a whistleblower who had helped the Commission
stop an ongoing multi-million dollar fraud received an award of 30
percent -- the maximum percentage payout allowed by law -- of the
amount collected in the Commission’s enforcement action against the
perpetrators of the scheme.

The award recipient in this matter submitted a tip concerning the fraud
and then provided documents and other significant information that
allowed the Commission’s investigation to move at an accelerated pace
and ultimately led to the filing of an emergency action in federal court to
prevent the defendants from ensnaring additional victims and further
dissipating investor funds.

The whistleblower’s assistance led to the court ordering more than $1
million in sanctions, of which approximately $150,000 had been collected
by the end of the fiscal year.

In accordance with the 30 percent award determination, on August 21,
2012, the whistleblower was paid nearly $50,000.

Motions for additional judgments are currently pending before the court
and any additional collections or increase in the sanctions ordered and
collected will increase the amount paid to the whistleblower.

As noted below, whistleblowers receive their awards from the Securities
and Exchange Commission Investor Protection Fund (“Fund”)
established pursuant to Section 922 of the Dodd-Frank Act.
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During the 2012 fiscal year, OWB posted 143 Notices of Covered Action
for enforcement judgments and orders issued during the applicable
period that included the imposition of sanctions exceeding the statutory
threshold of $1 million.

OWB is continuing to review and process applications for awards
received during the 2012 fiscal year.

Securities and Exchange Commission Investor Protection Fund

Section 922 of the Dodd-Frank Act established the Fund to provide
funding for the Commission's whistleblower award program, including
the payment of awards in related actions.

In addition, the Fund is used to finance the operations of the SEC Office
of the Inspector General’s suggestion program.

The suggestion program is intended for the receipt of suggestions from
Commission employees for improvements in the work efficiency,
effectiveness, and productivity, and use of resources at the Commission,
as well as allegations by Commission employees of waste, abuse,
misconduct, or mismanagement within the Commission.

The following table provides certain of the information required by
Exchange Act § 21F(g)(5) for the 2012 fiscal year (October 1, 2011 through
September 30, 2012).

As of September 30, 2012, the Fund was fully funded, with an ending
balance of $453,429,825.58.

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The audited financial statements for the Fund, including a balance sheet,
income statement, and cash flow analysis are included in the
Commission’s Agency Financial Report, separately submitted to
Congress and accessible at http://www.sec.gov/about/secafr2012.shtml.

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Current focus of the Basel Committee:
Raising the bar
Remarks by Mr Stefan Ingves, Governor of
Sveriges Riksbank and Chairman of the Basel
Committee on Banking Supervision
(At the 7th High-Level Meeting jointly organised
by the Association of Supervisors of Banks of the
Americas, the Basel Committee on Banking Supervision and the
Financial Stability Institute, Panama City, Panama)
I am very pleased to be here for this year's High-Level Meeting,
organised by ASBA, the Basel Committee and the FSI.
At its meeting in March of this year, the Basel Committee discussed a
number of strategies for enhancing its relationship and communications
with non-Basel Committee member countries.
One proposal that was readily endorsed by Committee members was to
establish even closer collaboration with the FSI with regard to its
High-Level Meetings.
Many of our members are familiar with these well-established annual
conferences, which draw together senior central bankers and supervisory
officials from various regions of the world.
In addition to last year's ASBA-FSI event, I have participated in several
other high level meetings this year.
The feedback that I and my Basel Committee colleagues have gained
from these events has been both illuminating and insightful.
When we met last year in San Francisco, I called for action on two items:
first, guarding against supervisory complacency, and second, putting into
practice the regulatory reforms that were developed to raise the resilience
of banks and banking systems to future shocks.

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These two themes - putting policies into practice, and recognising
supervision as an essential complement to regulation - continue to
pervade the Basel Committee's work.
I am going to repeat these themes today, although in doing so I am not
suggesting we have failed in our efforts in the past.
On the contrary, we have made good progress in both areas.
But more needs to be done.
I will share with you today some of the Committee's efforts to further
these objectives.
I will also say a few words about our ongoing policy work since there is
also more to be done to fully reflect lessons learnt from the crisis.
Supervision matters
I will start with supervision.
I have been quite vocal in warning that the Basel III Framework is not
sufficient - by itself - to set banks and banking systems on a clear path to
becoming stronger and more resilient.
It must be matched in practice by good supervision.
Good regulation empowers firm supervision, and firm supervision
enforces good regulation.
They are mutually reinforcing, and it is unrealistic to think that one can
be successful without the other.
Basel III provides a better rulebook by which to judge the safety and
soundness of banks, but the crisis taught us that we also need better
supervision.
And better supervision begins with the basic building blocks, which is the
Core Principles for Effective Banking Supervision.

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Core Principles for Effective Banking Supervision
Every financial crisis is an opportunity to reflect on what went wrong,
what worked well and what improvements can be made.
This is true for bankers and risk managers, for policy makers, and, of
course, for bank supervisors.
For the Basel Committee, the supervisory lessons learnt from the financial
crisis prompted our review of the Core Principles.
While Basel III has attracted most of the attention, its effectiveness will
only be realised if it rests on a solid bedrock of supervision and
implementation.
The Core Principles provide such a foundation.
The revised Core Principles were published in September, with the
endorsement of supervisors and central bankers representing more than
100 countries that were gathered in Istanbul for the 17th International
Conference of Banking Supervisors.
The latest revision was conducted jointly with the Basel Consultative
Group, which comprises banking supervisors from both member and
non-member countries of the Basel Committee, as well as regional groups
of banking supervisors, the IMF, the World Bank and the Islamic
Financial Services Board.
The review took account of post-crisis lessons and other significant
supervisory developments.
At the same time, we have remained mindful of the fact that the Core
Principles are applied on a global basis and that we need to maintain
continuity and comparability.
We have not sought to reinvent the wheel: many of the revisions are
designed to reinforce the fundamentals of banking supervision by
emphasising effective risk-based analysis, a more forward-looking
perspective and early intervention.

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Given the importance of these basic principles as the foundation for any
supervisory regime, it is imperative that they be implemented with
determination and rigour around the globe.
As many of you would already know, the revised Principles have been
reorganised to highlight the difference between what supervisors do and
what they expect banks to do.
The principles covering supervisory expectations of banks emphasise the
importance of good corporate governance and risk management, as well
as compliance with supervisory standards.
In addition, the review took account of several key trends and
developments that emerged during the last few years of market turmoil, in
particular the need for greater intensity and resources to deal effectively
with systemically important banks.
Our agenda for this High-Level Meeting includes an in-depth review and
discussion of the revised Core Principles, so I will not go into any more
detail now.
Let me simply make one very important point.
In discussing the revisions to the Core Principles, the Committee was
clear in its objective: we wanted to raise the bar.
Just as we needed to lift regulatory requirements that were too low, the
status quo for supervision was not going to be acceptable either.
An enhancement of supervisory capabilities is necessary if we want to
keep pace with the increasingly complex, diverse and interconnected
financial system.
We cannot stand still.
More importantly, and as I have stressed previously, we cannot allow
ourselves to think that just because the problems in the banking system
did not occur in our backyard this time will mean that they will not occur
there in the future.

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Systemically important banks
The financial crisis that began in 2007 not only reminded us of the critical
role of intensive supervision, it also reminded us of the importance of
systemically important banks.
During the crisis, the failure or impairment of a number of large, global
financial institutions sent shocks through the financial system which, in
turn, harmed the real economy.
The shocks were exacerbated when it became apparent that supervisors
and other relevant authorities had limited options to deal with these
banks, and therefore to prevent the problems from spreading through the
financial system.
As a consequence, public sector intervention to restore financial stability
during the crisis was not only necessary, but had to be conducted on a
massive scale.
In response, the Committee adopted a series of reforms that, once
implemented, will raise the resilience of banks and banking systems.
These reforms will have a particular impact on global systemically
important banks (G-SIBs) since their business models have generally
placed greater emphasis on trading and capital markets related activities,
which are most affected by the enhanced risk coverage of the capital
framework.
But Basel III is a minimum standard, and is not enough to address the
unique risks posed by G-SIBs, the moral hazard associated with the
perception that these firms are too big to fail, nor the cross-border
repercussions that problems in a G-SIB would create.
To alleviate these problems, the Committee sought to raise the bar further
for these largest banks.
We developed an assessment methodology for determining global
systemic importance, and prescribed additional loss absorbency
requirements for banks deemed systemically important.

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The G20 Leaders endorsed these rules at their summit last year.
At that time, they asked the Basel Committee and the Financial Stability
Board to work on extending the framework to domestic systemically
important banks (D-SIBs).
There are many banks that are not significant from an international
perspective, but nevertheless could have an important impact on their
domestic financial system and economy compared to non-systemic
institutions.
The Committee has recently published its framework for dealing with
D-SIBs, which is a topic of discussion for this High-Level Meeting.
Our goal was to develop a D-SIB regime which was complementary to the
G-SIB regime, while at the same time recognising that different
jurisdictions will wish to deal with domestic priorities in different ways.
The D-SIB framework therefore identifies a set of common actions that
all jurisdictions are expected to undertake, but leaves the detailed nature
of those actions and the specific policy responses to national discretion.
My main message for today is that critical to the success of this approach
and the interaction with the G-SIB framework is the need for strong and
cooperative dialogue between home and host supervisors where a bank
from one country is designated a D-SIB in foreign jurisdiction.
Implementation
Supervision is a top priority for the Basel Committee, and implementation
of Basel III is another.
We have seen signs of progress on implementation in some countries, but
much more is needed.
Rules and regulations have to be consistently formulated and effectively
applied. The implementation process is, therefore, a continuing one.
At its September 2011 meeting, the Basel Committee agreed to initiate a
programme to review members' implementation of the Basel regulatory
framework (which includes Basel II, Basel 2.5 and Basel III).

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This is a comprehensive programme which seeks to spur full
implementation of the Basel standards within the agreed timelines - this
is something that the Committee has not previously done.
The Committee has no doubt that with proper implementation, the
regulatory reforms - both those already announced and those still in the
pipeline - will help make banking systems more resilient.
That is why the G20 Leaders have also asked us to keep focus on
implementation issues and finish the job.
In Mexico recently, the G20 Finance Ministers and Central Bank
Governors said:
"We remain committed to the full, timely and consistent implementation
of the financial regulation agenda - We agree to take the measures needed
to ensure full, timely and effective implementation of Basel II, 2.5 and III
and its consistency with the internationally agreed standards."
Three baseline assessments (the European Union, Japan and the United
States) covering 11 Committee member jurisdictions have been
completed and the reports have been published.
Preparatory work relating to the next round of country assessments is
under way and includes Australia, Brazil, Canada, China, Singapore and
Switzerland.
A system of follow-up for those assessments already completed is being
designed and will be part of the regular implementation process going
forward.
The Basel Committee's systematic review of implementation is helping to
identify the regulatory fault lines early on by providing Committee
members a detailed and a point-of-time review of the progress made and
the materiality of the shortcomings.
As intended, the assessments are developing as a means to an end rather
than an end in themselves.
The expectation is that our assessments will help create a dependable
global regulatory environment that will also help strengthen supervisory
efficacy.
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The assessments we have thus far conducted demonstrate the strong
cooperative nature of the programme.
It involves senior-level experts from different jurisdictions, technical
counterparts and select industry participants from the assessed
jurisdiction, and the Committee's Secretariat.
The expert nature of the country assessments is central to its legitimacy.
Apart from assessing the regulatory consistency and materiality of the
gaps, the Basel III implementation process has drilled down to the level
of individual bank portfolios, and I expect the work will help us to identify
the key drivers of variations in risk-weighted assets across banks, across
jurisdictions and across time.
As other Basel standards and policies are completed - such as those
relating to liquidity, G-SIBs and large exposures - the focus on
implementation is expected to rise.
The implementation work is also helping inform the Committee's
ongoing policy initiatives.
This is an important feedback loop for the Basel Committee as our
premise is that tougher capital and liquidity rules under the Basel III
Framework are entirely appropriate for reducing the likelihood of failure
for systemically important banks.
Assessing implementation and the application of the Basel framework
among Committee members also becomes important for many
non-member countries where banks from BCBS jurisdictions operate and
become systemically relevant.
Their failure may not even be seen as a viable option since these banks
play a critical economic role in credit intermediation and maturity and
risk transformation.
Proper implementation of Basel III will enable internationally active
banks in emerging and developing markets to perform their role in a
safer, prudent and economically constructive fashion.
When globally active banks manage their capital and liquidity prudently,
they act as a source of financial stability in the relevant jurisdiction.
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But an important pre-condition is that such banks must play by the
international norms.
Collectively, the regulatory requirements and the supervisory standards
should push these banks along the path of the intended post-crisis reform
agenda so that even during times of stress the banking system operates
without material disruption to the financing of economic activities.
Further regulatory reforms are needed
The reforms to the capital adequacy rules have been substantial, and the
Basel Committee's efforts to ensure they are put into practice properly
and in a timely way have been considerable.
But we cannot say that our work to further improve the regulatory
framework is complete.
Liquidity
Basel III's liquidity rules are the most obvious element of the regulatory
framework that we are working to finalise.
Forging agreement on minimum liquidity rules for international banks
has been a longstanding but elusive goal for supervisors and central
bankers.
Indeed, Sir George Blunden, the Basel Committee's first chairman,
opened the Committee's very first meeting in 1975 by noting that its
mandate was "to help ensure bank solvency and liquidity".
While the Committee's reputation has been founded on the first part of
the task, it has taken 35 years - until Basel III was agreed in 2010 - to find
success on the second.
Liquidity is an extraordinarily difficult and multifaceted topic.
There are a wide range of views on how to define liquidity, as well as on
how best to supervise, regulate and manage its risk.
For example, in 1984 some of the questions relating to liquidity discussed
by the Committee included:

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What constitutes liquidity for an international bank, and how can it be
measured?
- What should be the role of particular asset classes within an overall
approach to liquidity in an international context?
- How does the degree of maturity transformation undertaken affect a
bank's liquidity?
- To what extent can lending in the interbank market constitute
liquidity? Does the ability of banks to draw funds from the interbank
market affect the extent to which they need liquid assets?
- What are the basic supervisory approaches to liquidity used by the
different countries represented on the Committee?
- What relationship do these approaches bear to the monetary policies
applied by the central banks?
These questions remain highly relevant, and they are just as difficult as
they were then, but I am pleased to say that the Committee has now come
to grips with them.
What has changed?
While the persistently increasing globalisation and interconnectedness of
our financial systems were known to be creating potential vulnerabilities,
there was no consensus on how (or how urgently) to deal with it.
Unfortunately, it took a global financial crisis to provide the necessary
impetus for agreeing on the Basel III liquidity rules.
So the storm clouds of the crisis at least had a silver lining in that respect.
As you know, the liquidity rules are comprised of a short-term Liquidity
Coverage Ratio (LCR) and a longer-term, structural Net Stable Funding
Ratio (NSFR).
Since these represent the first time we have had global standards, the
Committee agreed that we would review and, if necessary, refine them
before they came into force.

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And the question everyone therefore wants to know is where do we
currently stand with respect to finalising them, particularly the LCR
which is due to come into force in 2015?
The Committee is aiming to reach agreement by its December meeting
on a few outstanding issues.
As any bank supervisor, central banker or risk manager can attest, this is
very difficult work given the wide range of issues we must consider.
It has far-reaching implications, for example, for banking, financial
markets and monetary policy, and for this reason our work has been
undertaken with considerable care and caution.
It is important to note that several countries have already adopted the
liquidity framework in their jurisdictions, including Sweden, and I am
pleased to say the Swedish experience with liquidity regulation has been
very positive.
For more than a year now Swedish banks have been reporting their
liquidity coverage ratios to Sveriges Riksbank and the Swedish FSA, and
the large banking groups also disclose their LCR publicly.
Furthermore, from January 2013 minimum standards for the LCR will be
introduced for the largest banking groups, both on an aggregated basis
and separately in euro and US dollars.
The results so far are reassuring and there are no signs that monetary
policy operations or the functioning of the interbank market have been
affected by the implementation of the LCR.
Given the implications and potential costs - not the least of which are the
social costs - of not raising the bar for liquidity requirements and liquidity
risk management in banks, we would be failing in our responsibilities if
we did not push on to finalise these proposals in the near future.
Trading book and securitisation
Let me now turn to the work we are doing with respect to some of the
capital rules.

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Following on from the changes introduced in Basel 2.5, the Committee is
now undertaking a more fundamental review of the trading book and the
securitisation rules.
With respect to the former, we want to achieve a regulatory framework
that promotes more comparable levels of capital across banks with similar
trading book portfolios.
We also aim to provide more transparency, and limit arbitrage between
the banking and trading books.
Regarding securitisation, the complexity of the products, lack of
transparency and poor underlying incentives led to massive losses.
The Committee's objective is to address these weaknesses by making
capital requirements for securitisation products simpler, better reflective
of risk, less reliant on credit ratings and without significant cliff effects.
Standardised approaches
Also on the agenda in 2013 is to improve the standardised approaches for
credit and operational risk.
Our aim is to ensure these approaches continue to be suitable for
assessing the capital adequacy of internationally-active banks - as well as
other banks - that are not using the advanced approaches for risk
measurement.
While it would be premature to say what the result of our deliberations
will be, one issue to be considered will be the extent to which the revised
standardised approaches could also serve as a backstop or benchmark to
the models-based approaches (eg banks, when publishing their
risk-weighted assets, could be required to reference the calculations
based on the standardised approaches).
Linking the standardised approach with the models-based approach is
already being considered in the fundamental review of the trading book.
Using the standardised approaches as a backstop or benchmark could
help increase the comparability of risk-weighted asset calculations
among banks and jurisdictions.

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Large exposures
Another important regulatory policy that is under review by the
Committee is the large exposures regime.
The Committee's original guidance - Measuring and controlling large
credit exposures - was published in January 1991.
It was successful in promoting broad convergence in the supervision of
large exposures, while recognising the scope for variation according to
local conditions.
However, it is fair to say that the regulation of large exposures has
become increasingly inconsistent.
While there is considerable apparent homogeneity in the general
approaches being adopted, there are significant differences in the
specifics.
Another lesson from the crisis has been that we did not pay sufficient
attention to risk concentrations.
This makes a strong case for a more consistent and effective framework
for large exposures.
Such an internationally consistent framework would ensure a level
playing field, reinforce consistency in underlying capital requirements
(since the capital framework does not directly capture concentrations)
and avoid loopholes or exemptions where risks can build up undetected.
The Committee is therefore examining the merits of a more consistent
approach to large exposures, and will publish its proposals for comment
during the course of 2013.
Other areas for review
Let me quickly touch upon two other areas on the Committee's agenda:
one a broad theme, and the other a specific initiative that is supervisory in
nature.

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Simplicity and comparability
I am the first to acknowledge that a number of areas of the regulatory
framework have become increasingly complex over the years.
As a result, the Committee has this year been evaluating ways in which it
can be simplified, without materially altering its underlying objective or
strength.
There is a fine balance that must be achieved.
The use of a regulatory measure that is too simple and blunt can provide
strong, perverse incentives for banks.
On the other hand, there is a limit to how much faith we should put into
the complexity and sophistication of models.
A specific example of the Committee's current thinking is our recent
announcement on the regulatory treatment of debit valuation
adjustments (DVAs).
This is a complex issue relating to the impact of a bank's own credit risk
on the valuation of derivative transactions.
To precisely measure this impact, which we wished to remove from the
capital base, would have been extremely complex and difficult.
The maths and analysis necessary would be beyond the capabilities of the
average bank supervisor - let alone a central bank Governor!
The Committee therefore decided on a more simplistic, but conservative,
treatment.
This was criticised for not being precise enough and therefore potentially
overstating the risk.
But the Committee decided that there was a trade-off to be made, and
that the additional precision involved in refining the approach was not
worth the cost involved.
The message here is not that the Committee is dismissive of the benefits
or desirability of risk sensitivity, but rather that it needs to be traded off
against other objectives.
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At some point it is inevitable that the never-ending pursuit of greater
precision in risk measurement is not worth the effort - indeed, it can lead
to a dangerous false sense of precision, which is best avoided.
Capital planning
Given that we have raised minimum capital requirements, capital
planning will necessarily become more important - both for banks and
their supervisors.
Recognising this, we have established a task force to examine current
industry practices and develop guidance on good capital planning
processes.
This work is looking at issues such as:
- processes for establishing targets for the level and composition of
capital;
- monitoring and decision making with respect to capital;
- linkages to strategic plans and other business planning
considerations; and
- coordination with the assessment of firms' risk profile and appetite.
The objective of this work is not a new policy that will impose specific
requirements on banks such that every bank does its capital planning in
the same way.
Rather, it will be sound guidance that banks and supervisors can use to
help judge whether an individual bank has a robust capital planning
process, given its size, shape and complexity.
This will be particularly important in a Basel III world, with a number of
capital constraints (CET1, Tier 1 and total risk-based ratios, and the
leverage ratio) and buffers (capital conservation, countercyclical and SIB
surcharges) to which banks will need to manage.

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Conclusion
I would like to bring my remarks to a close by emphasising as I did at the
outset that regulatory reform has two essential complements: supervision
and implementation.
Even strong international regulations will be ineffective if they are not
implemented fully or if the associated supervisory regime is weak.
Hence, the Committee is raising the bar in all three areas.
First, it is obvious that we have been working to strengthen the regulatory
framework.
This is not just in the form of Basel III, but also the work we have
completed on SIBs, and the work still in train on the trading book,
securitisation and large exposures.
Second, we have been much more proactive in making sure that the
international agreements are implemented in full, on time and in a
consistent manner.
And, finally, we have used the revisions to the Core Principlesto also raise
the bar for supervision. Doing one is not enough; neither is doing two.
We need to raise the bar in all three areas if we are to achieve a robust and
resilient financial system for the future.

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Ben S Bernanke: Challenges in housing and
mortgage markets
Speech by Mr Ben S Bernanke, Chairman of the Board
of Governors of the Federal Reserve
System, at the Operation HOPE Global Financial
Dignity Summit, Atlanta, Georgia,

Good afternoon. I’d like to thank John Bryant and
Operation HOPE for inviting me to speak today.

I’d also like to congratulate Operation HOPE and the Ebenezer Baptist
Church on the grand opening of the HOPE Financial Dignity Center,
which holds the promise of becoming a tremendous resource for the
people of Atlanta and sits next to Martin Luther King’s home church.

Dr King’s legacy to our society is strong and enduring, and the new
center is very much in the spirit of his work.

The past few years have been difficult for many Americans and their
communities.

At the Federal Reserve, we understand the depth of the problem and the
need for action, and we will continue to use the policy tools that we have
to help support economic recovery.

We also know that the burdens of a weak economy and the benefits of
economic growth often are not equally shared, and that, to be truly
effective, policymakers must take into account how their decisions affect
the least advantaged, not just the economy as a whole.

My remarks today will focus on an important part of our economy, the
housing sector.

Housing and housing finance played a central role in touching off the
financial crisis and the associated recession, and the ensuing wave of
foreclosures wreaked great damage on communities across the country.
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As I will discuss, for the first time in a number of years, the housing sector
is improving, adding to growth and jobs. But the housing revival still
faces significant obstacles, and the benefits of that revival remain quite
uneven.

Strengthening and broadening the housing recovery remain a critical
challenge for policymakers, lenders, and community leaders.

The degree to which that challenge is met will help determine the
strength and sustainability of the economic recovery and the extent to
which its benefits are broadly felt.

Developments in housing and housing finance

The multiyear boom and bust in housing prices of the past decade,
together with the sharp increase in mortgage delinquencies and defaults
that followed, were among the principal causes of the financial crisis and
the ensuing deep recession – a recession that cost some 8 million jobs.

And continued weakness in housing – reflected in falling prices, low
rates of new construction, and historic levels of foreclosure – has proved a
powerful headwind to recovery.

It is encouraging, therefore, that we are seeing signs of improvement in
the housing market in most parts of the country.

House prices nationally have increased for nine consecutive months,
residential investment has risen about 15 percent from its low point, and
sales of both new and existing homes have edged up.

Homebuilder sentiment has improved considerably over the past year,
and real estate agents report a substantial rise in homebuyer traffic.

The growing demand for homes has been underpinned by record levels of
affordability, the result of historically low mortgage rates and house prices
that are 30 percent or more below their peaks in many areas.

To be sure, the housing sector is far from being out of the woods.
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Construction activity, sales, and prices remain much lower than they were
before the crisis.

About 20 percent of mortgage borrowers remain underwater – that is, they
owe more than their homes are worth.

Despite marked improvements in overall credit quality, 7 percent of
mortgages are either more than 90 days overdue or in the process of
foreclosure.

And, although the number of homes in foreclosure has edged down since
cresting in 2010, that number remains in excess of 2 million, three times
the historical norm.

Meanwhile, the national homeownership rate has slipped nearly 4
percentage points from its 2004 high of 69 percent, and it now stands at a
15-year low.

So, although there are good reasons to be encouraged by the recent
direction of the housing market, we should not be satisfied with the
progress we have seen so far.

Lower-income and minority communities are often disproportionately
affected by problems in the national economy, and the effects of the
housing bust have followed that unfortunate pattern.

Indeed, as a result of the crisis, most or all of the hard-won gains in
homeownership made by low-income and minority communities in the
past 15 years or so have been reversed.

For example, among all income groups, between 2007 and 2010,
homeownership rates fell the most for households with income of $20,000
or less, according to the Federal Reserve’s Survey of Consumer Finances.

Data from the Census Bureau show that, over the period from 2004 to
2012, the homeownership rate fell about 5 percentage points for African
Americans, compared with about 2 percentage points for other groups.

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Homeownership rates fall when existing homeowners lose or leave their
properties, when barriers to homeownership increase, or both.

In recent years, both factors have been important.

As I mentioned, home loss through foreclosure, though down from its
peaks, remains an important problem, with lower-income and minority
homeowners often being the hardest hit.

Importantly, foreclosures can inflict economic damage beyond the
personal suffering and dislocation that accompany them.

Foreclosed properties that sit vacant for months (or years) often
deteriorate from neglect, adversely affecting not only the value of the
individual property but the values of nearby homes as well.

Concentrations of foreclosures have been shown to do serious damage to
neighborhoods and communities, reducing tax bases and leading to
increased vandalism and crime.

Thus, the overall effect of the foreclosure wave, especially when
concentrated in lower-income and minority areas, is broader than its
effects on individual homeowners.

A strengthening housing market will help to gradually undo that damage,
but the process has only begun.

Homeownership rates have also declined because fewer households have
chosen, or have been able, to become new homeowners in recent years.

Buying a home usually means obtaining a mortgage, and the data show
that the pace of mortgage lending has fallen considerably on a national
basis; the extension of first-lien mortgages to purchase homes fell by
more than half from 2006 to 2011 and now stands at the lowest level since
1995.

Again the contraction in mortgage originations has been particularly
severe for minority groups and those with lower incomes: Since the peak
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in mortgage lending in 2006, the number of home-purchase loans
extended to African Americans and Hispanics has fallen more than 65
percent, whereas lending to non-Hispanic whites has fallen less than 50
percent.

Home purchase originations in lower-income neighborhoods have fallen
about 75 percent, compared with around 50 percent for middle- and
upper-income neighborhoods.

To be clear, the reduction in mortgage originations and home purchases
for all groups relative to the pre-crisis period partly reflects weakness in
the effective demand for housing rather than the unavailability of
mortgage credit.

Unemployment, income loss, and income insecurity prevent many
households from purchasing homes, and concerns about the future
direction of the labor market, housing prices, and the economy more
generally keep other potential buyers on the sidelines.

In addition, the fall in home prices means that many current homeowners
cannot rely as much as they could in the past on tapping their existing
home equity to trade up to larger or better homes, while underwater
homeowners may be financially unable to move from their current homes.

Although the decline in the number of willing and qualified potential
homebuyers explains some of the contraction in mortgage lending of the
past few years, I believe that tight credit nevertheless remains an
important factor as well.

The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank
Lending Practices indicates that lenders began tightening mortgage
credit standards in 2007 and have not significantly eased standards
since.

Terms and standards have tightened most for borrowers with lower credit
scores and with less money available for a down payment.

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For example, in April nearly 60 percent of lenders reported that they
would be much less likely, relative to 2006, to originate a conforming
home-purchase mortgage to a borrower with a 10 percent down payment
and a credit score of 620 – a traditional marker for those with weaker
credit histories.

As a result, the share of home-purchase borrowers with credit scores
below 620 has fallen from about 17 percent of borrowers at the end of 2006
to about 5 percent more recently.

Lenders also appear to have pulled back on offering these borrowers loans
insured by the Federal Housing Administration (FHA).

When lenders were asked why they have originated fewer mortgages, they
cited a variety of concerns, starting with worries about the economy, the
outlook for house prices, and their existing real estate loan exposures.

They also mention increases in servicing costs and the risk of being
required by government-sponsored enterprises (GSEs) to repurchase
delinquent loans (so-called putback risk).

Other concerns include the reduced availability of private mortgage
insurance for conventional loans and some program-specific issues for
FHA loans as reasons for tighter standards.

Also, some evidence suggests that mortgage originations for new
purchases may be constrained because of processing capacity, as high
levels of refinancing have drawn on the same personnel who would
otherwise be available for handling loans for purchase.

Importantly, however, restrictive mortgage lending conditions do not
seem to be linked to any insufficiency of bank capital or to a general
unwillingness to lend.

Certainly, some tightening of credit standards was an appropriate
response to the lax lending conditions that prevailed in the years leading
up to the peak in house prices.

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Mortgage loans that were poorly underwritten or inappropriate for the
borrower’s circumstances ultimately had devastating consequences for
many families and communities, as well as for the financial institutions
themselves and the broader economy.

However, it seems likely at this point that the pendulum has swung too
far the other way, and that overly tight lending standards may now be
preventing creditworthy borrowers from buying homes, thereby slowing
the revival in housing and impeding the economic recovery.

Policy responses

The factors contributing to reduced mortgage lending and lower rates of
homeownership are varied and complex; no simple solutions exist that
can, on their own, restore the housing market to health.

Since the extent of the crisis became apparent, a range of initiatives has
been undertaken.

For example, a number of public and private efforts have been made to
help avoid unnecessary foreclosures and to enable underwater and other
borrowers to refinance at lower interest rates.

Alternatives to foreclosure, including short sales and deed-in-lieu
arrangements, have become more common.

The recent settlement with a group of large servicers includes provisions
to improve the process for working with delinquent borrowers and to
compensate foreclosed-upon homeowners who were unfairly treated in
the past.

As I have noted, vacant foreclosed homes lose value and create problems
for neighborhoods.

The overhang of empty homes also slows the recovery of the housing
market by keeping prices low and limiting the need for new construction.

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To explore ways to address the number of foreclosed homes standing
empty, the Federal Housing Finance Agency, which supervises the GSEs,
undertook a pilot initiative that made it easier for qualified investors to
purchase pools of foreclosed properties from Fannie Mae; the acquired
properties would then be rented for a specified number of years.

For our part, the Federal Reserve is encouraging the institutions we
supervise to manage their inventories of foreclosed homes in ways that do
not exacerbate problems in local neighborhoods, including renting them
out, where appropriate, rather than leaving the properties vacant.

Policymakers have also taken steps to remove barriers to the flow of
mortgage credit.

The Federal Housing Finance Agency recently announced new rules that
will provide mortgage lenders greater clarity about the conditions under
which they will be required to buy back defaulted mortgages from Fannie
Mae and Freddie Mac or otherwise address origination problems.

This greater clarity may result in reduced concern about putback risk,
which in turn should increase the willingness of lenders to make new
loans.

In its rulemakings and supervision, the Federal Reserve, along with other
bank supervisors, has worked with lenders to try to achieve an appropriate
balance between reasonable prudence and ensuring that qualified
borrowers are not denied access to credit.

Although regulatory policy will be important for restoring a fully
functioning housing and mortgage market, the strength of the overall
economic recovery is crucial as well.

Obviously, loss of employment or income makes it more difficult for
families to pay their mortgages, maintain good credit histories, refinance
their mortgages at lower rates, and avoid foreclosure.

People who are worried about their jobs are understandably more
reluctant to purchase homes, and households who have suffered hits to
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P a g e | 44

their incomes face difficulty qualifying for a mortgage and saving for a
down payment.

Concerns about the financial strength of households and about the
economic recovery also make lenders more cautious.

At the Federal Reserve, we have sought to support the economic recovery
and maintain price stability – the two goals given to us by the Congress –
by keeping both short term and longer-term interest rates historically low.

Low interest rates reduce the cost to households of buying homes, cars,
and other consumer durables while increasing the attractiveness of new
capital investments by firms.

Increased demand in turn leads to faster economic growth and more jobs.

My colleagues and I have been and remain quite concerned about the
stubbornly high level of unemployment – particularly long-term
unemployment.

We have taken strong actions throughout the financial crisis and recovery
to help stabilize the economy.

In September, we took the added step of stating that we will continue
actions to put downward pressure on longer-term interest rates until the
outlook for the job market improves substantially in a context of price
stability.

Our hope is that our statement provides individuals, families, businesses,
and financial markets greater confidence about the Federal Reserve’s
commitment to promoting a sustainable recovery with price stability and
that, as a result, they will become more willing to invest, hire and spend.

In addition, of course, the historically low mortgage rates that have
resulted from the Federal Reserve’s policies are directly supporting the
housing market by putting homeownership within the reach of more
people.

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While the economic recovery and regulatory policy affect access to credit
for all households, some potential borrowers may face the added burden
of discrimination.

In our role as a banking regulator, the Federal Reserve strives to ensure
that the banks we supervise obey laws that prohibit illegal discrimination
in lending.

I am reminded here that fair treatment in housing was a significant focus
of Dr King’s, and the Fair Housing Act of 1968 – still one of the nation’s
cornerstone laws to prohibit discrimination – was passed only a week
after his assassination and stands among his legacies.

Two types of discrimination continue to have particular significance to
mortgage markets: One is redlining, in which mortgage lenders
discriminate against minority neighborhoods, and the other is pricing
discrimination, in which lenders charge minorities higher loan prices
than they would to comparable nonminority borrowers.

The Federal Reserve has been vigilant in identifying and stopping such
abuses, and we remain committed to vigorous enforcement of the
nation’s fair lending laws.

We currently co-chair, with the Department of Justice, an interagency
task force to promote robust fair lending supervision and enforcement.

Government policies, both microeconomic and macroeconomic, have an
important role to play in restoring the health of the housing sector.

However, government can only be part of the solution; in the remainder
of my remarks I will discuss what others can do, including potential
homeowners themselves.

Financial preparedness and homeownership

One lesson of the past few years is that the desire to own a home is not
enough.

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Although many foreclosures resulted from job loss or other economic
hardships, others occurred because people bought more of a house than
they could afford, took out a loan that was not appropriate to their
circumstances, or did not manage their resources well.

Future homeownership must be built on a more solid foundation.

And while much of the responsibility for building that foundation must lie
with lenders and with regulators, consumers must do their part as well by
acquiring the information and financial knowledge they need to make
sound decisions.

Operation HOPE has made this point frequently and forcefully.

Effective financial education – aimed at both youths and adults – can
provide people with the knowledge they need.

Some of the skills that prospective homeowners need are relatively basic –
for example, knowing how to shop for the lowest interest rate and fees,
understanding the difference between a fixed-rate and an adjustable-rate
mortgage, and, very importantly, knowing how to find trustworthy
information and advice.

More generally, the decision to buy a home must be consistent with a
family’s longer-term objectives, needs, and resources.

Good financial planning – including effective budgeting, adequate
saving, and sensible investing – can help families maintain
homeownership while also pursuing other important objectives, such as
preparing for retirement or financial emergencies.

And financially informed households will have a better chance to build
wealth, reducing – in the case of minority households – the large wealth
gap that exists between minorities and other groups.

At the Federal Reserve, we appreciate the benefits to families of acquiring
basic information and skills about managing their money.

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But we see another important advantage of financial education, which is
that an economy with financially knowledgeable households is likely to
be stronger, more equal, and more stable.

As such, we all gain from efforts to increase financial literacy.

Although basic knowledge about money management and decision
making is extremely useful, it is not practical, of course, for everyone to be
a financial expert.

Sometimes a professional can help, and people should not be afraid to
seek advice at appropriate times.

For example, an individual may be involved in buying a home – a
complex and intimidating experience for many people – only once or
twice in a lifetime.

That’s why advice from a housing counselor at the right point in the
process can make all the difference.

Nonprofit organizations can help prospective homeowners assess their
readiness to purchase.

And, by providing useful information about how to search for a home,
apply for financing, handle home maintenance, and prevent delinquency,
these nonprofits can help aspiring homebuyers find the right home and
maintain their mortgage payments.

We have also seen that counseling can help consumers who are facing
delinquency or default.

Borrowers in trouble who receive foreclosure counseling are relatively
more likely to subsequently become current on their mortgage, receive a
loan modification, and, ultimately, keep their home.

Financial preparedness is important not only for prospective homebuyers.

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It ought to be a lifelong undertaking, starting with children and
teenagers.

Organizations around the country – including Operation HOPE – help
people across a range of ages develop their skills.

Despite, or perhaps because of, the broader economic challenges we face,
it now seems to be a time of creativity and innovation in this field.

We are seeing experimentation, knowledge sharing, public-private
collaborations, “bottom up” community-driven approaches, and stateand
local-government efforts to promote family financial security and
opportunity.

More generally, community organizations like Operation HOPE have
played an important role in helping low-income and minority
communities weather the storm of the past few years.

Besides promoting financial literacy and providing counseling (and
sometimes credit) for homebuyers, community organizations have
helped build small businesses through investment and technical
assistance.

Organizations such as NeighborWorks America (and as an aside, Federal
Reserve Governor Sarah Bloom Raskin currently chairs its board) have
been leaders in fighting the blight in neighborhoods with high rates of
foreclosure.

Unfortunately, just as families have been hurt by the financial crisis and
recession, so have many community-based organizations.

These groups face the daunting task of finding new sources of capital and
investment in a constrained financial environment.

Some organizations have begun to retool their operations and develop
new markets, products, and strategies to better serve the financial needs
of consumers and communities.

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P a g e | 49

Among other goals, they are developing strategies to foster responsible
homeownership, which they see as an important building block for
stronger communities.

To return to where I began, after a long and difficult period, we are seeing
welcome signs of improvement in the housing market.

An improving housing market will in turn aid the economic recovery
while strengthening neighborhoods and increasing the financial
well-being of families.

Our recovery must be broadly felt to be complete, and families and
communities that were already struggling before the crisis must be
included in that recovery.

As Dr King is widely quoted to have said, “We may have all come on
different ships, but we’re in the same boat now.”

The Federal Reserve will continue to do what we can to support the
housing recovery, both through our monetary policy and our regulatory
and supervisory actions.

But, as I have discussed, not all of the responsibility lies with the
government; households, the financial services industry, and those in the
nonprofit sector must play their part as well.

In that spirit, I would like to close by expressing my appreciation and
admiration for the work that so many of you are doing to restore our
neighborhoods and to help individuals and families regain a solid
financial footing.

Thank you.

_____________________________________________________________

P a g e | 50

Gerri Walsh
Statement for the Record for Senate Special
Committee on Aging Hearing
Chairman Kohl, Ranking Member Corker and Members of the
Committee:

The Financial Industry Regulatory Authority (FINRA) appreciates the
opportunity to submit this statement for the record of the Committee's
hearing to examine fraud among senior investors.

Our comments focus on the outreach and educational initiatives FINRA
has underway to protect all investors—including seniors—from falling
victim to financial fraud.

FINRA and the FINRA Investor Education Foundation

FINRA is the largest non-governmental regulator for all securities firms
doing business with the public in the United States.

FINRA oversees nearly 4,345 brokerage firms and about 162,410 branch
offices, and more than 635,140 registered securities representatives.

We touch virtually every aspect of the securities business—from
registering and educating industry participants to examining securities
firms; writing rules; enforcing those rules and the federal securities laws;
informing and educating the investing public; providing trade reporting
and other industry utilities; and administering the largest dispute
resolution forum for investors and registered firms.

FINRA believes that investor education is a critical component of
investor protection—and that we are uniquely positioned to provide
valuable educational information and tools to retail investors.

Over the last decade, we have worked hard to develop a strong investor
education outreach program.
_____________________________________________________________

P a g e | 51

We produce alerts, interactive tools and educational content to help
investors make wise financial decisions.

Our BrokerCheck tool, for example, provides investors with a quick way
to check a broker's disciplinary and professional background.

Encouraging people to take this simple step before doing business—or
continuing to do business—with a broker is part of our greater
commitment to protecting investors.

In 2003, FINRA created the FINRA Investor Education Foundation,
currently the largest foundation in the United States dedicated to investor
education.

The FINRA Foundation seeks to provide underserved Americans with
the knowledge, skills and tools necessary for financial success throughout
life.

To date, the FINRA Foundation has approved approximately $73 million
in financial education and investor protection initiatives through a
combination of educational and research grants, as well as targeted
projects managed directly by the FINRA Foundation.

How FINRA Protects Older Investors

At FINRA, we serve every U.S. investor, from newlyweds planning to buy
a home to parents saving for a child's college education to seniors
depending on a secure retirement.

Over the past five years, we have been keenly focused on issues impacting
older investors, especially those at or approaching retirement.

For example, in September 2007, FINRA issuedRegulatory Notice 07-43,
which highlighted certain issues common to many older investors
—including suitability, senior- or retirement-specific credentials or
professional designations, high-pressure sales seminars and diminished
capacity.

_____________________________________________________________

P a g e | 52

The Notice reminded broker-dealers of their obligations in this area and
provided examples of industry best practices.

That same year, FINRA's Member Education and Training Department
launched the first in a series of webcasts to help registered representatives
and other frontline brokerage firm employees learn about their
compliance obligations when working with senior customers.

Topics in this free educational series include Senior Investor Issues:
Diminished Decisional Capacity, Senior Investor Suitability
Considerations and Supervisory Considerations for Working with
Seniors—and are available atwww.finra.org/Industry/Issues/Seniors.

In 2008 and 2010, FINRA joined with other regulators to issue findings
and guidance on firms' practices relative to senior investors.

More recently, at the beginning of 2011, FINRA issued its Annual
Regulatory and Examination Priorities Letter, which reiterated that the
protection of vulnerable customers, including senior investors, continues
to be a high regulatory priority—and that one area of particular focus is
the use of certifications and designations that imply expertise,
certification, training or specialty in advising senior investors.

And in November 2011, FINRA published Regulatory Notice 11-52:
FINRA Reminds Firms of Their Obligations Regarding the Supervision
of Registered Persons Using Senior Designations to remind firms of their
supervisory obligations regarding the use of certifications and
designations that imply expertise, certification, training or specialty in
advising senior investors.

In addition to educational outreach to regulated firms and registered
personnel, FINRA has also increased our efforts to fight fraud and, to that
end, established several programs to help root out bad actors and help
consumers protect themselves.

In early 2009, we created the Office of the Whistleblower, and later that
year, also established the Office of Fraud Detection and Market
Intelligence (OFDMI).
_____________________________________________________________

P a g e | 53

Through this office, staff with expertise in fraud detection and
investigation can provide a heightened review of potentially serious
frauds.

OFDMI's mission is to ensure that allegations of serious fraud received
by FINRA in the form of complaints, regulatory filings and other sources
are subjected to a heightened review.

OFDMI serves as a centralized point of contact on fraud issues, within
FINRA and externally with other regulators and the public.

The creation of OFDMI has expedited fraud detection and investigation,
by pursuing matters as far as possible and by referring cases that fall
outside of FINRA's scope to the appropriate authorities.

Investor Protection Campaign

One of the major initiatives of the FINRA Foundation aims to reduce
investor susceptibility to fraud.

Launched in 2008, the Investor Protection Campaign (IPC) is an
innovative, research-based, multi-faceted effort intended to help investors
understand how they might be susceptible to investment fraud and to
replace risky investment behaviors with fraud detection and prevention
behaviors.

Armed with research around investment fraud victims and fraudster
tactics, as well as the field-tested Outsmarting Investment
Fraud curriculum and related resources, the program has achieved the
following results to date:

- public television distribution of the award-winning
documentary, Trick$ of the Trade: Outsmarting Investment Fraud,
with 760 airings on 172 public television stations in 76 television
markets across 31 states since September 2010, reaching an estimated
51 million households of consumers age 50 and older;

_____________________________________________________________

P a g e | 54

- in-person and direct-mail distribution of more than 100,000 DVD
copies of the documentary and over 300,000 Fighting Fraud
101 brochures;

- delivery of more than 640 presentations in conjunction with national,
state and local partners that have reached more than 33,000 investors
nationwide;

- training of 40 percent of Better Business Bureau affiliates to deliver
the curriculum in local communities;

- "live" fraud prevention counseling to almost 28,000 investors through
outbound calls from a network of Fraud Fighter Call Centers; and

- creation of a Financial Fraud Research Center and release of a white
paper that comprehensively examines what is currently known about
retail financial fraud.

The campaign builds upon FINRA Foundation-funded research unveiled
in July 2006 that shattered the stereotypes of senior investment fraud
victims, revealing a fraud victim profile that was counterintuitive in many
respects.

Instead of being isolated, frail and gullible, fraud victims tended to be
married, college-educated males with above-average incomes and
above-average levels of financial literacy.

The research further identified the sophisticated and highly effective
influence tactics that fraudsters use to carry out investment scams.

These findings forced regulators and senior citizen advocates alike to
rethink how best to approach the challenge of equipping older investors
with the tools and information they need to thwart fraudsters touting
investment scams.

In 2007, the Foundation conducted extensive due diligence to develop a
program to meet these challenges, coordinating closely with one of the

_____________________________________________________________

P a g e | 55

lead social scientists on the 2006 study, Doug Shadel, director of AARP's
Washington State office.

Adopting best practices recommended by the Organization for Economic
Co-operation and Development (see OECD,Examining Consumer
Policy: A Report on Consumer Information Campaigns Concerning
Scams (December 20, 2005)), we structured the Investor Protection
Campaign to focus less on shortterm, information-led "warning"
strategies and more on a longer term, skills-based "educating" strategy
backed by significant research and resources.

In 2008, the FINRA Foundation launched the Investor Protection
Campaign, seeking to protect all investors, especially those over the age
of 55, from investment fraud by helping them to recognize their
vulnerability to financial fraud, to identify persuasion tactics and to take
simple steps to reduce risky behaviors.

The centerpiece of the campaign is a field-tested persuasion resistance
curriculum, Outsmarting Investment Fraud, which we developed in
consultation with an array of experts in psychology, marketing and fraud.

Designed to be flexible (with half-hour and hour-long versions available),
the curriculum typically features a moderated presentation with video
clips and hands-on learning activities that covers some of the most
common tactics employed by fraudsters:

- Phantom Riches—dangling the prospect of wealth or enticing
investors with something they want but can't have. "These oil wells
are guaranteed to produce $6,800 a month in income."

- Source Credibility or Authority—building credibility and trust by
claiming to be an expert. "I've been in the business for 20 years, hold
the 'XYZ' credential and wouldn't offer an investment that doesn't
make money for my clients."

- Social Consensus—leading the target to believe that other savvy
investors have already invested. "This is how 'Famous Person' got his

_____________________________________________________________

P a g e | 56

or her start. I know it's a lot of money, but I'm in—and so is my mom
and half her church. Everyone agrees it's worth every dime."

- Reciprocity—manipulating human tendencies to return one favor
with another, often used to prospect clients at free meal seminars and
build a relationship. "I'll give you a break on my commission if you
buy now—half off" or "You came to my seminar last week, let me
come to your home to discuss more opportunities."

- Scarcity—creating a false sense of urgency by claiming an offer is
limited, either by time, quantity or audience. "There are only two
units left, so I'd sign today if I were you" or "Only a select group of
investors will be able to get in on this deal."

The steps investors can take to avoid fraud and to separate fraudulent
offers from legitimate opportunities boil down to two words: ask and
check.

We arm investors with questions to ask about both any investment they're
considering and the individuals who tout it—and we show them where to
turn to independently verify the answers they get.

Our curriculum has been field-tested twice using treatment and control
groups—first to determine the extent to which our workshops reduced
susceptibility to fraudulent sales pitches, and then to assess both impact
and persistence over time.

In each instance, investors who had participated in one of our persuasion
resistance workshops prior to being pitched on a new investment
opportunity were half as likely to agree to receive materials about the deal
compared with a control group (who had not yet been exposed to the
campaign's messaging).

In 2009, we produced an hour-long documentary, Trick$ of the Trade:
Outsmarting Investment Fraud, modeled specifically after
the Outsmarting Investment Fraud curriculum.

_____________________________________________________________

Monday November 26 2012 - Top 10 Risk Management News

Monday November 26 2012 - Top 10 Risk Management News

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