Regulatory Developments for Risk Management Presented by Bob Cumberbatch Date 14 October 2010

Regulation

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22 September Systemic risk The good, the bad and the ugly ■The whole system is interdependent and interconnected  Built upon confidence  Can this be modelled?  Is it like forecasting the weather? ■Why was Canada not impacted?  Not one Canadian bank went bankrupt  Not one Canadian bank needed rescuing  Was it luck?  Was it their market regulation?  Was it their approach to investment? ■Why were some banks badly impacted?

22 September Regulatory tsunami It’s hard to keep up

22 September Regulations Opportunity or threat – How do you see them? ■Opportunity ■Threat – the 5 stages of regulatory acceptance 1.Denial  “That’ll never happen?”; “They have two hopes…”; “It won’t apply to me… will it? 2.Anger  “Why me? It's not fair!”; “Who is to blame?”; “This will cost £m” 3.Bargaining  “Yes, but…”; “I have a waiver”; “I’ll be ready by…” 4.Depression  “What is the minimum I have to do”; “What is everyone else doing” 5.Acceptance  “It's going to be okay”; “I can't fight it, I may as well prepare for it.”

22 September The global financial crisis Now it’s about avoiding a recurrence  G20 devised a 92 step action plan to prevent a recurrence  Basel have proposed measures to strengthen liquidity management  Committee of European Banking Supervisors (CEBS) have proposed measures to strengthen liquidity management  National regulators have implemented measures to strengthen liquidity management: –FSA UK –CSSF Luxembourg –APRA Australia

22 September Strengthening liquidity risk management It’s about avoiding a recurrence of Lehmans  Principle cause was capital inadequacy due to exposures to illiquid assets  Significant exposure to US & UK mortgage business  Lost the market’s confidence making raising capital impossible and its income payments slowed  UK relied upon US parent for funding  2,985 business entities went bankrupt

22 September Changing the scope of risk management Now it’s about avoiding a recurrence  It is not simply about avoiding risk  It is about taking calculated risks by understanding them and preparing for them –Ignorance is risk  Risk management will become: –More forward looking –Enterprise wide –Data hungry –Processing hungry –Qualitative and quantitative

22 September Basel III

22 September Basel III Timetable

22 September Liquidity risk The measurement and management of liquidity risk; 10 key drivers 1.Wholesale funding 2.Intra-group liquidity 3.Intra-day liquidity 4.Cross-currency liquidity 5.Retail funding 6.Off-balance sheet liquidity 7.Franchise stability risk 8.Marketable assets 9.Non-marketable assets 10.Funding diversification

22 September Retail funding For example  Identify retail deposit liabilities and categorise them by value, maturity, estimated speed of outflow, product type, interest rate and other factors  Assess behaviour of these liabilities under normal market conditions and under defined stress scenarios  “Funding is likely to be stickier when retail deposits are covered by deposit protection schemes” Northern Rock branch before and after the Government’s promise to guarantee customers' savings (Telegraph Sep 07)

22 September Strengthening liquidity risk management – UK “Dear CEO” letter from FSA  Letter sent to CEOs 13 Jan 2010  New regime effective 1 December 2009  CEOs requested to confirm their readiness to the FSA by 12 Feb 2010: 1.New systems and controls have been successfully implemented 2.Plans are in place to ensure accurate reporting when these requirements go live later in 2010

22 September Strengthening liquidity risk management “Dear CEO” letter from FSA – they will be checking  A cross-section of sample of firms will be checked for: –the firm’s current and Board-approved liquidity risk management policy; –Board minutes and papers setting out and agreeing the firm’s liquidity risk appetite; –terms of reference for all risk committees dealing with liquidity; –copies of all relevant liquidity risk management reports and management information (MI); –liquidity stress testing policy, including full descriptions of the methodology, all assumptions supporting and informing stress testing and examples of the reports and MI produced and used by management; and –the current Board approved Contingency Funding Plan.

22 September What’s happening now?

22 September What does this mean?

22 September Strengthening liquidity risk management How we can help  Instrument reference data  Independent evaluations  Business entity service

22 September Independent Evaluations from Interactive Data 18 Questions?

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