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The eight-month period has closed for comments by financial institutions on the new loan loss accounting standard first outlined in November 2009 by the International Accounting Standards Board (IASB). Although all of the feedback has not yet been reviewed, the IASB believes it has made substantial progress since it first published its exposure draft. The Expert Advisory Panel (EAP), a group of credit risk experts appointed to consider the operational implications of the new model, met for the sixth and final time in Beijing on June 21–22. The IASB’s original proposals would require banks to estimate expected credit losses when a loan is first made, using those figures to calculate a credit-adjusted interest rate, with the difference between that and the actual interest rate feeding into a loss reserve over time. But banks and regulators have complained that calculating expected loss over the life of a loan or portfolio using their existing infrastructure could be operationally difficult. The current incurred loss standard prohibits the building of reserves until the occurrence of an actual loss event, and politicians and regulators have argued that the standard exacerbated the effects of the financial crisis by preventing early recognition of losses.

The IASB has published a summary of the EAP’s discussions, and one of the group’s main achievements has been to prove that the calculation of expected interest revenue and expected credit losses can be decoupled without affecting the basis of the proposed model—an advantage because banks would make those estimations on the basis of data currently stored in separate systems. Another difficulty is how to revise loss expectations on open portfolios to which new loans are added. This is a challenge because it is hard to assess whether the new estimate should relate to the old loans that were already in the portfolio, or to the new loans that have been added, or to both. The EAP has suggested a weighted average life approach to allocating expected losses on open portfolios, which means banks would not need to be concerned about keeping the population of loans intact, which should limit some of the operational difficulties in implementing a new standard. The IASB last week revised its deadlines and plans to complete the replacement of all three elements of International Accounting Standard 39 in the second quarter of 2011, having originally planned to do so in the first quarter.

On July 23rd, eStandardsForum completed a comprehensive review of Spain’s compliance with the 12 Key Standards for Sound Financial Systems. In 2006, the Financial Action Task Force (FATF) conducted a mutual evaluation of Spain's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime. In its published findings, the FATF rated Spain as being only partially compliant with Recommendation 5 (on customer due diligence), designated as a core recommendation by the Task Force. A country needs a largely compliant or compliant rating for the core recommendations to be deemed as having in place a proper functioning AML/CFT regime. However, in its 2008-2009 Annual Report, the FATF names Spain as one of the countries that has committed to adopting the organization's 40 recommendations and 9 special recommendations. Consequently, Spain’s level of compliance for the Anti-Money Laundering/Combating the Financing of Terrorism standard was revised from Enacted to Intent Declared. Following this review, Spain’s score in eStandardsForum Standards Compliance Index changed from 59.17 to 56.67.

The Committee of European Banking Supervisors (CEBS) released its summary report of stress tests performed on the European banking system. The exercise included a sample of 91 European banks, representing 65% of the European market in terms of total assets, in coordination with 20 national supervisory authorities. It was conducted over a two-year horizon until the end of 2011. The stress test focused mainly on credit and market risks, including exposures to European sovereign debt. Results show that only seven of 91 banks failed to meet its capital requirements under the test scenarios. However, the two-month long test exercise has been under close scrutiny by investors, with growing skepticism in the markets that the parameters of the stress scenarios were insufficiently tough.
The CEBS identified a capital shortfall of €3.5bn at the seven banks that failed to reach the pass mark of a 6 percent tier one capital ratio. Five of the seven banks that failed were Spanish savings banks, or cajas. Germany’s Hypo Real Estate and Greece’s ATEbank were the only non-Spanish institutions to fail. Among the near-fails, which analysts say could come under pressure to raise capital soon, were Italy’s Monte dei Paschi at 6.2 percent, Allied Irish Banks, at 6.5 per cent, and Germany’s Postbank, at 6.6 per cent.
A handful of some of Europe’s vulnerable banks announced raising capital of a combined €1.3bn, just hours before regulators divulged the results of the test, although two of them—National Bank of Greece and Slovenia’s NLB—both passed. The third, Cívica, a caja based in northern Spain that failed the test, secured €450m of convertible bond finance from JC Flowers, the U.S. buy-out firm that has a record of investing in troubled banks, and which marked the first time a caja had sought outside capital following a liberalization of the law governing the public sector institutions. Germany also upset the pan-European exercise at the last minute by saying that its banks would be disclosing the full details of sovereign debt holdings only on a voluntary basis. Six of 14 German banks tested—including Deutsche Bank, Postbank, HRE, and DZ Bank—did not publish a breakdown of their sovereign holdings.

A Public Information Notice at the conclusion of the IMF’s Article IV Consultation with Romania has been issued, as well as publication of the staff report. Of particular note, according to the staff report, a Fiscal Responsibility Law (FRL) was approved by Parliament at the end of March, which is designed to strengthen fiscal discipline, provided political commitment exists. The FRL should help to improve medium-term fiscal planning, budget formulation and execution, transparency of the budget process, and accountability. Key elements include fiscal rules such as expenditure ceilings and fiscal balance limits that will guide the government in setting expenditure envelopes. Over the economic cycle, the fiscal balance has to be in surplus or in balance, thus requiring the government to run a prudent fiscal policy in good times to compensate for any deficit in recessionary times. Reporting requirements will allow the government to analyze fiscal policy implementation, adjust policy accordingly, and provide accountability and transparency. In its current form, various data are gathered and presented but analysis is lacking. Half-year and annual reports on the economic and budget outlook should provide a platform to analyze developments and suggest changes, if any. The establishment of an independent Fiscal Council should help raise accountability.

A Public Information Notice at the conclusion of the IMF’s Article IV Consultation with Singapore has been issued, as well as publication of the staff report. Of particular note from the IMF’s Executive Board, Directors agreed that Singapore’s strong supervision and risk management systems had been crucial in safeguarding financial stability in the global downturn. They endorsed the plans to unwind by year-end the blanket deposit guarantee and move to a system with higher deposit coverage. The authorities’ approach will ensure international consistency among economies with strong linkages. Directors welcomed recent measures to contain risks in exuberant segments of the property market and encouraged continued close monitoring of the situation.
Directors also acknowledged the authorities’ rationale for promoting self-reliance over social welfare programs, reflecting society’s preferences. At the same time, they encouraged the authorities to adapt their approach over time as needed to preserve social and intergenerational fairness. Directors noted that because of the special features of Singapore’s economy, building strong foreign exchange and fiscal reserve buffers has been a central element of economic strategy which has served the country well. They considered that, over time, a slower pace of reserve accumulation could be expected given Singapore’s demographic profile going forward.

Standard and Poor’s has revised its outlook on Hungary from stable to negative after the collapse of talks with the International Monetary Fund and European Union. Moody’s Investors Service also has said it might lower the country’s grade. On July 17, the IMF and the EU suspended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The two institutions provided Hungary with a EUR 20 billion rescue package in 2008, which served to reassure investors. Standard and Poor’s stated that without a new EU/IMF program to anchor policy, Hungary would likely be faced with higher and more volatile funding costs, which could weigh on financial sector balance sheets, the public finances, and economic growth. Standard and Poor’s rates Hungary at BBB-, its lowest investment grade, and will lower Hungary’s rating if in the coming year it concludes that government policies are unlikely to result in a meaningful decline in public debt. A downgrade would reduce Hungary’s rating at Standard and Poor’s to junk for the first time since 1992, placing the country on a par with Azerbaijan and Romania. Moody’s rating for Hungary is two steps higher at Baa1.

The Securities and Exchange Commission (SEC) will allow asset-backed bond issuers to omit credit ratings from filings for six months to help them comply with new rules promulgated by the passage of the financial reform bill. The new legislation makes credit-rating companies vulnerable to lawsuits when underwriters include their assessments in documents used to sell debt. The law subjects ratings firms, such as Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings to what is termed expert liability, meaning they would face the same legal risks as accountants and other parties that participate in bond sales. Sales have stalled as the ratings firms balked at allowing issuers to include their rankings in public documents, and companies were considering alternatives to the public markets, such as selling in the 144a market, where sales are not registered with the SEC.

A Public Information Notice at the conclusion of the IMF’s Article IV Consultation with Cameroon has been issued. The staff report remains unpublished. Of particular note, Directors of the IMF’s Executive Board expressed concern about weaknesses in public financial management as reflected in the surge in unsettled government obligations and the use of the National Hydrocarbon Company to fund spending operations. They emphasized that it was critical to strengthen expenditure and cash management to maintain fiscal and financial stability, ensure effectiveness of public spending, and enhance budget transparency. Directors commended the authorities for their efforts to assess the nature and level of outstanding payment obligations and settle a sizeable proportion of these obligations. They called for continued progress toward establishing effective mechanisms to track expenditure flows through the budget execution process and preventing new accumulation of domestic arrears. Directors welcomed the steps being taken to address concerns about the viability of the 2010 budget. They encouraged the authorities to adopt resolute measures to close the remaining financing gap. In this regard, Directors considered it important to protect priority capital spending, make vigorous efforts to mobilize revenues, and gradually phase out fuel subsidies. They also stressed the need to avoid depleting the fiscal buffer of usable government deposits at the regional central bank.
Directors also emphasized that concrete measures were needed to tackle the structural impediments to growth. Addressing these challenges will require in particular improving the execution of public investment, making the business environment more attractive, strengthening governance and accelerating regional integration. In addition, improving the quality and provision of fiscal, financial, and balance of payments data will be crucial.

A Public Information Notice at the conclusion of the IMF’s Article IV Consultation with regard to Euro Area Policies has been issued, as well as publication of the staff report and a Selected Issues paper. Of particular note, the IMF’s Executive Board encouraged the authorities to strengthen economic governance of EMU to deliver the collective responsibility necessary for a well-functioning economic and monetary union, which would help prevent future crises. They welcomed the recent proposals by the authorities in areas including budgetary policies and competitiveness. Directors pointed to the need for better enforcement of budgetary discipline and the extension of effective surveillance over key structural reforms. Directors encouraged further progress in building the EU’s financial stability architecture. They welcomed the steps taken toward a more harmonized regulation and supervision of the EU financial system. The establishment of a core set of effective resolution tools would raise the scope for coordination in the resolution of cross-border institutions.
In the Appendix to the staff report, on the subject of audit powers by Eurostat over Excessive Debt Procedure-related statistics, the staff notes that the problems faced with regard to Greece went well beyond what could be tackled using the statistical monitoring tools available to the European Commission, which according to a European Council Regulation, does not have audit powers. To remedy this, the ECOFIN Council has agreed legislation to give Eurostat audit powers over Member States’ national finances. In specific cases where significant risks or problems with the quality of data have been clearly identified, Eurostat officials will have the right to see data from every level of government on execution of national budgets and the accounts of corporations, non-profit institutions, and other bodies that are part of the general government sector.

A Public Information Notice at the conclusion of the IMF’s Article IV Consultation with Kuwait has been issued. The staff report remains unpublished. Of particular note, the Executive Board agreed with the staff state that successful implementation of the authorities’ growth agenda would require progress in structural reforms. In this context, the passage of recent key laws, namely the Capital Markets Law, the Labor Law, and the Privatization Law is welcome. The authorities should move ahead with an efficient implementation of these laws and the amendment of other key legislation, particularly the Companies and Tender Laws. On the financial system, the oversight framework should be strengthened. Proper coordination should be ensured between the three regulatory agencies—the Central Bank of Kuwait, the Capital Markets Authority, and the Ministry of Commerce and Industry, particularly with regard to investment companies; and the crisis management, contingency planning, and resolution frameworks should be enhanced. The authorities’ plans to introduce an enhanced regulatory prudential structure over investment companies are welcome. On a separate issue, the staff considers that the household debt relief law, if promulgated, would undermine the financial culture. The law was passed by the National Assembly but rejected by the Amir. Targeted household debt relief could be implemented instead through the already existing Insolvency Fund.

Standard and Poor's has placed Cyprus on review for a possible downgrade. The country’s A+ sovereign credit rating could be cut within three to four months if the government fails to improve its finances. Cyprus has experienced a decline in revenue primarily from a downturn in tourism and real estate in 2009, which pushed its public deficit to 6.1 percent of GDP. Without corrective action, the shortfall could reach 7.1 percent in 2010, according to the European Commission. Cyprus’ debt as a percent of GDP has increased by about 25 percent of GDP over 2008-2010 because of fiscal and financial sector pressures. On July 9, the centre-left government failed to get parliamentary approval to increase the corporate tax rate to 11 percent from its present 10 percent, and to change tax laws on real estate. On June 24, Fitch reaffirmed Cyprus’ AA- rating, while Moody's rates Cyprus at Aa3. The island tapped the international bond market for €1.0 billion with a 10-year benchmark bond in February, and is considering a new Eurobond worth another EUR 1.0 billon around November.

With regard to the impact of the financial crisis on official statistics, in addition to statistics related to the financial crisis at the national and the EU level, the Interagency Group on Economic and Financial Statistics with the participation of the IMF, BIS, Eurostat, ECB, World Bank, and UNSC has started the process of creating a set of global indicators building on the European concept of PEEIs (Principal European Economic Indicators). Discussions at the international level center on the extension of the PEEIs, the improvement of techniques to identify turning points, and the development of an integrated view of business cycles, growth cycles, and acceleration cycles. At the EU level, a European Statistical System Action Plan on the accounting consequences of the financial crisis was created to ensure the consistency across time and countries of the statistical treatment of bank and other support operations in full respect of the ESA95 rules.
 Source: International Monetary Fund
CHINA (July 21):
The head of China’s largest credit rating agency has criticized western rating agencies for causing the global financial crisis, and stated that, as the world’s largest creditor nation, China should have a larger say in how governments and their debt are rated. Guan Jianzhong, chairman of Dagong Global Credit Rating, criticized Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings for being too close to the clients they are supposed to objectively assess. Last week, privately-owned Dagong published its own sovereign credit ranking in what it said was a first for a non-western credit rating agency. The results were very different from those published by Moody’s, Standard & Poor’s, and Fitch, with China ranking higher than the United States, Britain, Japan, France, and most other major economies, reflecting Dagong’s belief that China is more politically and economically stable than all of these countries. Mr. Guan said his company’s methodology has been developed over the last five years and reflects a more objective assessment of a government’s fiscal position, ability to govern, economic power, foreign reserves, debt burden, and ability to create future wealth. A wildly enthusiastic editorial published by Xinhua, China’s official state newswire, lauded Dagong’s report as a significant step toward breaking the monopoly of western rating agencies of which it said China has long been a victim. Dagong’s share of China’s fledgling credit rating market is around 25 per cent, while subsidiaries of the big three global agencies control most of the rest.

The Financial Stability Board (FSB) has launched a peer review of the implementation of the recommendations concerning risk disclosures by market participants that were made in the April 2008 Financial Stability Forum Report on Enhancing Market and Institutional Resilience. As part of this review, the FSB invites public input on the implementation of the recommendations. The financial crisis highlighted the importance to market confidence of reliable valuations and disclosures of the risks that are most relevant to market conditions at the time. The recommendations in the April 2008 report related in large part to disclosures about structured products and certain other risk exposures that were of concern to market participants in 2008. The review will focus on implementation of the recommendations by FSB member jurisdictions and by the major financial institutions located in those jurisdictions.
A template to collect information from national authorities was distributed to FSB members in June 2010, and the responses will be analyzed and discussed by the FSB later this year. The review is to be completed by January 2011 and the report will be published. As part of this review, the FSB welcomes feedback from investors, audit firms, financial institutions, industry associations, and other stakeholders on their practical experiences as users of the resulting disclosures or in implementing the risk disclosure recommendations. This could include comments on how disclosure practices at financial institutions have changed, areas where implementation has proven to be challenging, or initiatives that have been taken to improve disclosures. Suggestions are also welcome for possible future approaches to enhance the dialogue amongst investors, financial institutions, audit firms, standard setters and regulators about improved principles for disclosure and further improvements in risk disclosure practices. Feedback should be submitted by 10 September 2010 to fsb@bis.org under the subject heading “FSB Thematic Peer Review on Risk Disclosure.” Individual submissions will not be made public.

The IMF released a Public Information Notice regarding a discussion held by the Executive Board on lessons from the global financial crisis for central banks. Executive Directors agreed that a macroprudential framework integrating macroeconomic and systemic financial considerations is necessary to help preserve financial stability, and that central banks should play a primary role in macroprudential policies, even if they do not serve as the main financial regulator. Still, Directors believe maintaining price stability should remain as central banks’ primary responsibility; however, the setting of monetary policy should take into account systemic and financial developments and risks. Directors also agreed that payment and settlement systems should be improved in order to prevent and better manage future crises. In any case, central banks’ policy roles need to be better defined for acts of intervention in future crises. Directors encouraged central banks to cooperate with other international bodies and country authorities in setting their roles for maintaining systemic financial stability.

A Public Information Notice at the conclusion of the IMF’s Article IV Consultation with Sweden has been issued, along with publication of the staff report. Of particular note in the report are proposals to strengthen Sweden’s financial stability framework. According to the staff, the most fundamental need is to strengthen micro and macro supervisory capacity and to review the crisis management framework, including the authorities’ capacity to deal with possible strains in the financial sector. A reform initiative has just begun, with reviews by a government commission expected to be completed within two years. The key issues include: (i) the division of labor on micro and macro prudential regulations among the Ministry of Finance, the Riksbank, the Financial Supervisory Authority, and the National Debt Office; (ii) macro prudential tools; (iii) a bank resolution framework and a deposit insurance scheme; (iv) international reserve management; and (v) supervisory capacity building. Further, the 2006 FATF assessment report suggested some weaknesses in Sweden’s AML/CFT framework. Among several measures to address such concerns, Sweden implemented the third EU Money Laundering Directive on March 15, 2009, and the Financial Supervisory Authority issued new regulations and guidelines governing measures against money laundering and terrorist financing on May 15, 2009.

Moody's Investors Service has downgraded Ireland's government bond ratings to Aa2 from Aa1. The main drivers for the downgrade are: (i) the government's gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability; (ii) Ireland's weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit; and (iii) the crystallization of contingent liabilities from the banking system, as represented by a series of recapitalization measures and the need to create the National Asset Management Agency (NAMA), a government-created special purpose vehicle that is acquiring impaired loans from banks. Moody's has changed the outlook on the ratings of the government of Ireland to stable from negative as the rating agency now views the upside and downside risks as being evenly balanced at the current rating level. Moody's has also affirmed Ireland's short-term issuer rating of Prime-1 with a stable outlook. Ireland falls under the Eurozone's Aaa regional ceilings for bonds and bank deposits, which are unaffected by the Irish government's downgrade. Moody's has also downgraded to Aa2/stable outlook from Aa1/negative outlook the rating of NAMA, whose debt is fully and unconditionally guaranteed by the government of Ireland.

The Financial Action Task Force (FATF) has raised doubts about the efficacy of India's laws with regard to combating money laundering and terrorist financing. India was admitted as FATF’s 36th member last month, and in its most recent review of India’s laws, the FATF has identified fund transfers from foreign non-profit organizations (NPOs), counterfeiting of currency, drug trafficking, and extortion as major sources of concern. India does not maintain a unified database for NPOs, and statistics on the number of registered NPOs under the various statutes are not generally available. The government does estimate that there are approximately two million foreign and domestic NPOs operating in India. A review has not yet been undertaken of the NPO sector, as envisaged by the FATF standards, nor has there been effective outreach to NPOs by the central or state governments. The FATF also expressed doubts about the effectiveness of laws such as the 2001 Narcotic Drugs and Psychotropic Substances Act and the 2005 Prevention of Money Laundering Act, given that there have been no convictions under these laws to date. In addition, given India's vulnerability to terrorism and the large number of actual terrorist attacks per year, the number of terrorist-related Suspicious Transaction Reports (STRs) also appears to be extremely low, raising further questions about the implementation and effectiveness of the STR reporting obligation. Banks and financial institutions submit STRs to the Finance Ministry's Financial Intelligence Unit (FIU), which then forwards reports to other investigative agencies.

The IMF is seeking commitments by as early as November to boost its lending resources to USD 1,000bn from USD 750bn to build safety nets that could prevent financial crises. Instead of responding solely to crises with conditional loan packages, the IMF wants financing agreed in advance and specially tailored to individual countries facing an imminent liquidity crunch. The IMF’s Managing Director, Dominique Strauss-Kahn, stated that even when not in a time of crisis, a large IMF, likely to intervene massively, is something that could help prevent crises. South Korea, as this year’s president of the G20, hopes to convince its member countries of backing the increased funding at a summit in November. The G20 meeting in London in 2009 tripled IMF resources from $250bn. A U.S. official has said that Washington is sympathetic to improved safety nets but needed more details on the plan.

The recently-passed Dodd-Frank Act makes no specific reference to adviser oversight duties for the Financial Industry Regulatory Authority Inc. (Finra), but at least two of its provisions suggest that regulators could head in that direction. The legislation requires the Securities and Exchange Commission (SEC) to study the effectiveness of the different standards of customer care governing broker-dealers and investment advisers and, if necessary, write rules harmonizing the standards. SEC Chairman Mary Schapiro has reiterated her support for imposing a uniform fiduciary standard on brokers and advisers when giving financial advice, and welcomed the new rulemaking authority. But constraints on the SEC’s budget and time, exacerbated by scores of studies and new responsibilities created by the new law, make it likely that the commission will cede oversight of the fiduciary standard to Finra, at least regarding brokers and dually registered, or hybrid, advisers. Authority for expanding Finra’s jurisdiction over all advisers lies in Section 914 of the legislation. The 205-word passage requires the SEC to evaluate the adequacy of its oversight of investment advisers, make appropriate rule revisions, and recommend whether Congress should designate one or more self-regulatory organizations to bolster the SEC supervision and exam schedule. The law gives the SEC six months from the date of passage to produce the two studies, and no deadlines for writing new or revised rules.

At the conclusion of the IMF’s Article IV consultation with Honduras, the Executive Board noted that the global slowdown and domestic political tensions in 2009 had an adverse impact on the Honduran economy. This led to a sharp deterioration in macroeconomic imbalances, fueled in part by expansionary policies. Directors stressed that it will be necessary to take prompt measures to restore macroeconomic stability and support the incipient economic recovery, and to establish the conditions for sustained long-term growth. Given the large deterioration of the fiscal position, Directors recommended a strategy aimed at reducing the public sector deficit and improving the composition of expenditure. This will require continued strengthening of tax administration and expenditure management, and adopting a multi-year budgetary framework supported by prudent public debt management. A comprehensive reform of public enterprises and public pension funds will also be necessary to improve their efficiency. This strategy will help create fiscal space for higher public investment and social spending, and allow a timely response to adverse shocks.

To keep inflation under control and protect the international reserve position, Directors supported a tightening of the monetary stance. They underscored the need to halt central bank financing of the public bank. Directors noted that the de facto peg of the lempira to the U.S. dollar has been an important nominal anchor. Nonetheless, to safeguard competitiveness and strengthen the external position, Directors deemed appropriate considering a gradual increase in exchange rate flexibility, supported by fiscal consolidation, wage moderation, and a prudent monetary policy. Directors noted that the domestic financial system has weathered the crisis relatively well. They advised continued vigilance and a strengthening of the financial sector safety net. They welcomed the authorities’ intention to address the shortcomings identified in the 2009 Financial System Stability Assessment (FSSA), including by focusing supervision on controlling risks, effectively enforcing capital charges and provisioning requirements, and enhancing liquidity monitoring. They commended the authorities for their efforts to address deficiencies in their Anti-Money Laundering/Countering the Financing of Terrorism regime, and encouraged to further align it with international standards.

Directors expressed regret over the limited progress toward sustained long-term growth and poverty reduction and the reversal of economic reforms. They welcomed the authorities’ plan to develop a comprehensive reform agenda for the next four years. High priority needs to be given to reforms aimed at strengthening the public finances and the climate for business and private investment, including the framework for private-public partnerships.

At its July 14-15 meeting, the Basel Committee on Banking Supervision reviewed the design and overall calibration of the capital and liquidity frameworks, comments on its December 2009 consultation package, the results of its comprehensive quantitative impact study (QIS), and its economic impact assessment analyses. Based on this review, the Committee has developed concrete recommendations for completing its package of regulatory reforms. The Basel Committee's oversight body—the Group of Central Bank Governors and Heads of Supervision—will review the Committee's progress and recommendations at its upcoming meeting later in July. The Committee will present to the Central Bank Governors and Heads of Supervision concrete recommendations for the definition of capital, the treatment of counterparty credit risk, the leverage ratio, the conservation buffer, and the liquidity ratios. The Committee also reviewed proposals for the role of "gone concern" contingent capital in the regulatory capital framework and will issue shortly a proposal for consultation. It continues to assess proposals on contingent capital from a "going concern" perspective.
Mr. Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that "the Committee made significant progress at its meeting and remains fully on track to deliver a complete package of capital and liquidity reforms, including design and calibration, in time for the November 2010 G20 Leaders Summit in Seoul." The Committee has issued for consultation a fully fleshed-out countercyclical buffer proposal. The countercyclical buffer would be imposed when, in the view of national authorities, excess aggregate credit growth is judged to be associated with a build-up of system-wide risk. This will help ensure the banking system has an adequate buffer of capital to protect it against future potential losses. The Committee has already consulted on the capital conservation buffer, which was elaborated in the December 2009 reform package. The Committee also continues to review specific proposals to address the risks of systemic banking institutions. These include a "guided discretion" approach for a systemic capital surcharge in combination with other mitigating regulatory and supervisory measures. Comments on the countercyclical buffer proposal should be submitted by September 10, 2010 by e-mail to: baselcommittee@bis.org.

The Senate has passed the U.S. financial reform bill, entitled the Dodd-Frank Act, following passage by the House last month. After it is signed into law in the coming days by the President, the legislation will allow for, among other things, the establishment of a council of regulators to monitor economic risks; a new agency to police consumer financial products; and the setting of new standards for the way derivatives are traded. The legislation will undergo clarification—in places, after considerable study and periods of time—by 10 regulatory agencies that have the discretion to write hundreds of new rules governing finance. The Commodity Futures Trading Commission has designated 30 team leaders to begin implementing its expansive new authority over derivatives, and has asked for $45 million for new staff. The Federal Reserve, Federal Deposit Insurance Corporation, and Securities and Exchange Commission are also heavily tasked. In the private sector, J.P. Morgan Chase, one of the biggest U.S. banks by assets, has assigned more than 100 teams to examine the legislation.
A provision of particular note in the Act will require energy and mining companies registered with the Securities and Exchange Commission (SEC) to report payments to foreign governments for the extraction of oil, gas, and minerals on a country-by-country basis. Similar reporting requirements were passed last month for petroleum and mineral companies listed with the Hong Kong stock exchange (HKEx). Under the HKEx reporting requirements, oil and mineral companies applying to be listed on the HKEx must disclose significantly more details about their operations on their applications, including material taxes, royalties, and other payments made to governments on a country-by-country basis.

The World Bank’s new Access to Information Policy has taken effect, making more information available to the public, particularly on Board actions and projects under implementation. The policy, approved by the Board of Executive Directors in November 2009, is broadly based on information laws adopted by India and the United States, and moves away from an approach that spells out what information the Bank can disclose to a policy where the Bank can make public any information in its possession that is not on a clear list of exceptions. Much more information will be made available on key decisions made during project development and implementation, including decisions of project concept review meetings, project supervision missions, and mid-term project reviews. Most Bank information can be accessed on its website, and at more than 100 Public Information Centers around the world. For information not readily accessible on the website, information requests can be submitted at www.worldbank.org/wbaccess. The site links to a new tracking system that will automatically assign a case number to a request and will track and flag that request to the appropriate unit for response. Under the new system, the Bank will acknowledge receipt of a request within five working days and will normally provide a comprehensive response or, depending on a complexity of the inquiry, the status of the request within 20 working days. The new policy also introduces the right of appeal to address claims that access to information has been improperly or unreasonably denied under the new policy, or that there is a public interest to override certain policy exceptions that restrict the information requested.

The International Auditing and Assurance Standards Board (IAASB) has released an exposure draft on a proposed revised standard that addresses the external auditor’s responsibilities relating to using internal auditors’ work during an audit. The proposed International Standard on Auditing (ISA) 610 (Revised), “Using the Work of Internal Auditors,” aims to enhance the external auditor’s performance by providing a stronger framework for evaluating and using the work and assistance of an entity’s internal auditors. Related enhancements to the external auditor’s required considerations of the internal audit function are also proposed in ISA 315 (Revised), “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.” “Internal auditing standards and practices continue to evolve, as does the relationship between external and internal auditors,” said Prof. Arnold Schilder, IAASB Chairman. “Ensuring that global audit practices take account of these changes benefits both auditors and preparers. Through our revision of ISA 610, we believe external auditors will be better equipped to evaluate opportunities for effective coordination with internal auditors.”

On July 14th, eStandardsForum completed a comprehensive review of Australia's compliance with the 12 Key Standards for Sound Financial Systems. In October 2009, the Auditing and Assurance Standards Board issued revised and redrafted Australian Auditing Standards (ASAs) effective January 1, 2010. Per the text of the ASAs, compliance with the national standards enables compliance with the corresponding International Standards on Auditing. Consequently the compliance level for the auditing standard was increased from Intent Declared to Enacted. In the Financial Action Task Force (FATF) mutual evaluation, Australia was rated non compliant with two of the FATF's core recommendations. A country needs a largely compliant or compliant rating for the core recommendations to be deemed as having in place a proper functioning AML/CFT regime. However, in its 2008-2009 Annual Report, the FATF names Australia as one of the countries that has committed to implementing the organization's 40 recommendations and 9 special recommendations. Based on this information Australia's compliance with the money laundering standard was downgraded from Enacted to Intent Declared. Following this review, Australia's score in eStandardsForum's Financial Standards Index was unchanged at 69.17.

At the conclusion of the IMF’s Article IV Consultation with Ireland, the Executive Board considered that the authorities’ decisive measures to support the banking sector and advance fiscal consolidation have helped gain policy credibility and stabilize the economy. Recognizing that much progress has been made to strengthen the banking sector, Directors observed that a sizeable agenda remains. They welcomed the transfer of banks’ distressed property development and commercial real estate assets to the National Asset Management Agency (NAMA) and the complementary decision to raise banks’ capital targets. Going forward, the orderly disposal of NAMA’s assets will help restore the commercial property market. While mindful of the moral hazard risks, Directors noted that narrowly-targeted support measures for vulnerable homeowners would limit the economic and social fallout of the crisis.
Directors emphasized the need to strengthen the financial stability framework, and welcomed recent institutional changes to enhance regulation and the proposed new risk-based supervisory approach. They also encouraged an early action to introduce a special bank resolution mechanism, which would further strengthen the stability framework and add to the set of tools available to meet contingencies.
Acknowledging the authorities’ significant fiscal efforts to date, Directors underscored the importance of adhering to the further consolidation targets going forward. They noted that the authorities’ ambitious targets remained appropriate, but their achievement would require continued resolve. Directors agreed that the consolidation plan would benefit from greater specificity. Many Directors also encouraged the authorities to stand ready to adopt additional measures to reach the fiscal goals and retain hard-earned credibility in the event of unfavorable developments.
Directors encouraged the authorities to move further towards a medium-term budget framework. This could help provide the structure to reduce the uncertainties associated with the consolidation process. Directors also recommended that the authorities consider adopting a fiscal rule and establish a fiscal council to advise on risks underlying public finances. Such mechanisms could help enhance policy credibility now and in the future.

At the conclusion of the IMF’s Article IV consultation with Japan, the Executive Board welcomed the Fiscal Management Strategy recently announced, laying out a medium-term consolidation path. They generally agreed that adjustment efforts should focus on a gradual increase in the consumption tax, supported by comprehensive tax reform, limits on non-social security spending growth, and reforms to entitlement programs. The pace, timing, and composition of consolidation measures would need to be carefully planned, with special attention to their impact on consumption, investment, and growth. Directors commended the government for its plan to adopt a “pay-as-you-go” expenditure rule. Introducing a cap on public debt would help strengthen the credibility of the fiscal consolidation plans.

Directors considered the accommodative monetary policy stance appropriate, and welcomed various measures by the Bank of Japan (BoJ) to combat deflation and support growth. They encouraged the authorities to stand ready to take additional easing measures, if deemed necessary in response to weakening recovery or renewed deflationary pressures. In this regard, consideration could be given to extending the maturity of the funds supplying operations and broadening the range of asset purchases, while being attentive to moral hazard risks. Directors stressed that, given growing uncertainty, clear communication would be crucial, with a few recommending that the BoJ more explicitly link its intention to maintain policy accommodation to its inflation forecast, provided that financial imbalances remain absent.
Directors welcomed the authorities’ continued commitment to a market-determined exchange rate, which would help facilitate a rebalancing of growth away from exports. They noted the staff’s assessment that, following the sharp appreciation since the outbreak of the crisis, the yen’s current level is broadly in line with its longer-term equilibrium value. Nevertheless, carry trade activities and their impact on the exchange rate would need to be monitored closely. Directors noted that, while the profitability and capital base of the banking sector have improved, banks still face risks from a slow recovery and their sizeable securities holdings, as well as challenges in adapting to new global financial standards. It would therefore be important for supervisors to ensure that banks follow proper risk management; take appropriate steps to facilitate borrower restructuring; and stand ready, when necessary, to assist banks in strengthening their financial positions. Directors emphasized that the unprecedented size of required fiscal consolidation, including to address the challenges of population aging, brings to the fore the need for structural reforms to promote domestic demand-led growth. The formulation of the “New Growth Strategy” is a welcome step, entailing the development of potentially dynamic areas, such as energy, environment, health, and technology. This could be complemented by supply-side measures aimed at increasing employment, raising productivity in nontradable sectors, deregulating services, and encouraging more risk-based lending by private financial institutions.

The European Union will not reach agreement on new rules for the region's financial-services industry before the beginning of August, pushing final agreement on the legislation until September at the earliest. The European Parliament and the European Council, representing the EU national governments, have both passed versions of the legislation, but the two institutions are at odds over how much power to grant three new EU-wide regulatory agencies for banks, insurance companies, and securities firms. The Parliament wants the agencies to have strong authority to regulate large banks directly in the event of a crisis, while some EU governments, led by the U.K., want to preserve the powers of national regulators. Talks between the Parliament and the Council, brokered by the European Commission, have failed to reach an agreement on the remaining areas of difference. However, Parliament is willing, under certain conditions, to concede to a demand that the proposed banking regulator be situated in London. As it stands, Parliament legislation calls for all three bodies to be based in Frankfurt. On another point of contention, the Council is insisting on a safeguard clause giving national governments the right to ignore mandates from the new authorities that are found to impact national budgets.

The SEC has decided to pose a series of questions to companies, shareholders, and others about whether rule changes should be adopted regarding a fundamental issue of corporate governance: how shareholders exercise voting rights to hold corporate executives accountable. The wholesale review, open 90 days for public comment, is designed to see whether rule changes should be adopted that would clamp down on potentially manipulative practices by some large investors and require disclosures of conflicts of interest at proxy-advisory firms. Another potential change could allow companies to contact and communicate directly with shareholders. Currently most shareholders choose to hold their stock in "street name" and are identified to companies by the brokerage firm that holds their securities. Companies want the change so they can directly solicit votes and communicate with their shareholders. Some shareholder organizations have rejected a change, citing concerns over privacy. The SEC is also asking questions about whether many more votes are cast than actually exist. In 2006, the New York Stock Exchange, Wall Street's then self-regulatory body, reached settlements with four major banks in which they agreed to pay $2.35 million to resolve over-voting allegations.

Moody’s Investors Service has downgraded Portugal’s government bond ratings to A1 from Aa2. The two-notch downgrade reflects the rating agency’s following conclusions: (i) the Portuguese government’s financial strength will continue to weaken over the medium term, as evidenced by ongoing deterioration in the country’s debt metrics, such as debt to GDP and debt to revenues; and (ii) the Portuguese economy’s growth prospects are likely to remain relatively weak unless recent structural reforms bear fruit over the medium to longer term. The rating outlook is now stable, with the upside and downside risks evenly balanced. This rating action concludes the review for possible downgrade that Moody's initiated on 5 May 2010. Separately, Moody’s has also affirmed Portugal's short-term issuer rating of Prime-1 with a stable outlook. Portugal falls under the Eurozone's Aaa regional ceilings for bonds and bank deposits, which were unaffected by the Portuguese government's downgrade.