risk management presentation july 9 2012

8/22/2019 Risk Management Presentation July 9 2012

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International Association of Risk and ComplianceProfessionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750www.risk-compliance-association.com

Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the week's

agenda, and what is next

George LekatisPresident of the IARCP

Dear Member,

According to the European Economic and Social Committee (EESC),international accounting standards were designed to protect theinterests of investors and markets: the focus must now be on the publicinterest.

The role of the IASB a private body needs to be rethought, as doesits function in laying down accounting rules, which should be far simpler

and readily and clearly comprehensible.Uh-ohUh-oh againWhat? Redesign the accounting standards and rethink the role of theIASB?

According to the EESC, the European Union must use every possiblemeansto step up its action within the G-20, the OECD and the FATF(Financial Action Task Force) to eradicate opaque tax jurisdictions asquickly as possible and to oblige Member States to combat the crimeoriginating in many of these jurisdictions.

Read our Number 6 below for more.Welcome to the Top 10 list.

International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
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A.Basel I I ICRD 4: Impact and stakesIntroductory speech by Mr Christian Noyer,

Governor of the Bank of France andChairman of the Board of Directors of theBank for International Settlements, at theAutorit de contrle prudentiel (ACP)conference, Paris, 27 June 2012.

B.Anand Sinha: IT and governance inbanks some thoughtsAddress by Mr. Anand Sinha, DeputyGovernor, Reserve Bank of India at the

Program for Independent Directors of Banks organized by IDRBT,Hyderabad

Stephanie Martin, Associate General Counsel

Mobile payments

Before the Subcommittee on Financial Institutions and Consumer Credit,Committee on Financial Services, Washington, D.C.

Last year, Monitoring indicators for intradayliquidity management - consultative document

Intraday liquidity can be defined as funds that are

accessible during the business day, usually toenable financial institutions to make payments inreal time.

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Synthesis of the Comments from the Call forEvidence of the Internal Market and Services

DirectorateGeneral on the fundamentalreview of the FINANCIALCONGLOMERATES DIRECTIVE

The Call for Evidence for the FundamentalReview of the Financial ConglomeratesDirective (hereafter "FICOD"), which wasannounced in February 2012, aimed atengaging interested stakeholders with the debate

Credible deterrence: here to stay

02 Jul 2012 - Speech by Tracey McDermott,acting director of the Enforcement andFinancial Crime Division at the FSAsEnforcement Conference

Tax and financial havens

OPI N ION of the European Economic and Social Committeeon Tax and financial havens: a threat to the EU's internal market.

The European Union must use every possible meansto step up its actionwithin the G-20, the OECD and the FATF (Financial Action Task Force)to eradicate opaque tax jurisdictions as quickly as possible and to obligeMember States to combat the crime originating in many of these

jurisdictions.



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Celebrating Independence Day atthe White House

In each of the past three years,President Obama has markedIndependence Day with acelebration at the White Housefeaturing a concert, organized bythe USO, to honor members of the U.S. military and their families.

Fahad Almubarak: Brief review of financialdevelopments in Saudi Arabia

Speech by His Excellency Dr Fahad Almubarak,Governor of the Saudi Arabian Monetary Agency(SAMA), marking the Seventh Anniversary ofBlessed Allegiance Pledge to the Custodian of theTwo Holy Mosques King Abdullah bin Abdulaziz,Riyadh.

"We affirm that it is imperative to break the viciouscircle between banks and sovereigns."

At the Euro area summit on 29 June, 2012, heads ofstate or government decided to:

- Establish a single banking supervisory mechanism run the by the

European Central Bank; and once this meachnism has been created;

- Provide the ESM with the possibility to inject funds into banksdirectly.



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Statement by the Chancellor of the Exchequer, RtHon George Osborne MP, on LIBOR

Check against delivery

[Note: The London Interbank Offered Rate(LIBOR) is the average interest rate estimated byleading banks in London that they would becharged if borrowing from other banks]



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NUMBER 1

Basel II I CRD 4: Impact and stakesIntroductory speech by Mr Christian Noyer,

Governor of the Bank of France andChairman of the Board of Directors of theBank for International Settlements, at theAutorit de contrle prudentiel (ACP)conference, Paris, 27 June 2012.

Ladies and gentlemen,

I am delighted to welcome you today to thisnew conference organised by the Autorit de

contrle prudentiel (ACP).

This morning, the conference will be dedicated to the impact and stakesof the Basel II I reform and, this afternoon, to the supervision of businesspractices in banking and insurance.

I would like to thank all the participants for the interest they have shownin these crucial exchanges between regulators, supervisors and marketparticipants.

This conference is being held against the backdrop of an economic andfinancial environment that remains very difficult, characterised inparticular in Europe by the ongoing sovereign debt crisis.

Many questions surround the future of the European banking system,which has already undergone major transformationsin the recent periodwhile significant changes in its prudential framework and theorganisation of its supervision are currently being reviewed.

Far from putting on the back burner questions concerning Basel I I I andits application in Europe, that is to say CRD IV and its project to create asingle rule bookfor European banks, I believe, on the contrary, thesedevelopments underscore the importance of better understanding thecurrent reform and taking time to reflect, in order to ensure that the new



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framework for banking regulation and the distribution of supervisoryresponsibilities in Europe will deliver all their expected benefits.

Before leaving you to discuss in greater detail the impact and stakes of the

Basel I I I reform, I would like to make a few remarks on this topic inrelation to the current environment.

1. Basel I I I and CRD IV represent a quantitative and qualitativeleap aimed at addressing the shortcomings highlighted by thecurrent financial crisis

First, I believe that it would be useful to rapidly place the Basel I I I reformin its context, in order to fully understand its scope.

Basel I I I is first and foremost a response to the financial crisis that startedin 2007.

This crisis and the subsequent wave of shocks to the banking system havenot merely resulted in a temporary loss of output for the major advancedeconomies.

They have also had a lasting impact on employment, industrialproduction, the confidence of investors and households, and needless to

say on public finances, which make crisis exit even more difficult.

In response to these developments, the international community adoptedin 2009, under the impetus of the G20, an ambitious reform programmeincluding Basel II I, which is a key element for the banking sector.

Indeed, a banking system that is more robust as a whole and capable ofabsorbing major shocks is vital to avoid the repetition of such chainreactions in the future.

In this respect,despite the delay in the reform agenda in the United States,Europe must clearly press forward: the credibility of our banks and oureconomies is at stake.



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Basel II I is naturally based on Basel I I which establishes the currentcapital adequacy rules.

However, Basel I I I goes furtherthan merely changing and updating the

existing rules.

Basel I I I indeed considerably strengthens the capital requirementsthatbanks must meet, but this reform is more extensive in that it significantlyenhances the prudential framework: in addition to capital requirements, itestablishes liquidity requirements, and a leverage ratio is set to beintroduced in the medium term.

From this point of view, Basel I I I is a far-reaching reform of bankingregulation.

Furthermore, and most importantly, I believe that Basel I I I is a majorstep forward in that it leads to a much closer interaction than has been thecase to date between the individual supervision of banks, known asmicroprudential supervision, and the overall supervision of the bankingand financial system, or macroprudential supervision.

This broader view of banking supervision, taking account of all its facets,translates into a number of provisions and notably introducesadditionalcapital buffers(a capital conservation buffer, a countercyclical buffer and

a buffer for systemically important financial institutions) in excess of theregulatory minimum.

Basel II I therefore represents a quantitative and also a qualitative leap.

Given the magnitude of the changes to be made, Basel I I I has majorrepercussions on market participants, who must adapt to this newenvironment.

These repercussions are both anticipated and desirable, but thepotentiallynegative consequences of this reform must be kept to aminimum.



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In this respect, many associated risks were highlighted during its draftingand even more so recently, due to the current economic and financialdifficulties.

These included the risk of a rise in the cost of credit or of a credit crunch.

Hence, the impact and stakes of Basel I I I must be carefully analysed andaddressed.

2. The difficult economic environment stresses the importanceof implementing Basel I I I in an appropriate manner but doesnot call into question the rationale of the reform

Without playing down the potential risks associated with the

implementation of Basel I I I, to which the ACP pays close attention, Ibelieve that this reform can be successfully implemented.

Allow me to mention some reasons for this conviction and offer someavenues for actions:

First, French banks, which have complied with Basel 2.5 rules sinceDecember 2011, are in a strong position to meet the new capital adequacyrequirements when they come into force.

Moreover, French banks are ahead of the Basel I I I schedule.

Currently with Core Tier 1 capital ratios of over 9%, the main Frenchgroups demonstrate their ability to meet the European Banking Authoritydeadline of 30 June 2012.

They should also fully comply with the new Basel I I I requirements by2013.

The ACP is closely monitoring credit institutionspreparations for Basel

I I I. By doing so, any problems can be identified at an early stage andissues relating to its implementation can be addressed, which I believe isessential for a smooth transition.



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More generally, in addition to the individual monitoring of bankspreparation, coordination between supervisors and the players concernedis also important to ensure a clear understanding of the rules and identifyany questions relating to the reform and their potential consequences.

The ACP liaises on a regular basis with the profession on all prudentialmatters.

Indeed, todays conference is a prime illustration of this.

It is alsoessential to closely monitor and take into account the impact ofthe new regulations on the financial system and the economy and toassess the different interactions in order, if necessary, to deal with theunforeseen consequences of Basel I I I.

In this respect, the ACP, which maintainsclose links to the Banque deFrance and operates under its aegis, is naturally particularly attentive toand involved in all these matters.

This is why we are accompanying the prudential reform with moregeneral and macroeconomic reflections on the financing of the economy,and in particular on credit developments and the relationship betweenbanking regulation and monetary policy.

The new liquidity ratios therefore cannot be applied as they stand as theydo not take into account all their consequences and interactions beyondthe prudential objectives themselves, which include in particular thefunctioning of the interbank market, the level of intermediation or theconditions of monetary policy implementation.

I therefore believe that the work underway on the calibration of theseratios is of the utmost importance in order to properly manage all theconsequences of these new rules.

Before handing the floor to Danile Nouy, Secretary General of theAutorit de contrle prudentiel, I would like to conclude with a few wordson recent developments in Europe.



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You are aware of my commitment to full harmonisation in Europe: thissingle rule book is the only way to achieve a truly efficient singlemarket.

You are also aware that the negotiations between the European Counciland Parliament might reintroduce the national options that theCommission had removed.

They may also, under a compromise text, render partly redundant andineffective the responsibilities of supervisors of home and host countries,as well as those of micro-prudential and macro-prudential supervisors.

In this context, I believe that the creation of a banking union is to besupported.

It would be a major development for banking supervision in Europe,which would bring numerous benefits and would enable us to efficientlyaddress the current difficulties.

Such a development would most likely have very positive consequences inthat it would be a step towards greater European harmonisation.

Naturally, the benefits of such a reform would be more far-reaching but

such questions go beyond the scope of todays conference.

Questions regarding the impact and stakes of Basel I I I will already giveample food for thought in the rich debates and discussions this morning.

I wish you all a fruitful conference.



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Anand Sinha: IT and governance in banks some thoughtsAddress by Mr. Anand Sinha, Deputy Governor, Reserve Bank of India atthe Program for Independent Directors of Banks organized by IDRBT,Hyderabad

Shri Sambamurthy, Director, IDRBT; Shri Prabhakar, Chairman andManaging Director, Andhra Bank, Shri Rao, Managing Director, SBH,Shri Siva Kumar, member of faculty, IDRBT, distinguished fellows ofIDRBT; other members of the faculty; and directors on the Boards ofbanks. Wish you all a very good morning.

Independent directors are looked upon by both the stakeholders andregulators as important contributorsto the value additive and ethicallypositive oversight of executive management activities.

The organization of this programme, by IDRBT and its Director, Mr.Sambamurthy, which focuses on IT governance, Information Security andthe role of Board therein, is very timely as these factors have assumedcritical importance in the sphere of corporate governance in general andbank governance in particular.

While talking about this programme organized by IDRBT, it would beappropriate to recall, in brief, that this institution, conceptualized in 1994and established in 1996 by the RBI to function as a centre for research anddevelopment in banking technology, has been commendably striving tomeet its objectives.

It has to its credit several achievements like launch of StructuredFinancial Messaging System (SFMS) and National Financial Switch(NFS) management; besides publication of guidance on best practicesand a number of research papers on topics of contemporary relevance tothe Indian banking industry.

Now, with the reviewed and redefined goals, the Institute is all set tosupport the banking I ndustry, by working at the intersection of bankingand technology, mainly in the areas offinancial networks andapplications, electronic payments and settlement systems, security



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technologies for the financial sector, financial information systems andbusiness intelligence.

I am sure the institute will continue to enrich the banking Industry in the

times to come through its good work.

Corporate governance

Coming to the theme of this programme, I would dwell, first of all, on theconcept of governance.

At the core of corporate governance is the principle of fiduciary duty,centered on oversight of management functioning in order to optimizestakeholder interests, within the limits of legal and regulatorycompliance.

This had its origin and basis in the need to balance the powersofexecutive management and the interests of diffused owners, i.e.shareholders, through an oversight process.

This dominant view of governance comes from Agency theory, whichemphasizes monitoring and control functions.

In this perspective, directorsresponsibilities take two forms: ensuringaccountability to minimize downside risks and enabling managerialentrepreneurship to reap upside potential.

Over a period of time, the optimization of shareholders interest objectivehas broadened to include strategic efficiency and social responsibility.

Connotation of oversight has changed and expanded, to mean effectiveleadership in guiding the management in strategic decisions, creation ofsuitable structures and processes for effective implementation and

monitoring of managerial performance; and ensuring compliance withlaws and regulations.



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The scope of oversight has undergone further change with impliedinclusion of an ethic that transcends strict response to regulations.

This interpretation of the meaning of governance and role of the Board

hasgained greater currency in the wake of some big ticket events likecollapse of Enron, WorldCom, H IH insurance, and, in the aftermath ofthe recent crisis, where a large part of the blame was attributed, inter alia,to unethical conduct by banks and market participants.

Over all, the concept of governance has come to signify strategicleadership support and objective oversight by the Board to ensureoptimized resource utilization, effective compliance and robustmanagement.

It is in this overall context of governance that IT governance has evolvedas an area of great contemporary interest.

Information technology has grown from a mere enabler to an essentialcomponent of business processes in the banking industry whereinformation and data are considered most valued resources.

IT is a critical asset, not simply in enabling organizational success butalso in providing opportunities for competitive advantage.

IT and Indian banking

Banking in India, as all of us know, has traversed a long way from thedays of manual work processes to mechanization, followed by wordprocessing on standalone PCs and onto IT based applications and so on.

As things stand today, it would be difficult to imagine a bank of anysignificance which does not have some or most of the key processes beingrun on IT based applications.

Most of the customer related functions in banks, be it account opening,transaction processing or account and data maintenance, are all run on ITenabled systems.



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It is the reach and capacity of information technology that has facilitatedbanks to transcend the limitations of, geographical spread, burgeoningtransaction volumes and, to an extent, human resources.

Banks are expanding their size and services to cater to fast increasingcustomer needs through technology enabled payment systems, internetbased access and innovative service delivery modes.

Other important business activities of banks such as participation insecurities, currency and money markets, besides compliance functionslike reserve maintenance, regulatory reporting etc. are all havingprocesses heavily dependent on information technology.

Even in case of internal work processes having large component of

manual processing, dependence on computers and IT basedcommunication mechanism is increasingly felt.

Overall, banks are dependent on IT based systems for almost all of theiractivities, although the level of sophistication and refinement in suchsystems may vary from bank to bank or across activities or bankingIndustry segments (commercial banks, cooperative banks etc.).

Reasons for this are not far to seek.

Technology has become essential component for customer related andmarket related activities and participant banks cannot meet therequirements imposed by timelines or volumes without leveraging ontechnology.

Even for backend and internal work processes, cost and time constraintsare pushing banks to lean upon technology.

It may not be possible to store and retrieve huge amounts of customer

data, transaction data and business information, but for the power oftechnology based systems.



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More so, the globalization, competition and compliance requirementsmake it imperative for banks to increasingly use IT based platforms andapplications for most of their activities.

It has become necessary for banks to use modern marketing as well ascustomer service tools to survive in a competitive environment; whichinvolve large scale data collection, analysis and efficient communicationwhich are not possible without the help of IT.

IT and financial inclusion

IT has a great role to play in furthering the financial inclusion drive,involving expansion of banking access to remote locations in a costeffective way.

Reaching banking to the excluded segments has been the focus ofregulatory agenda and many initiatives have been taken in this regard.

Of the 74,414 villages with a population of more than 2000 identified asunbanked, 74,199 (99.7 per cent) villages have already been provided withbanking services,on the back of concerted efforts of the banking fraternityencouraged by the Government and Reserve Bank of India.

In the next stage, it has been proposed to cover unbanked villageswith population less than 2000.

Considering the vast geographical expanse of the country, such a gigantictask would not be possible at all without the help of technology.

Technology has the potential to cut down the costs, bring down thebarriers and make the financial inclusion a viable business proposition.

Financial inclusion, apart from its social welfare enhancing role, should

make a lot of business sense for banks in as much as they can get a largestable pool of retail deposits which will contribute very significantly to therobustness of the individual banks and to financial stability at thesystemic level.



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Additionally, there would be small value but large volume of lending andother business.

What is constraining the full realization of this business potential is the

comparatively large transaction costs.

Several technological efforts and innovations have been made forincreasing the reach which has reduced the transaction costs.

However, much more needs to be done to make the financial inclusion anattractive and profitable business for banks.

IT in banking concerns

While the increased deployment of IT certainly has its own benefits interms of enabling banks to meet the business requirements and enhancetheir service delivery capacity, such IT usage and dependence, however,bring in some new challenges and concerns.

These challenges keep on getting more complex and qualitativelydifferent, as technology keeps on evolving rapidly.

For instance, technologies like cloud computing bring in advantages and

efficiencies along with new risks which have to be managed.

Any delay in adoption of new technologies would only let the competitionpass by the laggard institutions.

Cloud computing is an innovative concept which enables participants toleverage on collaborative sharing of resources, which not only bringsdown costs but also facilitates the participants to concentrate more ontheir core activities, leaving the management of I T resources to theservice providers.

This facility, by making the sophisticated applications affordable, has thepotential to enable even the marginal players to make use of thetechnology and develop their businesses.



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However, this being a new technology data integrity and confidentialityseem to be a major concern at this stage.

Further, if too many participants rely on a single service provider, it may

lead to a risk of over-concentration inasmuch as the failure of the serviceprovider will be catastrophic.

Banks will have to assess the pros and cons of new technologies and putin place adequate safe guards while adopting them.

As regulator and supervisor of the banking system in I ndia, inter alia, itsmany other roles, RBI is concerned about the soundness of the financialsystem in general and banking system in particular.

While IT usage contributes to efficiency, it brings, along with it, certainissues such as, issues of technology selection with strategic, financial andcompliance considerations; process management to ensure cost effectiveand timely service delivery; security of customer and business data ataccess, storage and retrieval level, as also the accuracy of data andinformation for internal and external reporting.

Important issues and concerns in this context have been flagged by RBIin the IT vision document 201117 and the recent Monetary Policy

statement (April 2012).

These concerns mainly revolve around the areas of governance,information security and MIS/ reporting and banks have to addressthese issues, on priority.

Technology and information security

Information security is an area that needs constant and continuingattention, considering, particularly, the operational risks associated with

the use of technology.



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Security and integrity of data, communication and storage has acquiredchallenging dimensions as all of these activities are carried out overtechnology enabled systems.

Internet and remote access are necessities today, while threats throughthese modes come in newer forms each day.

Privacy and confidentiality of customer as well as business data are atstake.

Denial of service, disruption, permanent data loss and even datamanipulation are risks that cannot be ignored.

The IT management systems and processes in banks, therefore, have to

be robust enough to meet these challenges effectively, on continuingbasis.

Any lapse in this regard can lead to several kinds of risks to the bank, itscustomers as well as other market participants, depending on the size andsignificance of the institution as well as magnitude of risk event.

Regulatory reporting and MIS

Another area of significant importance to the top managements,regulators and shareholders is the quality and efficiency of data reporting.Indian banking, even today, has housekeeping, M IS and reportingprocesses which are largely interspersed with manual intervention.

This has implications for the quality, consistency and timeliness of data,with the risk of subjective interpretation, manipulation and delays,leading to potential adverse consequences in many forms.

Even where the information collection and submission process is largely

IT based, process design itself has to be in sync with information andreporting requirements.



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The top management, Board, regulators, the shareholders and customersmay not get correct or timely information and disclosures due toinadvertent or deliberate action on the part of those compiling orsubmitting information.

There have been instances of process design facilitating manipulation ofdata, with serious implications.

So, it is imperative that information systems are designed and managed ina way that data and information are efficiently and accurately compiledand reported.

Automated data flow (ADF) initiative by RBI is a step in this direction.

Banks are being exhorted to ensure ADF implementation at the earliest,not only as a matter of regulatory comfort but also in their own interest.

Benefits for banks in such implementation are many.

One, reduction in the number of procedures and sub-processes inprocuring information, leading to enhanced efficiency on cost and timeparameters.

Two, more efficient internal monitoring, review and managerial decisionmaking, reducing the scope for misreporting.

Three, accurate and timely regulatory reporting leading to reduced risk ofadverse regulatory action and timely support for course correction, whererequired.

I would urge the Independent Directors to provide an oversight in theirbanks to this project so that the complete switchover to ADF is achievedin a timely and efficient manner.

Regulatory compliance and single view of informationAs we all know, banking regulation across the globe is being tightened inthe wake of recent financial crisis.



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Both Basel I I, which, for large banks, focusses on internal processes formeasuring and managing risks and, Basel I I I, have enhanced the need forcontinuous monitoring of data on several parameters to ensurecontinuing, rather than point in time compliance.

There are new regulatory provisioning requirements as well, which can becomplied with, only by proper data collection, compilation, and analysisand reporting.

It is mandated that business decision making and regulatory reportingprocesses use the same data and information.

Any lapse in this regard is increasingly being viewed adversely by themarkets, customers, shareholders and regulators.

It may, in fact, become highly time and cost intensive proposition forbanks to collect, compile and report on the basis of voluminous data ondiverse parameters through processes having manual interventions.

The time criticality, even for internal reporting, is further amplified, bythe fact that in a severely competitive market environment, quickinformation dissemination and decision making is an absoluterequirement for growth and, may be for survival itself.

Risks and opportunities have to be recognized quickly, followed by swiftaction to avoid being swamped by events.

So, it is in the interest of all stakeholders to ensure that there is a singleview of information and data in the banks with automated/ straightthrough processing for internal and external reporting.

As recent events have shown, ability to identify the risks in time andmanage them effectively differentiates successful institutions from the

unsuccessful ones.

To survive in the fast changing environment, institutions are required tohave complete handle on the risks they face which helps them in takingcorrective action.



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For this they need to have robust IT systems which can collect riskinformation from across different business segments and differentgeographical locations in a timely and comprehensive manner.

The systems should be able to process data and provide necessary reportsto the management to enable quick action where necessary.

Building of such systems involves significant investments and, therefore,requires, a dedicated focus from the Board and the top managements.

Weak and ineffective governance has been a very important contributoryfactor to the current crisis and clearly this is an area which needsconsiderable improvement.

In this context, maintaining robust risk information technology (IT )systems that can generate timely, comprehensive, cross-geography, andcross-product information on exposure is of vital importance and,therefore, needs closer attention of the Board.

Let me quote from a recent G-30 document Toward EffectiveGovernance of Financial Institutionswhich succinctly emphasises therole of risk information technology in financial Institutions and thecritical role Boards can play in implementing them.

Ultimately, the quality of risk information that FI boards andmanagement teams receive depends largely on the quality of theorganizations IT systems.

Ideally, FIs need risk IT systems that can gather risk information quicklyand comprehensively, producing global, cross-product, cross-legal entityestimates of their exposures promptly.

Unfortunately, few global FIs are capable of this.

They are hampered by legacy systems that are inefficient, costly, andburdensome.

Boards are well advised to press management to maintain and where



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necessary increase investment in risk IT systems, both as a short-termpriority and as part of a long-term strategic initiative.

Risk IT investments must not be sidelined by necessary upgrades to

finance and customer data systems.

Instead, they must be integrated and prioritized.

Given that for many large firms, necessary investments will run to severalbillion dollars over the coming years, boards may need to rethink theirapproach to evaluating managements investment in core IT spending.

While some firms still have the audit or risk committee review ITinvestments, others have established committees dedicated to I T

oversight.

That is an interesting trend, and worth further consideration.

IT governance

Coming to I T governance, there are two ways to look at it.

One is to view it as a sub-set of overall corporate governance and the other

is to see it as a distinct concept/ discipline by itself.

There are arguments on both sides, but the former looks moreappropriate.

Corporate governance, with its holistic definition covering fiduciary,strategic leadership/ guidance and ethics related roles, is inclusive of ITstrategy and IT management oversight as IT systems and information areas valuable as any other resource for a bank, and may be more.

Dependence on these resources and systems make it imperative thatthese are managed and governed through an appropriate IT governanceframework (ITG).



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There are several alternative ITG frameworks (over 14 as per a 2009research), with many more evolving, suitability of which depends on theoverall ecosystem in which a bank operates.

In an early research on governance, IT governance mechanisms werecategorized into three: decision making, alignment processes andcommunication approaches.

Some ITG frameworks like Cobit (Control Objectives for Information andRelated Technologies), COSO (Committee of Sponsoring Organisationsof the Treadway Commission) and ITIL (Information TechnologyInfrastructure Library) provide guidance from micro level onwards.

AS 8015, the Australian standard for ICT governance, is targeted at

strategic level.

However, there is no single dominant approach for ITG. Some recentresearch has conceived ITG as having:

(i)Defensive or

(ii)Strategic approach where defensive approach refers to preventing ormitigating disasters while strategic approach aims to create sustainableshareholder value by either reducing costs or creating a sustainablecompetitive advantage.

In practice, holistic understanding of legal, regulatory, business andinternal ethic environment contexts should determine the suitability ofthe framework for a particular bank.

What is important is that ITG achieves its applicable objectives, bothdefensive and strategic, and enhances the overall corporate governance ina bank, by facilitating maximization of benefits and minimization of risks

emanating from IT deployment.

It focuses specifically on information technology systems, theirperformance and risk management.



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Role of board and independent directors

While we have discussed about governance in general and, I T governancein particular, one aspect which remains to be mentioned is the importance

of the role that independent directors on the Boards of banks are expectedto play.

Banks, basically, are organizations which mainly have roles ofintermediaries as well as financial market participants.

Their soundness and stability has potential impact much beyond theirown well being.

So, the role of Board in banks is more focused on compliance,organizational ethic and strategic guidance.

In the Indian banking context, Boards have a lot to contribute to strategicITG as the IT implementation is still evolving and structures for robustoversight on acquisition, deployment and management of IT systems andinformation security mechanisms need closer attention andstrengthening.

Investments required in acquisition, maintenance and regular

upgradation of technology systems in banks, along with the need to haveappropriate human resource, are significant, and, therefore, requireappropriate management controls and accountability framework under awatchful Board.

Regulations and laws do contribute, but do not constitute the whole storyabout governance, as recent global events have shown.

Governance landscape, including IT governance, has much more to becovered by quality of Board oversight than mere compliance with the

written word.

Good governance should be, and is often, the result of endogenous factorsthose that emerge from within, not without.



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Governance is not about what decisions get made that is managementbut it is about who makes the decisions and how they are made.

Independent directors, with an assumption of higher level of objectivity

and professionalism, are expected to guide the banks in a manner that ourbanks as well as customers reap the fruits of IT deployment while therisks are contained through appropriate assessment and mitigationmeasures.

Aristotle said it is better for a city to be governed by a good man thangood laws.

Board and its Directors can contribute towards governance, including ITgovernance, more than the law under which it is constituted, and that is

what is expected of them.

In conclusion, I would exhort the independent directors to perform theirrole at a level expected of them, so as to benefit the I ndustry, economyand society and once again convey my thanks to IDRBT for organizingthe program.

I wish the program great success. Thank you.



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NUMBER 2

Communications with the Public

The Federal Reserve Board will be involved in many rulemakings toimplement the Dodd-Frank Wall Street Reform and Consumer ProtectionAct of 2010.

During the rulemaking process, meetings will take place between theBoard and the public--representatives of bank organizations, consumergroups, trade associations, researchers and academics--that allow theBoard to gather information and help educate the public on matterssubject to agency rulemaking.

The meetings contribute to an informed rulemaking process.

To help ensure the process is conducted in a fair, open, and transparentmanner, Federal Reserve staff who communicate with the public on anymatter subject to potential or proposed rulemaking under the Act willsubmit a written summary of the meeting or other contact.

Contacts and meeting summaries will be posted below.

Summaries will generally be posted on Monday afternoons.

Categories:

- Systemic Designations, Enhanced Prudential Standards, and BankingSupervision and Regulation

- Derivatives Markets and Products

- Interchange Fees

- Payments, Settlement and Clearing Activities and Utilities

http://www.federalreserve.gov/newsevents/reform_systemic.htmhttp://www.federalreserve.gov/newsevents/reform_systemic.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_payments.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_interchange.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/newsevents/reform_derivatives.htmhttp://www.federalreserve.gov/news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- Consumer Financial Protection

- Resolution Framework

Stephanie Martin, Associate General Counsel

Mobile payments

Before the Subcommittee on Financial Institutions and Consumer Credit,Committee on Financial Services, Washington, D.C.

Chairman Capito, Ranking Member Maloney, and members of theSubcommittee, thank you for inviting me to appear before you today totalk about the regulation of mobile payments.

The evolution of technologies that enable consumers to conduct financialtransactions using mobile devices has the potential to affect their financiallives in important and new ways.

In discussing "mobile payments," I am referring to making purchases,bill payments, charitable donations, or payments to other persons usingyour mobile device, with the payment applied to your phone bill, chargedto your credit card, or withdrawn directly from your bank account.

Beyond payments, mobile devices have the potential to be useful tools in

helping consumers track their spending, saving, investing, and borrowing,and in making financial decisions.

These technologies also hold the potential to expand access tomainstream financial services to segments of the population that arecurrently unbanked or underbanked.

That said, the technologies are still new, and there are important issues toconsider, such as the reliability and security of these technologies.

With any type of payment system, including mobile payment systems,

regulators have two key concerns:

(1) Whether consumers are protected if something goes wrong, such as anunauthorized transaction; and

http://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_resolution.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htmhttp://www.federalreserve.gov/newsevents/reform_consumer.htm


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(2) Whether the system provides appropriate security and confidentialityfor the transmission and storage of payment instructions and the personalfinancial information of consumers.

A legal framework exists to address the payment activities of insureddepository institutions--collectively, "banks."

This framework includes consumer protection statutes, such as theElectronic Fund Transfer Act (EFTA) and the Truth in Lending Act, aswell as the bank supervisory process.

To the extent that nonbanks are involved, whether and the degree towhich federal or state statutes and rules are applicable depends on thenonbank's role in the transaction and the specific provisions of theparticular statute or rule.

Even so, many of our payments laws were initially drafted long beforemobile payments (or the devices that facilitate them) were evenenvisioned.

Therefore, those laws may not be well-tailored to address the full range ofmobile payment services in the marketplace.

The Evolution of Payments

The U.S. payments landscapehas changed dramatically in recent

decades and continues to evolve rapidly.

Electronic payments made through payment card networks and theautomated clearinghouse system have become increasingly prevalent,and now represent about four out of every five noncash payments in thiscountry.

Virtually all check payments, which have been declining in number sincethe mid-1990s, are now cleared electronically rather than in paper form.

The cumulative effects of automation and innovation have driven severalwaves of new banking and payment services that continue to improve theefficiency and effectiveness of our payment systems.



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The evolution of mobile payments encompasses a combination ofcontinued advances in hardware, software, and payment systems.

These advances include contactless payments, online banking, mobilephones (particularly smart phones) and other remote devices,applications, and the convergence of Internet or e-commerce and mobilecommerce.

At its core, however, a mobile payment, like any other type of payment,results in money moving between bank accounts--for example, from aconsumer's checking account at the consumer's bank to the merchant'schecking account at the merchant's bank.

This is true even if the payment initially is charged to a consumer's bill forservices or to a prepaid balance held by a nonbank.

For example, in the case of a mobile payment charged to a phone bill,ultimately, the consumer pays the bill with funds from an account at abank.

In the "back end" bank-to-bank settlement of these payments, the fundswill typically travel on existing payment "rails," such as the automatedclearinghouse system or a card network.

The settlements between bank accounts over these existing systems aresubject to the statutes, rules, or procedures that are already in place.

There are, though, new and evolving aspects of mobile payments--typically related to the consumer interface and non traditional paymentor settlement arrangements--which can involve new types ofintermediaries or service providers.

A new interface is not a new phenomenon.

The evolution of consumer payments has gone from paper checks todebit and credit cards to home banking through personal computers andis now moving to smart phones and other remote devices, which havesome of the processing and communications characteristics of homecomputers.



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In the case of bank-offered payment products, a new communicationchannel to an existing payment mechanism, such as a smart phoneconnection to the debit card or credit card system, generally does notresult in changes to the basic rights afforded to consumers under those

systems or to a bank's responsibility to ensure the security of thatcommunication channel.

However, consumers may make payments in new ways using the servicesof entities that have not traditionally been in the payments business.

For example, a consumer may settle a mobile payment transaction via abill from a telephone company.

Making payments through nontraditional arrangements may change thelegal protections related to the purchase, depending on the details of the

arrangement and the applicable federal or state statutes and rules.

Regulation of Mobile Payment Services Offered by Banks

As I stated, a legal framework to address the activities of banks already isin place, and to the extent that existing laws and rules apply, federal bankregulators have the tools to ensure that banks offer mobile paymentservices in compliance with the consumer protection provisions of thoselaws and rules.

For example, electronic debits or credits to certain consumer assetaccounts would generally be covered by the error-resolution, disclosure,and other provisions of the EFTA.

The application of this act and most other federal consumer laws to bankor nonbank mobile payment transactions, including the extent to whichtransactions involving prepaid balances are covered, is subject to therulemaking and interpretive authority of the Consumer FinancialProte

risk management presentation july 9 2012

Documents