kpmg banking report 2009

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| rontiers in nance June 2009

rontiers in fnanceFINANCIAL SERVICES

or decision makers in nancial servicesJune 2009

The long roadto recoveryMaking it a reality

Major changes ahead

Making sense o regulation

Clarity and reality

The role o the auditorin nancial services

Jump start

Reviving the US nancial system

Confdence must return

An investment management perspective


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orewordrontiers in nance

June 2009

Brendan Nelson

Vice Chairman, KPMG in the UK

Global Chairman, Financial Services

The long road to recovery

The nancial services

sector like the global

economy as a whole

aces a long and

potentially bumpy road

to recovery. One o the

oundations or long term stability

should be regulatory reorm. While

regulation cannot eliminate all riskrom nancial markets, the old regime

was in need o some redevelopment.

Regulators in many jurisdictions are

struggling to ormulate new rameworks

which will prove robust and eective.

As yet, it is not clear that there is

agreement on basic principles.

Furthermore, solutions are likely

to dier between the banking,

investment management and insurance

sectors. I believe the audit proession

has much to contribute and hasty and

ill-considered action should be avoided.At the same time, the speed at which

new regulations may be brought in

means that rms do not have the luxury

o waiting until the dust has settled.

Some preparatory work has to start

now. In this issue we highlight this

rom a range o perspectives.

The US remains the engine o the

global economy, and so the success

o the Financial Stability Plan will be

crucial or us all. We look at some o

its key eatures and implications.

More generally, we recognize

recovery requires that trust in the

nancial services industry be rebuilt.

This is equally true in investment

management where there are

exciting opportunities ahead as

is the case in banking and insurance.

Also in this issue, we ocus on two

contrasting economies: Canada, where

the nancial services environment hasremained largely intact; and India, which

despite suering a battering rom the

crisis, is still on course or enviable

growth this year.

At KPMG, our member rms

work with leading nancial services

institutions across the world, providing

an opportunity to explore in detail how

companies are coping with these

turbulent times. A number o recent

KPMG surveys in investment

management, insurance and payments

also assist in oering valuable insights.On this journey to recovery, the

nancial services sector is going to

need all the insight and advice that is

available. I hope this issue o rontiers

in fnancegoes some way to meeting

that need.

Brendan Nelson

2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


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Contents | rontiers in fnance June 2009

In this issue

For your inormation

yi 2

Topics

Major changes ahead: Making sense

o regulation 4

Perspectives on regulation in banking,

investment management and insurance 8

Clarity and reality: The role o the

auditor in fnancial services 2

Jump start Reviving the US fnancial

system: The Financial Stability Plan 4

Economic turmoil: The US commercial

real estate perspective 7

Confdence must return: An investment

management perspective 8

Renewing the promise: Time to mend

relationships in investment

management 2

Act now: The implications o

Basel II revisions 22

Quietly prospering: Canadian

fnancial services 24

A glimmer o hope 28

Show me the money: Insights into

global payments 30

Addressing the trust gap:

Renewing confdence in the fnancial

services industry 34

Separating value: Getting the most

rom your disposals 38

Changing or the better 42

Getting ahead UCITS IV: Putting thepotential into action 44

Order returns An economic overview 46

Series

Emerging markets: India: A brighter

uture? 48

Insights

Updates rom KPMG member frms,

thought leadership & contacts 52

12

Topics: Clarity and reality: The role

o the auditor in fnancial services

18

Topics: Confdence must return:

Investment management

24

Topics: Quietly prospering: Canadian

fnancial services

48

Series: Emerging markets:

India: A brighter uture?

2009 KPMG International. KPMG International is a Swiss cooperative. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no client services.No member frm has any authority to obligate or bind KPMG International or any other member frm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member frm. All rights reserved.


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rontiers in nance June 2009 | For your inormation

yi...At your fnger tips

rontiers in fnanceonlineWith our audiencegrowing rapidly, we wantedto make rontiers in fnancemore accessible to you,our readers. The rontiersin fnanceteam is pleasedto bring you KPMGs rstonline magazine. Thisexciting new versionmeans you will be ableto read the latest editiono the magazine at the

click o a button! But not only will you be able to viewthe entire magazine, you will also be able to downloadindividual articles, share them with your colleagues, viewvideos and podcasts on various topics and keep up to

w section, rontiers

d regularly to addressnancial servicesgazine now ate.

here is no clear leader or levels ro

date with hot issues through our nesupplements. These will be updatespecic aspects o interest in the industry arena. Go to our online mawww.kpmg.com/rontiersinfnanc

Insights in Nigerian Banking

Tpreerred bank or SMEs(Small to Medium Enterprises).According to the 2009 edition o

KPMGs Nigerian Banking Industry

Customer Satisaction Survey, it is

evident that the SME market may

not be receiving the attention it

deserves rom banks in Nigeria.

This insightul report also

highlighted a progressive rate o

diminishing customer satisaction

m the larger corporate

respondents. Futhermore it goes

on to highlight opportunities or banks

in Nigeria to improve customer

satisaction and in turn, increase

customer retention and loyalty, a

hot topic we are seeing or nancial

services globally.

For more inormation go to

www.ng.kpmg.com

Focus on next practices,not best practices

Proessor C.K. Prahalad1,

one o the worlds most

infuential experts in corporate

strategy visited KPMG in Finlands

top executive seminar on strategy

in May in Helsinki. Prahalad revealed

that the key to creating value and

the uture growth o every business

depends on accessing a global

network o resources to co-create

unique experiences with customers,

one at a time.

He argued that the nature

o strategy has changed and the

management ocus has to be on

anticipating new business

opportunities and on creating

next practices, not best practices.

According to Prahalad, the

competitive arena is shiting rom a

product-centric view o value creation

to a personalized experience-centric

view o value creation and innovation.

Prahalad believes that competitive

advantage will depend on a rms

approach to business processes, that

can seamlessly connect customers

and resources and manage

simultaneously the needs or

eciency and fexibility. It will be a

race to provide a unique customer

experience at the lowest cost.

For more inormation contact:

KPMG in Finland www.kpmg.f/en

1. For urther reading: The New Age o Innovation Driving Co-Created Value through Global Networks,C.K. Prahalad, M.S. Krishnan, McGraw-Hill 2008.


2
http://www.kpmg.com/frontiersinfinancehttp://www.kpmg.com/frontiersinfinancehttp://www.kpmg.com/frontiersinfinancehttp://www.ng.kpmg.com/http://www.kpmg.fi/enhttp://www.kpmg.fi/enhttp://www.ng.kpmg.com/http://www.kpmg.com/frontiersinfinance


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For your inormation | rontiers in nance June 2009

Global Financial Forum

Taking stock andlooking aheadIn New York recently,The Foreign PolicyAssociation, ChathamHouse, and BritishAmerican Business,supported by KPMGInternational, organizedthe Global FinancialForum.

World economic leaders

gathered to discuss the

state o nancial services

and what is needed to move

orward. Christine Lagarde, The

French Minister or the Economy,

Finance and Employment pointed

out that what is unprecedented today

is not so much the consensus on a

need or stimulus, but rather the

consensus on a need or nancial

services regulation.

Lord Turner, Chairman Financial

Services Authority (the UK regulator),

highlighted three areas o regulatory

reorm needed; a macro-prudential

approach, capital reorm and a

mechanism to reverse the unding

o long term obligations by short

term risk.

President o the European Central

Bank, Jean-Claude Trichet, noted

the over-arching need to restore

condence in nancial services.

Some o these key themes are

discussed later in this edition.

For more discussion on regulation,

see page 4.

2009 frontiers in taxRestructuring, consolidationand government intervention

The 2009 issue o rontiers in tax,our sister title, looks at the impactsand consequences o the nancialcrisis and identies some othe longer term tax risks andopportunities.

T

hrough the global network

o KPMG member rms,

our colleagues take a orward-

looking view o the tax consequences

o major developments in the industry

such as the drat UCITS IV directive.

This is a major development in the

establishment o a single market in

mutual unds within the EU which

has wide-reaching eects.

Our colleagues look into recent

reorms and tax changes in the

Chinese insurance market which

give rise to interesting opportunities

or oreign investors. In addition a

recent trend in South East Asia sees

authorities taking a stricter line on

oreign investors using treaty networks

or cross-boarder transactions.

Finally, this issue discusses

proposed changes to indirect tax

or nancial services that could have

some unoreseen consequences or

the industry.

For urther inormation visit

www.kpmg.com/tax

Governance, riskand reportingDrat EC Directive orAlternative InvestmentFund Managers

I

n late April the European

Commission published new

legislation or the regulation o

Alternative Investment Fund Managers.

This ollows global calls or reorm to

risks taken by nancial institutions,

which have been linked to the credit

crisis1. The proposals would require

the alternative und managers, not the

unds, to register and seek government

authorization which would include

elements o reporting, governance

and risk management standards2.

Tom Brown, partner KPMG in

the UK noted while we can welcome

the directive rom the perspective o

supporting the industrys own

agenda o building good practice,

and while the better run hedge

unds will likely nd little change

rom many o the measures being

introduced, the real challenge is one

o implementation. Politicians need

to ensure that the political agenda

doesnt end up destroying the

European hedge und industry by

imposing sweeping changes that

are unworkable or unnecessary.

1. Hedge und managers warn on EU plans, www.t.com,April 29, 2009.

2. Hedge und managers warn EU rules will cripple their industry,www.t.com, April 30, 2009.



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rontiers in nance June 2009 | Topics

Brendan Nelson

MajorchangesaheadMaking sense o regulation

In some respects, the likely shape o the nancialservices industry ater the crisis may remain unclear.But one thing seems certain: the nature, scope andpurpose o regulation will change substantially.Politicians, regulators and treasury ocials acrossthe developed world are setting out proposals ora more robust and eective regulatory regime toimprove protection against uture crashes.

The ailure o the authorities

Responsibility or the crisis may

reasonably be shared among a

number o interests. Central bankers

declined to assume responsibility or

the growth o unsustainable asset

bubbles; governments ailed to tighten

policy when public nances allowed

and regulation ailed in its key task o

maintaining stability and condence

in markets and the nancial system.

The dangers o systemic risk

were ignored, and the need or

macro-prudential oversight orgotten.

As a consequence banks, especially,

are now coming under huge pressure

rom regulators to signicantly

improve their capital and liquidity

positions and demonstrate sound

and prudent management. A major

drive or regulatory reorm is already

under way. 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


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5

Topics | rontiers in nance June 2009



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6


Regulatory reorm

In the US, Treasury Secretary Tim

Geithner is calling or comprehensive

regulatory reorm: not modest repairs

at the margin, but new rules o the

game. The European Commissions de

Larosire report suggests the creationo a European Systemic Risk Council

to oversee a new system o regulation

and supervision. In the UK, the Turner

Review calls or higher minimum capital

requirements, counter-cyclical capital

buers and limits on gross leverage.

What is still unclear is how all o the

proposals currently being ormulated

and discussed can be integrated into an

eective global ramework which also

refects individual national priorities. The

dangers o conusion, incoherence and

promotion o regulatory arbitrage are real.At the G20 London Summit in April,

world leaders pledged action to build

a stronger, more globally consistent

supervisory and regulatory ramework

or the uture nancial sector:

Strengthened regulation and

supervision must promote

propriety, integrity and

transparency; guard against

risk across the nancial system;

dampen rather than ampliy the

nancial and economic cycle;reduce reliance on inappropriately

risky sources o nancing; and

discourage excessive risk-taking.

G20 Final Communique, April 2009

They announced that regulation

and oversight would be extended

to all systemically important nancial

institutions, instruments and markets,

including hedge unds.

While the principles o the G20

declaration are to be applauded, a great

deal o detailed discussion and drating

will be needed to ensure that an

eective and unambiguous system

emerges. The criterion o systemic

importance, while intuitively clear, is

merely the most high-prole concept

over which erce debate is inevitable.

There is also a risk that the realprogress made over the last 20 years

towards harmonization o global

standards will be undermined or

thrown o course.

Capital adequacy

The G20 proposals or a counter-cyclical

capital adequacy regime are likely to

be among the least contentious in

principle, since they are consistent

with current thinking rom a number o

sources. But they are likely to result in

a more ormulaic regime, which couldconstrain scope or fexibility at the

same time as imposing more stringent

overall capital requirements. It remains

to be seen whether any new system

will be truly balanced, or will simply

be used to impose higher limits during

the good times. Nor is it clear that it

will be easy in practice to track the

economic cycle with sucient

precision. The rate and extent to which

capital requirements are tightened as

we emerge rom recession will be a

particularly sensitive decision.One o the more challenging

commitments o the G20 Communiqu

is that all G20 countries should

progressively adopt the Basel II

ramework. However, no timetable or

this has been agreed. One o the

obvious major stumbling blocks is that

the US has, to date, ailed to make any

commitment to Basel II at all. In

addition, it is not obvious that imposing

Basel II on all banks, whatever their size

and degree o cross-border exposure,

will turn out to be realistic.

A great deal of detaileddiscussion and drafting willbe needed to ensure that an

effective and unambiguoussystem emerges.



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7

Topics

Hedge unds

Political considerations and public

anger are giving extra orce to demands

or tighter regulation. Although hedge

unds have had only a minor role in

causing the crisis, they are widely

criticized and misunderstood and

are going to be drawn more tightly

into the new regulatory ramework.Funds and their managers can expect

to be registered and subject to new

disclosure requirements. The adequacy

o risk management systems will likely

be probed. Institutions which have

hedge unds as their counter-parties

will likely need to develop mechanisms

to monitor the unds leverage and set

limits or single counter-party exposures.

Once again, though, the detail will be

critical. There is not yet even an agreed

denition o what is, or is not, a hedge

und, let alone which criteria wouldidentiy one as systemically signicant.

In the UK, Lord Turner notes that hedge

unds in general are not like banks; the

implication is that they should not be

regulated in the same way as banks.

The UKs Hedge Fund Standards Board,

while operating a voluntary ramework,

has established a sound oundation

which global regulators could protably

build on.

Remuneration

There is also widespread publicconcern and anger at the

remuneration o those bankers

perceived to have caused the crisis;

some extension o regulation to include

salaries and bonus arrangements is

politically inevitable. The argument

seems even more compelling in relation

to those institutions which have been

bailed out or taken into public ownership.

The argument that compensation

arrangements should properly refect

risk and, in particular, match the time

horizon o risks so that payments

should not be nalized over short

periods where risks are managed over

long periods is surely sound. Similarly,

recent high-prole controversies have

accentuated the need or non-executive

directors and shareholders to be more

ully involved in and appraised o

remuneration arrangements beore

irrevocable awards are made.However, it will be important

that decisions in this area are air,

reasonable and proportionate, and

do not succumb to bash the bankers

prejudice. The G20s proposal that

supervisors should, where necessary

intervene in compensation policies

(with responses including increased

capital requirements) could be seen

as a veiled threat. The Turner Review

concluded that remuneration structures

played a less important role in

contributing to the nancial crisis thaninadequate approaches to capital,

accounting and liquidity.

Overall

Nobody can argue that the current

systems o regulation are sustainable.

They have very dramatically ailed to

prevent one o the worst nancial crises

in many decades. Financial services

institutions have to brace themselves

or a much more muscular and

interventionist regime in uture. But

what that regime ultimately looks likewill depend on a great deal o argument

and compromise, which is a process

only just beginning. Moreover it is

essential that it avoids giving the

impression that all risk can be

eliminated rom nancial markets.

For more inormation please contact:

Brendan Nelson



Tel: +44 20 7311 6157

e-Mail: [email protected]

Political considerationsand public anger are givingextra force to demands fortighter regulation.



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regulation in banking,investment management

and insurance

Perspectives on:

David Sayer Dave Seymour Frank Ellenbrger



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From let to right:

David Sayer,

Dave Seymour and

Frank Ellenbrger.

Many authorities across the world are seeking to ormulate new regulatoryrameworks in the wake o the crash. But the nal shape o any new systemremains quite unclear; and it is unlikely to remain ree o political distortionand intererence. David Sayer, Global Sector Leader, Retail Banking,

Dave Seymour, Global Sector Leader, Investment Management (IM)and Frank Ellenbrger, Global Sector Leader, Insurance, met recentlyto compare and contrast their dierent perspectives.

David Sayer (Banking) Looking at

whats happening at the moment, it

seems to me important that this crisis

is seen to have been caused by the

banks. So the diagnosis is ocused on

bank ailures and the need to stop this

happening again, oten to the exclusion

o other potential causes o the crisisincluding: trade surpluses, scal

decits, regulatory policies and so on.

Dave Seymour (IM) I agree.

Just ollowing up on the political

dimension or a moment, there is a

great deal o debate over the extent

to which US executive and legislative

policies during the mid 1990s, such

as the modications made to regulate

and strengthen the CommunityReinvestment Act anti-redlining

procedures, as well as other legislative

actions, may have impacted the crisis.

Policy makers are now trying to x it,

but given the complexities, it is dicult

to know what, or how much to regulate.

Frank Ellenbrger (Insurance)

O course by contrast with the huge

stress and uncertainty in the economy

caused by the banks, insurance and

the insurance markets have continued

to operate normally, without any major

disruption. The same is true or

reinsurance markets. The impact othe crisis on insurers has mainly been

on the lie side, with the value o

investments tumbling. Those that have

been most aected deviated rom their

core operations into nancial products

developed without understanding the

risk that underpinned them. But the

business model o insurers and the

largely uncorrelated relationship

between insurance risk and market

risk have so ar been stabilizing actors;

hence insurance is much lower on

the political and risk radar. 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


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There is always a political dimension tonancial markets. The world has discoverednot only how dangerous nancial marketscan be, but how valuable functioning

nancial markets are to economies.Dave Seymour

SayerIn the case o the banks,

though, there is huge pressure now

or taxpayers to provide guarantees

and bailouts. These include liquidity

support through guarantees and

protection o savers and borrowers,

asset purchases, orced recapitalization,

bad bank schemes and so on. But the

big questions that I think should still

be answered are to do with how to

reduce systemic risk in the banking

system. This involves a range o issues:the nature o nancial regulation;

strengthening regulators; reducing

the impact o ailure o nancial rms;

protecting and supporting customers;

improving competition.

SeymourAnd this raises the key issue

o whether we can recreate a duciary

society with a common ramework

and set o rules, or whether we are

inevitably aced with a much more rigid,

strict set o rules. Do we really need

more regulation?

EllenbrgerBeore any action is

taken, it should be well thought through

and balanced, taking into account the

macro-economic considerations.

Intervention should not create an

uneven playing eld between dierent

sectors o the nancial services

industry. Although banking has been

the crux o the crisis, a new ramework

or set o rules should look beyond this

sector; introducing a one-size-ts-all

response will only lead to uturecomplications. Each industry will

require separate revisions.

SayerIn the banking sector, some

trends are clear. The quantity o capital

required will be high, and counter-

cyclical requirements will be imposed

to make banks hold more capital in

the good times (unlike the Basel II

ramework, which is pro-cyclical).

But it is yet unclear how this is going

to work in practice, and in dierent

economies. The other problem withimposing counter-cyclicality is that

cyclicality will always be there.

Someone has got to turn the lights

out just as everyone else is enjoying

the party. And thats really dicult.

Looking back, its hard to see how

macro-prudential regulation would

have been accepted in say 2005 or

1987 when the last booms were

getting going.

EllenbrgerIt will be interesting to see

how the banks adapt to the anticipated

counter-cyclical requirements requiring

them to signicantly shore-up their

capital holding. Intrinsically insurers

have always had to calculate their capital

adequacy because o their exposures

to risk when underwriting. But with the

2012 EU-wide implementation deadline

o Solvency II, Europes insurers will

have to undamentally review their

capital requirements and riskmanagement standards. Whether other

key global insurance markets look to

replicate this ramework locally remains

to be seen, and undoubtedly regulators

will be heavily involved.

SeymourAnd that makes it even

more dicult to see how greater

regulation can eectively be extended

to investment management. The G20

couldnt agree on regulating hedge

unds. The European countries are

pushing or regulation, while the US islooking or registration. The European

Commissions drat directive on the

issue is itsel proving highly contentious

among member states. Investment

unds are products, not companies,

and this makes providing saeguards

or investors a dierent matter than in

the banking sector. There is as yet no

clear idea o how to tie investment

unds into the systemic risk argument,

especially in view o the easy fow

o unds into and out o dierent

economies and jurisdictions. 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


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| rontiers in nance June 2009Topics

Although banking hasbeen the crux of the crisis,a new framework or set ofrules should look beyond

this sector.Frank Ellenbrger

EllenbrgerNevertheless, the

systemic risks resulting rom an overtly

complicated banking system with an

inadequately developed regulatory

ramework have been one o the

causes o the current crisis, and these

need to be addressed. The precondition

or creating an anti-cyclical regulatory

environment is to obtain transparency

and a holistic view o the global nancial

system, without leaving large parts

unregulated.

Sayer The debate over whether or

not a global regulator is necessary,

or possible, will inevitably go on. But

however global the ramework, its a

act that global institutions come home

to die. In the end, ailing banks are the

responsibility o their home regulators.

In my view, the global role should be

about ensuring consistency between

national rameworks and limiting the

scope or regulatory arbitrage.

Regulation itsel needs to remain local.In Europe, though, there is a particular

problem caused by the single market.

Since the single market requires ree

and open movement o capital, the case

or a single European regulator may be

stronger. Its not going to be politically

easy to achieve, but the potential

accession o Iceland to EU membership

may be a trigger.

EllenbrgerInternational groups

may benet rom diversication eects

but also be exposed to accumulation

or contagion risks. Those need to

be mirrored by supervision on a

cross-border basis.

SeymourAny regulatory reorm must

look to prevent the next crisis, not the

last one.

SayerIts also important that regulationavoids the moral hazard problem, and

avoids giving investors and customers

the impression that all risk has been

removed rom nancial markets.

SeymourI guess one thing that we

have certainly learned is that there is

always a political dimension to nancial

markets. The world has discovered not

only how dangerous nancial markets

can be, but how valuable unctioning

nancial markets are to economies.

SayerIts going to take time to work

out solutions in the banking sector.

What has happened by way o

emergency action was what needed to

happen, but the rest, a new approach

to regulation, will take time. And thats

a good thing. We need to take the time

to get this right.

In my view, the global roleshould be about ensuringconsistency betweennational frameworks andlimiting the scope forregulatory arbitrage.David Sayer


David Sayer

Partner

Global Sector Leader, Retail Banking

KPMG in the UK

Tel: +44 20 7311 5404


Wm. David SeymourPartner

Global Sector Leader,

Investment Management

KPMG in the US

Tel: +1 212 872 5988


Frank Ellenbrger

Partner

Global Sector Leader, Insurance

KPMG in Germany

Tel: +49 89 9282 1867




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Brendan Nelson Scott Marcello

Brendan NelsonandScott Marcelloexplore the possible need to expand theuture role o the auditor in nancial services.

The role o the auditor in fnancial services:Is reorm desirable?

Clarityand reality

Financial Reporting today

is clearly complex and oten

not well understood. Why

is this the case? One key

reason is that we oten lose

sight o what should be

the overriding objectives. Too oten, we

succumb to treatments and positions

that we believe to be conceptually pure

or technically superior but that are

potentially less than relevant and all

too oten not understandable.

In the extreme, what good isserved i each and every accounting

pronouncement is perectly consistent,

globally harmonized, and aligned with

well developed conceptual

underpinnings, i users nd that

inormation wholly irrelevant and

incomprehensible? Adding to this, the

objectives or underlying concepts used

to develop accounting standards are not

really agreed; this is particularly true

when you consider issues rom a global

perspective. This was evident in the

recent debate in the US regarding air

value accounting or investments.

Some people strongly support the use

o air value, others hate it. Probably a

majority believe it is a valid principle,

but have signicant concerns about

when it should be viewed as the most

relevant attribute or measurement in

nancial statements. Vast amounts o

energy have been invested in this issue

but conusion remains.

Another issue is, rankly, who reads

all o this inormation anyway? Annual

reports today have grown to hundredso pages, including inormation o

widely varying importance and

relevance. How many people read and

really understand all o this inormation?

Is it more than a handul o people?

And how many is that when you

exclude the auditors, certain members

o management and certain regulators?

The role and involvement o the

auditor with respect to inormation also

may oten be poorly understood. Most

people recognize the technical content

an auditor provides: their opinion on the

air presentation o a companys

nancial statements and, in some

cases, the internal controls relevant

or nancial reporting. But there is a

vast amount o inormation included

in companies lings that is not

subject to audit work. Users o nancial

statements may be quite surprised to

learn that many pieces o inormation

that they view as being very signicant

to their analysis are not covered by the

audit liquidity or example.

So how can the auditing proessioncontribute to improving the global

paradigms or regulation and nancial

reporting? Accountants, when you think

about it, can help in leading the debate.

When it comes to accounting rules and

nancial statement reporting, they can

help keep the real goals in sight and

in proper perspective. Apart rom the

regulators, accountants are one o

the ew groups uniquely qualied to

understand complex nancial institutions

and provide genuine insight about their

business, their operations and their 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


15/56

3


Apart from the regulators, accountants are one of thefew groups uniquely qualied to understand complexnancial institutions and provide genuine insight abouttheir business, their operations and their reportedinformation. They can bring a varied and globalperspective, and professionalism and objectivityto important and challenging debates.

reported inormation. They can bringa varied and global perspective, and

proessionalism and objectivity to

important and challenging debates.

Progressing that thought, together,

management, regulators and auditors

have to move toward providing insight

and important perspective rather than

expanses o accurate, but possibly

less relevant inormation:

more relevant and important

inormation has to be prioritized

and unimportant, obvious, or

redundant inormation has tobe eliminated rom the equation

second guessing should be

minimized while still respecting

the need to protect stakeholders

it needs to be recognized that the

role o nancial reporting is to

provide relevant and reasonably

reliable inormation, not to predict

the uture with certainty

and its important to recognize

the judgment and intellectual capital

that can be added by management,

regulators and auditors

On this last point, a critical question

is whether this intellectual capital will

fow reely and to its ull extent i it is

hampered by the potential or signicant

legal liabilities. The potential liability

issues that prevail, particularly in

America, may now need to be

nally and ully addressed.

Now you could argue we would

say this wouldnt we? But we genuinely

believe that reorm isdesirable and that

the auditing proession can and should

make a signicant contribution.


Brendan Nelson



Tel: +44 20 7311 6157


Scott Marcello

Joint Regional Coordinating Partner,

Financial Services, Americas region

Tel: +1 614 249 2366




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4


JumpstartReviving the US fnancial system:

The Financial Stability Plan 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


17/56

Howard Margolin

Calls to action in combating the ongoing economiccrisis are coming rom all parts o the globe. Inparticular, governments are aced with ar-reachingpolicy decisions to try to stem the tide o oreclosures,job losses, and disappearing savings. With the USnancial system taking much heat or its role in therecent economic turmoil, many acknowledge that astrong US nancial system is also one o the keysto recovery. Howard Margolinexplains.

O

n February 17, 2009,

President Barack

Obama signed into

law the Financial

Stability Plan (FSP) to

help stabilize the US

nancial system and restore condencein the markets. The FSP is a multi-

pronged oensive designed to boost

the nations economy by eliminating

the uncertainty surrounding nancial

institution assets and stimulating lending

while imposing new measures around

nancial service industry accountability,

oversight, and transparency.

The FSP includes the ollowing

components:

Capital Assistance ProgramAs a means o reducing uncertainty

over whether certain nancial

institutions have sucient capital to

weather the nancial storm, the Capital

Assistance Program (CAP) requires US

banking organizations with assets o

US$100 billion or more to undergo a

more thorough regulatory review. This

includes a comprehensive stress test

designed to asses the balance sheet

exposures o these institutions, should

there be a greater than expected

decline in the economic environment.

Should the results indicate that

capital is inadequate, such institutions

will have six months to raise the

necessary capital buer via private

unds. Lacking such private unds, they

may access capital through CAP in the

orm o convertible preerred stock.

Capital shortfalls for thelargest banks totaledapproximately US$75 billion.Many banks have issued, orplan to issue, common stockto meet the shortfalls.

The stress test results werereleased on May 7, 2009, indicating

that the largest banks had adequate

capital to meet adverse (not worst

case) economic conditions. Capital

shortalls or the largest banks totaled

approximately US$75 billion. Many

banks have issued, or plan to issue,

common stock to meet the shortalls.

Others plan to convert preerred

stock to common stock or sell assets.

A limited number o more capital-

constrained banks may be orced to sell

operations or curtail certain activities.

Public-Private Investment Program

The Public-Private Investment Program

(PPIP) has been created to address the

challenge o cleansing balance sheets

o legacy assets. PPIP seeks to lure

new private capital into the market byproviding government equity co-

investment and attractive private

nancing to reduce the risks inherent

in investing in these legacy loans and

securities. Equity co-investment is

intended to protect US taxpayers rom

overpaying or assets through a market-

based valuation approach as opposed

to prices being set by the public sector

and taxpayers stand to benet by

sharing in any prots derived rom

these assets.

Both potential sellers and buyersare still seeking clarication on many

ronts, such as pricing mechanisms, the

accounting impact o such transactions

on capital levels, and other sale terms.

The impact that recent changes by the

Financial Accounting Standards Board

relating to the recognition and

measurement o credit impairment

losses on debt securities has on the

demand or this program remains to be

seen. Additionally, the impact o the

stress test results on PPIP participation

has yet to be determined.

5




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6


Term Asset-Backed Securities

Lending Facility

This joint initiative o the Federal Reserve

and the Treasury Department seeks to

encourage consumer and business

lending through the renewed issuance

o certain asset-backed securities (e.g.

those supported by auto, credit card

and student loans, mortgages, andother assets) at reduced interest rate

spreads. Already in existence, unding

or the Term Asset-Backed Securities

Lending Facility (TALF) has been greatly

expanded under the FSP.

Those receiving FSP fundswill be required to engagein mortgage foreclosure

mitigation efforts; whetherother lenders may berequired or otherwiseencouraged to participatein these efforts remainsto be seen.

Mortgage Loan Modifcation

Program

The FSP includes a proposal to reduce

mortgage rates through FederalReserve and Treasury Department

purchases o up to US$600 billion o

Government-Sponsored Enterprise

mortgage-backed securities and debt.

Additionally, the FSP calls or issuance

o ormal loan modication guidelines

and standards applicable to government

and private programs. Those receiving

FSP unds will be required to engage in

mortgage oreclosure mitigation eorts;

whether other lenders may be required

or otherwise encouraged to participate

in these eorts remains to be seen.

Small Business and Community

Bank Lending Initiative

In light o the increased capital

pressures on lending institutions and

the lack o demand or Small Business

Association (SBA) loans in the

secondary markets, the FSP addresses

the precipitous decline in SBA lending.

A joint Treasury Department and SBAinitiative will seek to increase such

lending by nancing the purchase o

AAA-rated SBA loans and pursuing

eorts to increase the Federal guarantee

up to 90 percent or eligible loans.

Transparency and Accountability

Agenda

The Treasury Department will

require all FSP und recipients to

conorm to intensied requirements

or transparency, accountability,reporting, and monitoring.

Reporting requirements include a

one-time plan discussing the recipients

intended use o government unds to

preserve and strengthen lending

capacity. Further, there will be monthly

reporting on new lending activities and

tracking o CAP unds separate rom

other assets.

Additional FSP conditions include

restrictions on dividends on stock

repurchases and acquisitions, limitations

on executive compensation, andrestrictions on lobbying.

Each FSP component willhave unique accounting, tax,and nancial considerationsdepending on a companysparticular circumstances.

Implications

These ar-ranging initiatives have

broad consequences or both nancial

institutions and government agencies.

Each FSP component will have unique

accounting, tax, and nancial

considerations depending on a

companys particular circumstances.

Management should consider these

implications as strategic decisions aresurrounding participation in the FSP.

Similarly, assessments o modeling

techniques, expanded data and

disclosure requirements, systems

capabilities, and stang will be

essential to plans or moving orward.

The sheer magnitude o changes and

level o regulatory scrutiny will present

sizable implementation challenges, and

companies may nd the need or

project management teams to try to

keep all initiatives on track.

The private sector now has multipleronts through which to cleanse its

balance sheets and reinvigorate lending

activities. At the same time, these

initiatives signicantly expand the role

and power o government, necessitate

changes to current processes and

controls, and place additional

requirements on both nancial institutions

and government related to reporting,

monitoring, and compliance activities.

Over the coming months, additional

details will emerge regarding these

programs, and institutions should remainvigilant to the strategic opportunities

that could result, while maintaining

appropriate discipline and controls to

satisy the attendant increased

reporting and compliance activities.


Howard Margolin

Partner

Financial Services

KPMG in the US

Tel: +1 212 954 7863




19/56

7


The US commercial real estate perspective

Ray Milnes

Economicturmoil

As numerous US

public and private

enterprises work to

jump-start the national

economy much

attention has been

paid to restoring the health o the

residential real estate market andthe banking system. Yet, as the

global recession has deepened,

the commercial real estate market

also aces distinct hardships.

A core challenge has been the lack

o available liquidity or transactions.

For instance, securitizing commercial

loans, especially via Commercial

Mortgage-Backed Securities (CMBS)

has been a signicant source o

liquidity, ueling the prior growth in

commercial real estate transactions.

However, the reezing o the CMBSmarketplace (issuances decreased rom

US$237 billion in 2007 to US$12 billion

in the rst hal o 2008 with virtually

nothing since then, according

to JPMorgan Chase & Co. data) has

caused transactions to grind to a halt.

This lack o transactions urther

complicates the ability to properly value

property in the current marketplace.

Real estate values have plummeted,

and investors are waiting to see how

low they will go. There is a ear among

industry specialists that this investor

inertia may cause a continuing

downward spiral in prices, or, at a

minimum, prolong the lack o activity.

Stimulating Credit Markets

One potential solution or this bleak

situation is the inclusion o CMBS

nancing in the US-government-sponsored Term Asset-Backed

Securities Loan Facility (TALF).

Designed to stimulate the credit

markets and restore stability by

providing nancing to purchase

asset-backed securities, TALF was

expanded by the Treasury Department

to earmark US$100 billion to leverage

US$1 trillion o lending. While TALFs

inclusion o CMBS should stimulate

the market, debate remains over

how vigorously the various players

will embrace the program.

Purchasing Legacy Assets

The US Governments Public-Private

Investment Program (PPIP) provides

public-sector equity and debt nancing

to private-sector investors to achieve

two critical goals: attracting idle assets

back into the market by tackling the

inertia o private investors, while also

reeing up embedded capital rom the

balance sheets o institutions. This

mechanism will hopeully achieve

the goal o creating a market or

these real-estate-related assets,

enabling institutions to unnel unds

into new credit ormation.

It is hoped that restoring liquidity

or new transactions including those

involving commercial real estate

will ultimately stimulate the economy.

Additionally, greater clarity about assetvalues gleaned rom the resulting

transactions should boost investor

condence, increasing the amount

o investment in the market or

urther transactions.

While investors and asset holders

are still waiting or greater clarity on

these programs to help determine the

extent o their participation, the US

Government has taken an activist

stance to help resolve some o the core

issues that initiated the global economic

crisis. With nancial leaders worldwidewatching and evaluating what happens

in the US economy, it remains to be

seen whether the depth and breadth

o this situation can be signicantly

aected by the actions o government.


Ray Milnes

Partner

Building Construction & Real Estate

KPMG in the US

Tel: +1 312 665 5023




20/56

8

rontiers in nance June 2009 |

Everybody has been hurt by current market conditions. For example,hedge unds, traditionally ocused on absolute rather than relative returns,have inevitably been hit hard, although a number o unds are continuingto do well in attracting new investment. Dave Seymour argues thatinvestment management is likely to emerge changed but probablystronger rom the crisis. There are exciting opportunities ahead.

But success will depend critically on rebuilding trust and condence.

Topics



21/56

9


Dave Seymour

Confdence

must returnAn investment management perspective

The simplest way o

summarizing the current

state o the investment

management industry is

to say it is conused. A

large part o the industry

is still sitting on the sidelines. Funds

with private capital reserves still haveinvestable resources. But they cant be

sure the market has bottomed out, and

are wary o investing into assets which

may lose urther value. Overall, there

is a lot o uncertainty over where the

market is going and how to respond.

Historically, the mostsuccessful investment

management rms havebeen those which focusclearly on their customers.This is going to be evenmore important in the future.

Getting in shape

One sensible and eective strategy is

to concentrate on getting into shape or

the upturn, when it comes. Here, one

o the most important challenges is to

rebuild trust and condence by strong

customer relationship management.

Historically, the most successul

investment management rms have

been those which ocus clearly on their

customers. This is going to be even

more important in the uture. Whether

they are private capital investors or retail

investors, customers are increasingly

going to demand better, more requentand more transparent communication.

The crash, exacerbated by high-prole

rauds has made investors very

nervous. Risk management processes

have been called into serious question.

Perceptions o risk have changed. The

investor community is rattled, and

condence will not return easily.

The rms which come through

the crisis best are likely to be those

which are currently investing in creating

or growing meaningul customer

relationships.Successul rms are taking the

opportunity to improve the organization,

build new skills and capabilities, and

perhaps acquire complementary

expertise or capacity through corporate

restructuring. Those who have been

badly burned by the crisis need to

rebuild and re-organize their operations

or the new risk environment. As ever,

its the simple things which can count

or most. Ater a period o irrational

exuberance, ocusing on execution

will be the key to achieving returns.

Many rms are already beginning to

restructure themselves, their products,

teams and capabilities. In an industry

where many players dont have deep

in-house inrastructures, instead relying

on networks o third party vendors or

many operational activities, ocusing on

execution also means ensuring that thetotal risk prole is eectively managed.

The uture o regulation

The chorus o calls or tighter regulation

should be met with care. Many o the

participants at the G20 London meeting

are seeking to build new regulatory

rameworks, to curb what they see as

the excesses o Anglo-Saxon capital

markets. There is a tendency to

characterize hedge unds, in particular,

as opportunist players who damage

rather than support local economies.Tighter regulation is an understandable

and instinctive response.

A risk with stand alone or knee-jerk

regulatory changes is that they can

open up arbitrage opportunities

between dierent markets and

stimulate rms to nd alternative ways

o investing capital in situations which

match their risk appetite. Financial

markets are very creative, and will seek

to invent new structures, products and

techniques in the pursuit o a return

on investment.

Topics



22/56

20


Smaller, nimbler rms willincreasingly dominate themarket in the years to come.And customers will nd iteasier to relate to andunderstand simpler, morefocused rms as well.

Furthermore, traditional regulatory

rameworks, rom the Securities

Exchange Commission (SEC), Financial

Services Authority (FSA), the G10sBasel Committee and the like, are

ocused on corporate entities. But

investment unds are not companies,

and are not like companies. They are

products. Any move to greater

regulation may be more appropriate

i it ollows the model o consumer

product saety regulation in order to

satisy the objective o protecting

investors. The authorities need to move

careully i they are to avoid rustrating

the markets natural recovery and

readjustment ater the crisis.They should also seek to guard

against appearing to guarantee investor

protection, since this could lead to

distorted consumer behavior. In the

particular case o hedge unds, there

is a risk that i these are more tightly

regulated it could give investors the

alse illusion that this type o

investment has the same risk prole

as a traditional und or example.

People could then misunderstand the

risk o hedge und investing mistaking

higher regulation or lower risk.

A return to boutiques

One area where the market already

seems to be in tune with regulators

concerns is in the increasing move

back to smaller boutique operations.

The last 15 years or so have seen agreat deal o consolidation in the

industry, with asset managers being

acquired by large institutions, nancial

conglomerates expanding into third

party business and so on. Financial

institutions have become complex and

opaque, and the potential or localized

risk management ailure to contaminate

entire corporate balance sheets has

become painully apparent. Regulators

and politicians have begun to call or

smaller, simpler and more transparent

institutions.The market already appears to

be responding. Among the major

global institutions, one has exited

rom retail asset management; another

is divesting a high-growth business

to a private equity rm; continued

pressure to deleverage and bolster

balance sheets will inevitably lead to

more de-consolidation over the next

ew years. Conversely, traditional und

management rms are looking to make

acquisitions to develop complementary

capabilities or increase capacity.Talented individuals are already

moving in the same direction. Since

the major investment houses became

mainstream banks, a steady stream

o start-ups and boutiques has been

orming. The dierence today is that

the inrastructure o third-party vendors

which has developed over the

intervening period provides a ready

made, mature support environment or

these new boutiques. Smaller, nimbler

rms will increasingly dominate the

market in the years to come. Andcustomers will nd it easier to relate

to and understand simpler, more

ocused rms as well.

The uture is ull o opportunities

The recession and its atermath will

provide great opportunities or the

investment management industry,

magnied by demographic and

geo-political trends which have been

under way or some years. We expect

private capital to play a critical role in

deleveraging the nancial system.

Many economists argue that we

are seeing not simply the bursting o

another bubble like that o the dot-com

crash, but a more undamental

realignment to a higher-saving world

much like the Asian markets. Theconsumer spending boom will

give way to more restrained behavior

as individuals and amilies respond

to uncertainty and the ear o

unemployment and repossession.

History suggests that undamental

changes in attitude persist or many

years ater a major nancial crisis.

I savings ratios rise to consistently

higher levels, more assets will be

under management and the demand

or investments o all types will grow.

Against this, however, are some keydemographic trends, especially the

great transition in developed western

economies as the baby-boomers move

into retirement and begin drawing down,

rather than building up, their savings.

In addition, the long-term transers o

wealth rom the developed world to

the oil-rich nations and the developing

world will be o crucial signicance.

Middle-Eastern and other sovereign

wealth unds are already major players

in the investment community.

In the 1980s, the US was the worldslargest creditor nation. Today that role

has been taken by China, overtaking

Japan to hold some US$1 trillion o

US debt. The US itsel has become

the worlds biggest debtor nation.

How these unsustainable imbalances

are sorted will prove o vital importance

or 21st century geopolitics.

While the immediate outlook remains

uncertain, the medium- and long-term

opportunities are tremendous, and

tremendously exciting. Those investment

unds which keep their nerve,concentrate on improving transparency

and communication with customers,

and get themselves in shape or the

new nancial world order stand to enjoy

an exciting and protable uture.


Wm. David Seymour

Partner, Global Sector Leader,

Investment Management

KPMG in the US

Tel: +1 212 872 5988




23/56

James Suglia Tom Brown

A recent KPMG report provides insight into thenew world acing investment managers ater thecrisis. Reviewing its key conclusions, James Suglia,and Tom Brownargue that the key to recoverylies in mending relationships.

Time to mend relationships in investment management

Renewing the promise

T

he credit crisis is

undamentally reshaping

investment management.

A new report, drawing

on the ndings o a globalsurvey o 288 investment

managers, investors and senior

executives working in the industry,

provides valuable pointers to how

the industry will develop as a result1.

I rms are to grasp the potential o

these changes, mending relationships

with investors, regulators and other

stakeholders will be key.

Corporate governance and risk

management

Many investment managers couldbenet rom liting their game in this

area. Investors believe that independent

assurance and adherence to a best

practice code o conduct need

improvement, despite investment

managers believing that they are

perorming well in these areas. This

is a disconnect that managers really

need to address to avoid alienating their

investors. Managers who have strong

programs need to be more transparent

(i.e. better at communicating them)

while other managers must rst workon strengthening their practices.

Investment managers need to

clearly articulate their risk appetite and

transparently communicate this. When

risk appetite is properly understood and

clearly dened, it becomes a powerul

tool or enhancing overall business

perormance. A clear and eective risk

management and governance structure

gives both the investment manager and

investors condence that investments

can be competently managed in a

controlled way.

Rebuilding trust

The trustworthiness o nancial

intermediaries has been hard hit by

the crisis. This is on top o a string o

scandals in recent years, rom markettiming abuse to Ponzi schemes, which

had already damaged this trust.

Investment products can be complex

and dicult to understand or most

members o the general public, while

ailure is easy to see and measure.

Investment managers need to help

intermediaries, who sit with clients, to

explain the risks and benets, the costs

and the small print. This should deliver

the message to their investors in all o

these areas. Unortunately, the research

indicates that there is still a wide gul tobridge between investment managers

and intermediaries.

Regulation

There are widespread concerns about

the impact o potential new regulations,

especially in the areas o leverage,

disclosure to clients and the external

assurance. The great majority o

respondents elt that regulators clamping

down will seriously increase costs or

investment managers. In many cases,

managers will be unable to pass onthese associated costs to their clients.

Likely regulation in areas like shorting

and leverage will damage many

business models. Many hedge unds

could nd lie very hard. Greater

transparency may also mean that

investors begin to question the ees

they are being asked to pay or hedge

and other alternative unds. In response

some alternative und managers will

entrench but many will diversiy and

seek to migrate into more traditional

activities.

Dierentiation

For many years, investment managers

did not have to try very hard to be

successul in the industry. Today, the key

to success has become dierentiation.The study highlights the importance

o personal relationships and service

quality as well as delivering on clients

expectations. Achieving dierentiation

is really about getting back-to-basics:

determining what clients need, getting

the value proposition ocussed and

communicating it clearly.


James Suglia

Partner

KPMG in the US

Tel: +1 617 988 5607


Tom Brown

Partner

KPMG in the UK

Tel: +44 20 7694 2011


1. Renewing the promise: Time to mend relationships in investmentmanagement, KPMG International, June 2009; in partnershipwith Datamonitor.

About the report

The ull report,

Renewing the

promise:

Time to mend

relationships in

investment

managementwill

be available in

June, please visit

www.kpmg.com

or copies.


2



24/56


25/56

23


Thilo Kasprowicz Klaus Ott

Current proposals

In January 2009, the Basel Committee

published three discussion documents

addressing critical areas where they

believe the current ramework needs

to be strengthened:

Enhancements to the overall

ramework: these are aimed at

strengthening risk capture in Pillar 1

(minimum capital requirements);

improving corporate governance

and risk management and their

supervisory oversight (Pillar 2); and

improving disclosure o nancial

exposures to enhance market

discipline and allow third parties to

develop better understanding o a

banks overall risk prole (Pillar 3)

Revisions to the market riskramework: the current ramework

ails to capture some key aspects

o market risk and will be extended;

in addition, stressed value-at-risk

requirements will be imposed

Incremental risk in the trading book:

since the crisis began, a number o

banks have suered large losses

rom trading exposures, and the

committee now proposes a

supplementary incremental risk

capital charge, based on estimates

o potential losses

Consultation on these proposals has

now ended, and there are clear target

dates or complete implementation o

the nal conclusions: December 2009

or the overall ramework enhancements,

December 2010 or the market risk and

incremental trading risk proposals.

Since the revised Accord can only take

legal eect when it is implemented into

individual national jurisdictions, it is clear

that these implementation timetables

are extremely challenging.

Similarly, many banks should wake

up to the potential implications now. In

view o the high political pressure to act

on the lessons learned rom the crisis,

the European Union and others are

already anticipating expected changes.

They are issuing detailed directives and

drat regulations to strengthen bankingsupervision and improve risk and capital

management o banks even beore

December 2009 or 2010. The luxury

o waiting until proposals are nalized

and regulations drated in detail beore

planning how to comply is simply not

available. Most aspects o the revised

ramework are already clear in principle.

Banks should be urgently working out

how to respond.

Strategies, methodology

A number o the new proposals willinvolve banks in reconsidering strategic

decisions. For example, certain trading

book products will attract higher capital

charges, and some banks may need

to review whether or not to continue

in a particular securitization markets,

whether as originator or investor.

Changes to capital denitions will

mean banks will have to review the

issuance o some capital instruments,

or example hybrids. Proposals on

concentration risk will mean that credit

portolios will need to be scrutinizedcritically. Credit risk management

teams should re-think their approach

to active portolio management.

Basel II will also involve changes

to methodologies and valuations.

Stress testing will almost certainly be

imposed more widely, and potentially

even applied to integrated underlying

portolios o securitizations. Liquidity

regulations will involve the thorough

identication o cash-fow positions or

a wide range o products and the need

or adequate processes or liquidity riskmanagement. Furthermore, the

calculation o risk-weighted assets or

some products will change. Changes

to disclosure, in particular or

securitizations, trading book activities

and the use o special purpose vehicles,

are likely to accelerate the move to

bring internal management reporting,

external statutory and nancial reporting

according to IFRS into closer alignment:

banks should be looking at consistent

disclosure strategies, capital market

communications and reporting policies.

Organization and IT

These proposals will have implications

or many aspects o a banks systems,

processes and inrastructure. Some

risk management and disclosure

processes will need to be redesigned.

Management inormation systems

may have to be recongured to supportnew reporting procedures and acilitate

enhanced communication with

supervisory authorities. Banks should

prepare or a much closer interaction

with regulators, who will increasingly

use their intervention to monitor

business and risk strategies.

Underpinning process changes will

be requirements to recongure and

enhance IT architectures and system

unctionality. Databases supporting cash

fow inormation, portolio composition,

disclosure and risk management willalmost certainly need to be upgraded.

Issues o skills, resources, stang and

cooperation across departments are

likely to arise, both as banks undertake

the necessary change programs, and

as they comply with the new regime

on a continuing basis.

Basel II has been a signicant

challenge or many banks to date.

Even beore the current ramework

has been ully implemented, new

challenges are now apparent. It may

be tempting to think that the proposedrevisions to the ramework are simply

slight enhancements or variations.

But the changes will impact even

on banks using the less demanding

Basel II standardized approaches.

There is a lot to do and, as we have

seen, the timetable is tight. Given the

present political momentum or change,

it is more likely that deadlines will be

brought orward rather than be delayed.

Analyzing the strategic impact o

the new regulations and planning

or implementation should not bedelayed or urther clarication.


Thilo Kasprowicz

Partner

KPMG in Germany

Tel: +49 69 9587 3198


Klaus Ott

Partner

KPMG in Germany

Tel: +49 69 9587 2684




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Quietlyprospering

Canadian fnancial services



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Ann Davis

Largely away romthe gaze o internationalcommentators, nancialservices in Canada remainin robust health, and incertain cases are positivelybooming. A number oactors are responsible,

including a generallyconservative culture oexcessive risk-avoidance,strong regulation, and awelcoming businessenvironment.Ann Davisexplains.

A

cross the developed

world, the nancial

crisis has seen banks

collapsing, being bailed

out by governments or

being taken into public

ownership. More than a trillion USdollars o value has been wiped out

rom bank balance sheets. However,

many Canadian banks have proved

much more resilient than those o any

other major economy. Last November,

Time magazine called Canada the new

gold standard in banking1. The 2009

Global Competitiveness Report rom

the World Economic Forum ranked

Canada No 1 or soundness o banks2.

By any measure, Canadas banking

sector is one o the strongest i not

the strongest in the world. How so? 2009 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services.No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.

Topics


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Ten years ago, the Financial Times top-50 ranking ofthe worlds biggest banks was dominated by US and UKbanks. No Canadian banks made the list. Today, all ofthe Big 5 Canadian banks are now in the top 505.

Five major banks dominate

Canadas banking sector (see box),

which in total embraces 21 domesticbanks, 55 oreign-owned subsidiaries

and branches and 47 Trust companies.

The nancial services sector as a whole

has shown remarkably steady growth

o about 3.5 percent per year over the

last ten years, to reach a total turnover

o C$80 billion3. Over the same period,

the Big 5 has collectively doubled their

market capitalization4. Ten years ago,

the Financial Times top-50 ranking o

the worlds biggest banks was

dominated by US and UK banks. No

Canadian banks made the list. Today,all o the Big 5 are now in the top 505.

Royal Bank o Canada and Toronto-

Dominion are among only seven

global nancial institutions to hold a

triple-A credit rating rom Moodys.

Regulation is part o the reason or

the solid success o Canadian banking.

Cultural attitudes are also crucial. In

both o these respects, Canada has

maintained a distinctive tradition, the

roots o which extend deep into the

early hal o the last century. That

regulatory ramework, coupled witha conservative attitude to risk-taking,

has helped to ensure a consistently

prudent approach and a greater

degree o openness and transparency

than in many other systems.

Another key eature is that mergers

and acquisitions in the banking sector

are constrained among the Big 5,

which has limited the size o individual

banks and avoided concentration o risk.

Government policy encourages the

establishment o new banks to promote

competition. Large banks those with

more than C$5 billion equity must

remain widely held. Bank mergers

have been proposed as a route togreater international competitiveness,

but have been vetoed at the political

level. Limits on oreign ownership have

been imposed and mergers between

banks and insurance companies are not

allowed. A urther signicant actor is

that during the 1980s, the big banks

bought most o the large independent

investment dealers, thereby integrating

them into the more prudential banking

structure.

These strengths have been

consistently recognized by theInternational Monetary Fund. In its

regular Financial System Stability

Assessment in 2008, the IMF

concluded6:

The Canadian nancial sector is

among the worlds most highly

developed

The ve large banking groups that

orm the core o the system are

conservatively managed and highly

protable

Stress tests suggest that the largeCanadian banks are able to withstand

a broad range o shocks

O course Canadas banks have

not been unaected by the global crisis.

Nevertheless, none have collapsed,

none have needed government bailout

and there has been no need or

injections o government capital. There

may have been an air o condence in

the comments by the governor o

the Bank o Canada, Mark Carney,

when he claimed in April 2009 that

Canadas bankingsector embraces:

21domestic banks.

55oreign-ownedsubsidiaries andbranches.

47Trust companies.



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Canadas Big 5 Banks9

Market Capitalization (Q3 2008)

Royal Bank oC

kpmg banking report 2009

Documents