Global Survey 2008 Regulatory and Market Developments Banking - Securities - Insurance Covering 36 Countries and the EU October 2008 Institute of International Bankers Global Survey 2008 OVERVIEW The Institute of International Bankers represents internationally headquartered banking/financial institutions from over 30 countries in connection with U.S. legislative, regulatory, compliance and tax issues that affect their banking, securities, insurance and other financial activities in the United States. As of September 30, 2007, the combined banking and nonbanking assets of the U.S. operations of international banks exceeded $5.6 trillion according to data from the Federal Reserve, with non-banking assets of approximately $3.27 trillion and banking assets of approximately $2.42 trillion. As demonstrated by the findings of the study on Economic Benefits to the United States from the Activities of International Banks published by the Institute in February 2008 (a copy of which is available on the Institute’s web site (http://www.iib.org/associations/6316/files/2008EcoBenefitStudy.pdf)), international banks contribute significantly to the depth, liquidity and vitality of the U.S. financial markets. In the aggregate, their U.S. operations directly account for more than 250,000 jobs nationwide and annual expenditures in excess of $60 billion. This 21st annual Global Survey of Regulatory and Market Developments in Banking, Securities and Insurance is part of the Institute’s efforts to contribute to the understanding of the trends toward globalization of financial markets and convergence of regulatory systems around the world. This year’s Global Survey covers developments during the period from July 1, 2007 to June 30, 2008 in 36 countries and the European Union (EU). We are very grateful to the banking associations and financial services supervisory authorities from those countries and the EU that have contributed to this year’s Survey and without whose participation this publication would not be possible. The country chapters provide valuable insights into the varying degrees to which liquidity and credit problems emerged around the world during the period under review and the variety of actions taken by different governments in response. However, owing to the practical limitations of producing the Survey, the chapters do not in all cases capture the full extent and severity of the issues that emerged in the global financial system in September and early October 2008 and the initiatives that have been undertaken to resolve them. A matter selected for special attention in this year’s Global Survey is whether a host country, in applying its financial reporting requirements to non-domestic financial institutions operating within its territory, permits these institutions to utilize either International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB IFRS”) or, if different from IASB IFRS, the generally accepted accounting principles (“GAAP”) used in the institutions’ home country, or whether they are required to apply host country GAAP for these purposes. As indicated in the individual country chapters, a variety of approaches is taken around the world. In the European Union, for example, companies whose securities are publicly traded are required to provide IFRS-based financial statements unless the European Commission has determined that a third country’s GAAP is “equivalent” to IFRS, in which case financial statements prepared on the basis of such third country GAAP are acceptable (U.S. GAAP has been found to meet this “equivalence” standard). In the United States, the Securities and Exchange Commission has adopted a rule permitting foreign private issuers to file financial statements with i Institute of International Bankers Global Survey 2008 the Commission that are prepared in accordance with IASB IFRS without reconciliation to U.S. GAAP and has requested comment on whether U.S. issuers also should be permitted to use IASB IFRS. In a related development the Federal Reserve has requested comment on whether the U.S. branches and agencies of international banks should be permitted to file their “Call Reports” on the basis of IASB IFRS instead of U.S. GAAP. This year’s Survey also includes an updated table (see page 1) summarizing the status of various countries’ efforts to implement the Basel II Capital Accord. The discussion in the country chapters indicate that Basel II has been broadly, but not universally, implemented. Several of the chapters also highlight the increasing attention that has been devoted in the face of the financial crisis to revising certain aspects of the Basel II framework, especially as it applies to securitization exposures. A significant majority of the countries that have implemented the Basel II Accord report that the Accord applies to all domestic banks, which are permitted to select among the standardized, foundation IRB and advanced IRB approaches to credit risk, as well as the basic indicator, standardized and advanced measurement approaches to operational risk. The United States is one of the few countries to have adopted the Basel II Accord that has limited its application to a small number of “core” banks, which are required to apply the advanced IRB and advanced measurement approaches. However, in an important development during the period covered by this year’s survey, the federal banking regulators issued for comment a proposal to permit non-“core” banks that do not wish to remain under the Basel I framework to elect to apply a version of the Basel II standardized approach. Of particular note, this proposal included a request for comments on whether even “core” banks should be permitted to elect to apply the standardized approach. No further action has been taken on the proposal as of the end of September 2008, and U.S. “core” banks are still in the process of qualifying their implementation plans under the advanced approaches with their primary regulator. In adopting the Basel II Accord, the federal banking agencies included a three-year transitional period and higher ceilings during the transition period than apply under the Accord as adopted by the Basel Committee and also retained the leverage ratio requirement (which allocates capital on a non-risk-adjusted basis). In addition, the federal banking agencies have applied Basel II’s requirements to intermediate holding companies based on their consolidated assets, regardless of whether the holding company’s bank subsidiary itself would qualify as a core bank. This approach results in the application of U.S. Basel II requirements to international banks that conduct operations in the United States through intermediate U.S. holding companies that have large U.S. securities subsidiaries but relatively small U.S. bank subsidiaries, although the U.S. rules permit such international banks to seek an exemption from this requirement from the Federal Reserve on a case-by-case basis. Many of the country chapters deal with ongoing efforts to combat money laundering and the financing of terrorism. European Union Member States are in the process of implementing the Third Anti-Money Laundering Directive, which, among other things, calls for enhanced customer due diligence, especially with respect to politically exposed persons (PEPs). Many countries have taken actions to implement into their national law the provisions of Special Recommendation VII adopted by the Financial Action Task Force (FATF) regarding cross-border wire transfers. ii Institute of International Bankers Global Survey 2008 In the United States, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued new Economic Sanctions Enforcement Guidelines (the “Guidelines”) in September 2008. The Guidelines implement the provisions of the International Emergency Economic Powers Enhancement Act, which was enacted in October 2007 and significantly increases the maximum penalties assessable by OFAC. The Guidelines apply to all currently pending, as well as any future enforcement matters and supercede the guidelines applicable to banking institutions published by OFAC in January 2006. Other subjects covered in the individual country chapters include implementation of the European Commission’s Market in Financial Instruments Directive (MiFID), the Transparency Directive, and the Single European Payment Area (SEPA); efforts to streamline financial supervision (see, for example, the chapters on developments in Israel and Switzerland); and enhancements to corporate governance practices (see, for example the chapter on developments in Germany). As in past years, the Survey includes an updated table on permissible securities, insurance and real estate activities of banking organizations in various countries. In addition, this year’s Survey includes updated tables on the approach countries take to funding the activities of their bank supervisory authorities, consolidated supervision, host country supervision of branches of non-domestic banks, applicability of host country endowment/dotational capital requirements for branches of non-domestic banking organizations, the applicability of asset pledge requirements to branches of non-domestic banking organizations, and the availability of central bank “daylight overdraft” credit for both domestic and non-domestic banking organizations. Lawrence R. Uhlick Richard W. Coffman Chief Executive Officer General Counsel For further information contact: Institute of International Bankers 299 Park Avenue