Risk Management and the UNECE Policy Framework Michael P. Malloy, Ph.D. Distinguished Professor and Scholar University of the Pacific McGeorge School of Law 19 October 2012 FIABCI-USA UN Symposium Raising the Standard of Real Estate Development around the World Copyright © 2012 Michael P. Malloy.

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation  Supporting public confidence in the FS sectors

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation  Supporting public confidence in the FS sectors  Maintaining safety and soundness in FS sectors

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation  Supporting public confidence in the FS sectors  Maintaining safety and soundness in FS sectors  Harmonization and efficiency across borders

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation  Supporting public confidence in the FS sectors  Maintaining safety and soundness in FS sectors  Harmonization and efficiency across borders Traditional/standard approaches to risk supervision and management

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation  Supporting public confidence in the FS sectors  Maintaining safety and soundness in FS sectors  Harmonization and efficiency across borders Traditional/standard approaches to risk supervision and management  Examination

Risk Management and the UNECE Policy Framework Focus on risk management as a fundamental principle of financial services regulation Objectives of FS regulation  Supporting public confidence in the FS sectors  Maintaining safety and soundness in FS sectors  Harmonization and efficiency across borders Traditional/standard approaches to risk supervision and management  Examination  Supervisory standards

Risk Management and the UNECE Policy Framework Risk analysis and management principles

Risk Management and the UNECE Policy Framework Risk analysis and management principles  Risk-weighted capital adequacy standards (Basel I and its sequels)

Risk Management and the UNECE Policy Framework Risk analysis and management principles  Risk-weighted capital adequacy standards (Basel I and its sequels)  Stress testing

Risk Management and the UNECE Policy Framework Stress Testing

Risk Management and the UNECE Policy Framework Risk analysis and management principles  Risk-weighted capital adequacy standards (Basel I and its sequels)  Stress testing Blind spots in traditional approaches

Risk Management and the UNECE Policy Framework Risk analysis and management principles  Risk-weighted capital adequacy standards (Basel I and its sequels)  Stress testing Blind spots in traditional approaches Limitations of risk analysis and management

Risk Management and the UNECE Policy Framework Risk analysis and management principles  Risk-weighted capital adequacy standards (Basel I and its sequels)  Stress testing Blind spots in traditional approaches Limitations of risk analysis and management Complexity of U.S. regulatory structure

Risk Management and the UNECE Policy Framework UNECE Policy Framework makes an important contribution to the twin objectives of FS regulation

Risk Management and the UNECE Policy Framework UNECE Policy Framework makes an important contribution to the twin objectives of FS regulation  Rigorous analytical foundation to the evaluation of an extremely significant asset category

Risk Management and the UNECE Policy Framework UNECE Policy Framework makes an important contribution to the twin objectives of FS regulation  Rigorous analytical foundation to the evaluation of an extremely significant asset category  Framework Principles provide a conceptual structure that other risk management approaches cannot match

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework UNECE Policy Framework Integrated national framework harmonized with regional and international norms Efficient registration system Necessity of consistency with “rule of law,” including local practice Recognition of the role of real estate in economic development Clarity in financial and investment rules Access to credit, including mortgages and microfinance Transparency and credible valuation rules, particularly in advanced financial products Credible appraisal criteria Recognition of the social policy dimension of real estate Necessity of professional development within the industry

Risk Management and the UNECE Policy Framework Complexity of U.S. Regulatory Structure

Tour d’horizon of U.S. Regulatory Structure (excluding Investment Firms and Securities Firms) Federal Reserve Board (FRB) → SSFIs Secretary of the Treasury Securities & Exchange Commission (SEC) State Regulators → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OCC → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, FDIC, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator FDIC, State OCC State OCC Regulator Regulator Risk Management and the UNECE Policy Framework

Origins of the Meltdown of U.S. Financial Services Markets Risk Management and the UNECE Policy Framework

Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Risk Management and the UNECE Policy Framework

 Identifying Key Regulatory and Supervisory Problems  The Death of Consumer Protection Structural Problems in Regulation and Supervision Risk Management and the UNECE Policy Framework

 Identifying Key Regulatory and Supervisory Problems  The Death of Consumer Protection  Structural Problems in Regulation and Supervision Risk Management and the UNECE Policy Framework

Structural gaps in regulation make for ineffective oversight Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

U.S. Financial Regulatory System ― pre-DFA (excluding Investment Firms and Securities Firms) Federal Reserve Board (FRB) Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OTS, → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Two-Tiered Structure Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OTS, → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Formal Multiplicity of Depositories Federal Reserve Board (FRB) Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OTS, → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Multiplicity of Chartering Authorities Federal Reserve Board (FRB) Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OTS, → Savings State Federal ________↑ ____ ↑ ↑ Associations if insured Banks ↑ ↑ | State | OCC FRB _____|_______ _____|______ State NCUA FRS Regulator RS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Two Deposit Insurers Federal Reserve Board (FRB) Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OTS, → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Federal Regulators of Depository Institution Securities Federal Reserve Board (FRB) Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ ______________________________________| | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OTS, → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, FDIC Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Federal Regulators of Securities Activities Federal Reserve Board (FRB) Secretary of the Treasury Securities & Exchange Commission (SEC) Office of Thrift Supervision (OTS) → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of thurrency (OCC) Institutions DOJ _____________________________________| ___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OOTS → → Savings State Federal ________|_____ ↑ ↑ Associations f insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, FDIC tate Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator State OTS State OTS Regulator Regulator Risk Management and the UNECE Policy Framework

Origins of the Meltdown of U.S. Financial Services Markets  Identifying Key Regulatory and Supervisory Problems  The Death of Consumer Protection  Structural Problems in Regulation and Supervision  Failure of “Safety and Soundness” (“Prudential”) Supervision Risk Management and the UNECE Policy Framework

Failure of “safety and soundness” supervision by the federal banking regulators Risk Management and the UNECE Policy Framework Home Buyers (Mortgagors) Appraisers

Anatomy of a Meltdown: Some Empirical Observations on the Social Utility of Financial Services and the Housing Market Risk Management and the UNECE Policy Framework

Lags in market reaction Risk Management and the UNECE Policy Framework

Lags in market reaction Counterintuitive price movement Risk Management and the UNECE Policy Framework

Lags in market reaction Counterintuitive price movement Slide into collapse Risk Management and the UNECE Policy Framework

Lags in market reaction Counterintuitive price movement Slide into collapse Persisting bankruptcy Risk Management and the UNECE Policy Framework

Lags in market reaction Risk Management and the UNECE Policy Framework

Lags in market reaction Counterintuitive price movement Risk Management and the UNECE Policy Framework

Lags in market reaction Counterintuitive price movement Abrupt collapse Risk Management and the UNECE Policy Framework

Lags in market reaction Counterintuitive price movement Abrupt collapse Swift return to operations (after JPMorgan Chase acquisition) Risk Management and the UNECE Policy Framework

“Centralized Approach” Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged ● Favors large, institutional interests Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged ● Favors large, institutional interests “Case Resolution Approach” Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged ● Favors large, institutional interests “Case Resolution Approach” ● Individualized Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged ● Favors large, institutional interests “Case Resolution Approach” ● Individualized ● Microeconomic Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged ● Favors large, institutional interests “Case Resolution Approach” ● Individualized ● Microeconomic ● Swift turnaround Risk Management and the UNECE Policy Framework

“Centralized Approach” ● Programmatic ● Macroeconomic ● Prolonged ● Favors large, institutional interests “Case Resolution Approach” ● Individualized ● Microeconomic ● Swift turnaround ● Emphasizes interests of depositors and borrowers Risk Management and the UNECE Policy Framework

Dodd-Frank Act (“DFA”) and the current status of its implementation Risk Management and the UNECE Policy Framework

Essential structural problems persist Risk Management and the UNECE Policy Framework

U.S. Regulatory Structure post-DFA (excluding Investment Firms and Securities Firms) Federal Reserve Board (FRB) → SSFIs, Secretary of the Treasury Securities & Exchange Commission (SEC) State Regulators → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OCC → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator FDIC, State OCC FDIC, State OCC Regulator Regulator Risk Management and the UNECE Policy Framework

U.S. Regulatory Structure post-DFA (excluding Investment Firms and Securities Firms) Federal Reserve Board (FRB) → SSFIs, Secretary of the Treasury Securities & Exchange Commission (SEC) State Regulators → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OCC → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator FDIC, State OCC FDIC, State OCC Regulator Regulator Risk Management and the UNECE Policy Framework

U.S. Regulatory Structure post-DFA (excluding Investment Firms and Securities Firms) Federal Reserve Board (FRB) → SSFIs, Secretary of the Treasury Securities & Exchange Commission (SEC) State Regulators → Holding ← Department of Justice [DOJ] State Regulators Companies | FRB → Depository ← SEC Office of the Comptroller of the Currency (OCC) Institutions DOJ _____________________________________|___________________________________________ | | | Commercial ← FDIC → Savings NCUA → Credit Banks (insurer) Associations Unions ______|_____ _____________________|__________________ __|__ | | | | | | State National Savings & Loan ← OCC → Savings State Federal ________|_____ ↑ ↑ Associations if insured Banks ↑ ↑ | | OCC FRB _____|_______ _____|______ State NCUA FRS FRS | | | | Regulator Member non-member State Federal State Federal ↑ ↑ | | | | | | | | FRB, State Mutual Stock Mutual Stock Mutual Stock Mutual Stock State Regulator ↑ ↑ ↑ ↑ Regulator FDIC, State OCC FDIC, State OCC Regulator Regulator Risk Management and the UNECE Policy Framework

Mortgage Market Regulators – pre-DFA

FSOC Post-Dodd-Frank & CFTC CFPB Risk Management and the UNECE Policy Framework Mortgage Market Regulators – post-DFA

Essential structural problems persist DFA delayed its own effectiveness for at least one year, and as much as two years, now further slowed by regulatory delays Risk Management and the UNECE Policy Framework

Essential structural problems persist DFA delayed its own effectiveness for at least one year, and as much as two years, now further slowed by regulatory delays Does not address operations of government- sponsored housing finance enterprises Fannie Mae and Freddie Mac, reform of the mortgage markets, or the foreclosure crisis Risk Management and the UNECE Policy Framework

Selective approach to resolution of failures of “systemically significant,” nonbanking firms is untested, ad hoc, and prone to public choice dilemmas Risk Management and the UNECE Policy Framework

NOW LET THESE PEOPLE ASK SOME QUESTIONS !

AND LET THESE PEOPLE ASK SOME QUESTIONS ! GOOD IDEA !

ROLL THE CREDITS !

Risk Management and the UNECE Policy Framework. THANK YOU!.

Risk Management and the UNECE Policy Framework