2. 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.

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

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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

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

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

14. Risk Management and the UNECE Policy Framework Stress Testing

15. 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

16. 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

17. 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

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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

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

29. 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

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

31. Home Buyers (Mortgagors) Appraisers

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

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

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

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

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

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

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

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

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

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

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

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

44. Risk Management and the UNECE Policy Framework

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

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

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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. 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

56. 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

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

58. 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

64. Lags in market reaction Risk Management and the UNECE Policy Framework

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

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

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

69. Lags in market reaction Risk Management and the UNECE Policy Framework

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

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

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

74. “Centralized Approach” Risk Management and the UNECE Policy Framework

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

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

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

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

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

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

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

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

83. “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

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

85. Essential structural problems persist Risk Management and the UNECE Policy Framework

86. 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

87. 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

88. 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

89. Mortgage Market Regulators – pre-DFA

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

91. 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

92. 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

93. 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

94. NOW LET THESE PEOPLE ASK SOME QUESTIONS !

95. AND LET THESE PEOPLE ASK SOME QUESTIONS ! GOOD IDEA !

96. ROLL THE CREDITS !

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

98. Risk Management and the UNECE Policy Framework malloympm@aol.com