World Bank Annual KPMG Workshop Bank Regulatory Update

World Bank Annual KPMG Workshop Bank Regulatory Update Washington, DC May 20, 2015 Hugh Kelly Principal, National Lead Partner Bank Regulatory Advisory

Agenda ■ ■ ■ KPMG’s Global Regulatory Pressure Index Regulatory developments Impact of regulatory pressures on bank structure What are banks doing? What do banks need to do? © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 1

KPMG’s Global Regulatory Pressure Index

Regulatory Pressure Index Global pressure continues to grow Overall, regulatory pressures have risen again this year. In some areas this reflects the continuing challenges of implementing regulatory reforms, now that the details of the regulations have become clear. This includes: ■ Most of the core Basel 3 capital and liquidity standards; ■ Risk and performance-adjusted remuneration; and ■ Some market infrastructure requirements. Global regulatory pressure index 2011 - 2015 33. 7 2011 36. 7 2012 36. 7 2013 37. 0 39. 0 2014 2015 Note: 1. The regional numbers are the sum of the scores in each region across the ten individual areas of regulatory pressure. 2. Mexico is included in the Latin America data. 3. From 2011 to 2013 the global pressure index is the unweighted average of the indices for North America, EMA and ASPAC. In 2014 and 2015 the global pressure index is a weighted average of North America (one-third), EMA (one-third), ASPAC (one-sixth) and LATAM (one-sixth). 4. Data for LATAM is only available for 2014 and 2015. Source: KPMG International Survey, 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 3

Regulatory Pressure Index Regulatory change – Regional divergences ■ Pressures remain highest in North America and Europe, with the most severe pressures in the areas of capital, systemic risk, conduct and culture, and the intensity of supervision. ■ Steady increase in regulatory pressure on banks in the Asia-Pacific region has continued, particularly in liquidity and retail and wholesale conduct. ■ The highest regulatory pressure in LATAM is in the areas of financial crime and tax. ■ In other areas the regulatory pressures reflect the continuing development of regulatory initiatives that are at various stages of evolution, including the risk weighting of assets, the designation and regulatory treatment of domestic systemically important banks (D-SIBs), macro-prudential policy, retail and wholesale market conduct and culture, risk governance, and recovery and resolution planning. Key 1 Our regulatory pressure index is based on a combination of the views of regulatory experts from across KPMG’s global network and banking clients across the Americas (where we separate out Latin America from North America for the first time); Europe, the Middle East and Africa; and the Asia. Pacific region. 2 3 Low Regulatory Pressure © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 4 5 High Regulatory Pressure 4

Regulatory Pressure Index Key areas of regulatory pressure by region Capital – Even as the core Basel 3 standards are being implemented, the shift towards ‘Basel 4’ continues, with the calibration of the leverage ratio either set higher than 3 percent (as in Switzerland the United States, and proposed in the United Kingdom) or yet to be determined, and new pressures on banks emerging from stress testing and from wide-ranging revisions to risk-weighted assets, including the Federal Reserve’s proposed risk-based capital surcharge for global systemically important bank holding companies (GSIBs). Supervision – In addition to the generally tougher supervision that has emerged in all regions since the financial crisis, making the ECB the single banking supervisor in the Banking Union area has already led to a more demanding supervisory approach for many banks subject to direct supervision by the ECB. Governance – Banks are coming under increasing pressure from supervisors to demonstrate that they are meeting the corporate, risk, and data governance requirements in the series of FSB papers on risk governance, the Basel Committee’s revised governance principles, and the Basel Committee’s principles for risk data aggregation and risk reporting. Some countries (including the United Kingdom and the United States) are also seeking to increase the personal responsibility and accountability of senior managers and executives. Source: KPMG International Survey, 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 5

Regulatory Pressure Index Key areas of regulatory pressure by region (continued) Liquidity – Further revisions to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) calculations have, on balance, reduced the pressures here, in particular in Europe through the more generous treatment of covered bonds as a source of high quality liquid assets. However, as with capital requirements, the overlay of stress testing (already underway for the largest US banks), Pillar 2, and macro-prudential requirements for liquidity may increase the regulatory pressures on banks significantly. Systemic risk – Increasing pressures, particularly in Europe and the United States, are building from the designation and regulatory treatment of GSIBS and D-SIBs, minimum requirements for banks to issue long-term bail-in liabilities, and the increasing use of macroprudential instruments. Culture & Conduct – A series of misconduct episodes in the retail, wholesale, and capital markets has left banks and regulators seeking to improve conduct and culture. Regulation and supervision are becoming increasingly intensive in this area. Source: KPMG International Survey, 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 6

Regulatory Pressure Index Key areas of regulatory pressure by region (continued) The highest regulatory pressures here concern financial crime and tax. Banks face increasing demands to demonstrate they meet the stringent requirements of the Foreign Account Tax Compliance Act (FATCA) and of local rules on anti-money laundering and terrorist financing. Meanwhile, an increasing number of countries are entering into information-sharing agreements on tax, requiring banks to report large amounts of information. Source: KPMG International Survey, 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 7

Regulatory developments

Regulatory developments Regulation: The road to implementation The volume of unfinished business is diminishing somewhat as more regulations are moving through the design and calibration stages to implementation, and fewer regulatory reform initiatives remain at an earlier developmental stage. 4 3 1 2 4 2 Unknowns ■ Size limits on banks and/or trading entities ■ New macro-prudential tools (e. g. credit controls) ■ Further bans on sales of certain products to retail consumers ■ Austerity-led pension and other welfare reforms 3 Under development ■ 1 5 ■ ■ ■ ■ Single counterparty credit limits (US) Revised risk weights Capital floor Simplicity versus complexity Capital requirements for simple securitisations IRRBB as a Pillar 1 requirement EU legislation on structural separation Pillar 3 disclosure (phase 2) Mi. FID 2 technical standards ESAs guidelines on retail conduct issues EU fourth AML directive EU Capital Markets Union Mi. FIR technical standards EU legislation on benchmarks EU legislation on MMFs Financial Transactions Tax Designed ■ ■ ■ ■ Key: Leverage ratio D-SIB designation and GSIB riskbased capital surcharges TLAC and MREL FSB risk governance and risk governance principles BCBS corporate governance principles BCBS risk data aggregation and risk reporting principles Macro-prudential tools Haircuts on securities financing transactions Pillar 3 disclosure (phase 1) FSB on assessing risk culture Some EMIR technical standards IOSCO principles for benchmarks ELTIFs Financial stability Conduct and culture Calibrated ■ ■ ■ ■ NSFR BRRD bail-in powers IFRS 9/ECL accounting Disclosure of securities financing transactions Mi. FID 2 Mi. FIR AIFMD MAR and MAD 2 Market infrastructure Implemented (usually on phased-in basis) 5 ■ ■ ■ ■ ■ ■ Basel 3 G-SIB designation Enhanced Prudential Standards OCC Heightened Standards CCAR and stress testing Resolution and recovery planning Risk weights on exposures to CCPs Volcker Capital treatment of securitisations Macro-prudential tools (some countries) LCR Large exposures COREP/FINREP National structural separation legislation BRRD resolution powers Deposit Guarantee Schemes National and single resolution funds EBA SREP guidelines ECB supervision in Banking Union Remuneration Mortgage credit directive EMIR © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 9

Regulatory developments Key regulatory developments: from design to implementation Six areas where banks will need to respond to the continuing evolution of regulatory and supervisory requirements: 1. Macro-prudential regulation 2. Risk-weighted assets 3. Comprehensive Assessment 4. Enhanced Prudential Supervision Standards 5. Total loss-absorbing capacity (TLAC) and minimum required eligible liabilities (MREL) 6. Culture/Conduct © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 10

Regulatory developments 1. Macro-prudential regulation – watch this space Institutional structures for macro-prudential policy are taking shape across the globe. Powers National authorities (and the ECB) are putting powers in place for the use of a wide range of macro-prudential policy tools. In the United States and EU, many of these powers and tools include: ■ The counter-cyclical capital buffer (along the lines set out in Basel 3); ■ A systemic risk buffer (SRB), where the Financial Conduct Authority’s Capital Requirements Directive (CRD IV) provides discretion for member states to impose an SRB in order to address long-term non-cyclical systemic risks not already covered by the minimum capital requirements; ■ Proposed risk-based capital surcharges on G-SIBs and other systemically important financial institutions; and ■ Additional macro-prudential tools, such as large exposure limits, liquidity requirements, sector-specific risk weights to target asset bubbles in the residential and commercial property sectors, limits on intra-financial sector exposures, and disclosure requirements. Implications for banks ■ Banks need to understand what macro-prudential policy measures might be applied to them, when, by whom, and on what basis. ■ These measures may be difficult to predict and follow, especially where new and multiple agencies are involved. ■ Macro-prudential requirements can be large – both absolutely and relative to other regulatory requirements. ■ Macro-prudential requirements can also be wide-ranging – they can operate not just through additional capital requirements, but also through leverage, liquidity, lending standards, sectoral risk weightings, and property taxes. ■ Additional complexity may arise through the patchy application of reciprocity across countries to banks’ cross-border exposures. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 11

Regulatory developments 2. Risk-weighted assets (RWAs) The intention of the standard setters and regulators is clear: to introduce a revised set of standardised approaches, and to use these to constrain the extent to which banks can reduce their capital requirements through the use of internal models. Completing the ‘Basel 4’ picture, these RWA revisions will then complement the development of international standards on leverage and the use of severe but plausible stress tests as additional determinants of minimum capital requirements. Implications for banks ■ Potentially reduce significantly the benefits to banks from the use of internal model-based approaches to credit, market, and operational risk. ■ For some banks, increase the capital required under the standardised approaches and the Collins Amendment’s capital floors. ■ Systems and data management enhancements to calculate the new standardised approaches – including by banks using internal model-based approaches. ■ Supervisory checks that banks are collecting and applying accurate data on their risk exposures, including the valuation of residential and commercial real estate, and the calculation of corporate leverage ratios. Deficiencies here could lead to the imposition of additional Pillar 2 capital requirements. ■ Wider implications on the economy as banks re-price and pull back from some activities. The move to risk drivers and more risksensitive risk weightings will accentuate the capital requirement cost to banks for exposures judged under the proposals to be at the riskier end of the spectrum. This could increase the cost – and reduce the availability – of bank finance and other services for borrowers and other customers. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 12

Regulatory developments 2. Risk-weighted assets (RWAs) (continued) Rationale and overall regulatory approach Credit risk: standardised approach (cont. ) Regulators are concerned that: ■ Banks – replace external credit ratings with two risk drivers: the capital adequacy ratio and an asset quality ratio of the borrower, to determine risk weights ranging from 30 -30%. ■ The standardised approaches to credit and counterparty risk relied too heavily on external credit ratings; ■ Some banks have been too aggressive in the use of internal model-based approaches to drive down risk weightings; and ■ Risk weightings generated by internal models are too inconsistent, complex, and opaque, and this lack of transparency constrains the scope for relying on market discipline. ■ Credit risk mitigation – amend the framework by reducing the number of approaches, recalibrating supervisory haircuts, and updating corporate guarantor eligibility criteria. ■ Sovereigns, central banks and public sector entities – no changes at this stage, pending a wider review of sovereign exposures. Credit risk: standardised approach ■ Corporate exposures – replace external credit ratings with two risk drivers: the revenue and leverage of the borrower, to determine risk weights ranging from 60 -30%. Operational risk: standardised approach ■ Banks – proposed revisions include: (a) refining the operational risk proxy indicator by replacing gross income with a statistically superior measure of operational risk termed the Business ■ Residential mortgages – determine risk weights by two risk Indicator (BI) and comprised of the three macro-components of a drivers: loan-to-value and debt-service coverage ratios, with risk bank’s income statement: the “interest component, ” “services weights ranging from 25 -10%. component, ” and the “financial component, ” and (b) improving the ■ Other retail – tighten the criteria to qualify for the 75% preferential calibration of the regulatory coefficients, preliminarily identified as risk weight. a five-bucket structure with corresponding coefficients increasing in value from 10 percent to 30 percent as the BI increases in ■ Exposures secured on commercial real estate – two options here: value. (a) to treat these as unsecured exposures to the counterparty, with a national discretion for a preferential risk weight under certain conditions, or (b) to determine risk weights on the basis of the loan-to-value ratio, with risk weights ranging from 75 -120%. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 13

Regulatory developments 3. Comprehensive Assessment – immediate and longer-term impacts (continued) During 2014, the ECB conducted a Comprehensive assessment of 130 major banks from 18 member states in the euro area, constituting around 85 percent of euro area bank assets. The two main elements of this assessment were an asset quality review (AQR) and a stress test (conducted jointly with the EBA on an EU-wide basis). Asset quality review ■ As expected, the AQR identified a series of issues, reflecting in part the application of a common approach to impairment criteria and provisioning levels across the euro area. Implications for banks ■ Post-AQR follow-up agenda set out by the ECB. ■ Incentive to sell off non-performing exposures. ■ Wider range of banks subject to stress tests specified by the EBA and ECB, requiring these banks to provide more detailed reported data. ■ Greater emphasis in future stress tests on specific areas of banks’ activities (sovereign debt, household sector, trading book, international and emerging market exposures), the leverage ratio, funding and liability structure, and operational risk and the costs of misconduct. ■ Greater emphasis in future stress tests on banks’ processes and systems for converting macro and financial variable stress tests into an impact on their capital ratios. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 14

Regulatory developments 3. Comprehensive Assessment – immediate and longer-term impacts (continued) ROE NPE Less than 10% More than 10% Less than 5% 55 21 Between 5 and 10% 17 2 Above 10% 30 5 50 45 40 35 30 25. 3 23 25 19. 6 20 15 10 5 0 Large corporates SME Pre-AQR Source: ECB/EBA; KPMG Analysis. Source: Post-AQR 250 44. 6 39. 7 200 150 100 1. 7 2. 2 5. 9 7. 3 1. 5 2. 6 50 Additional provisions in basis points of credit exposure RWAs Number of banks by NPE and Ro. E buckets Total provisions (€bn) Provision reclassifications Non-performing exposures and returns on equity (number of banks) 0 Other Real Shipping estate related Additional provisions in basis points of credit exposure RWAs Project finance European Central Bank, 2014. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 15

Regulatory developments 3. Comprehensive Assessment – immediate and longer-term impacts (continued) The ECB intends to follow up the key shortcomings revealed by the AQR shortcomings Fair value hierarchy Banks will need to revisit their internal definitions and ensure they are aligned to accounting policies adopted by the EU. Forbearance Banks will need to meet revised expectations on how they identify exposures to which forbearance should apply. Provisioning Large AQR adjustment to carrying values highlights the poor coverage ratios across the industry and a need for banks to improve their provisioning processes. Collective provisioning The AQR revealed that a number of banks were out of line with accounting standards in (i) not drawing a clear distinction between individual and collectively provisioned exposures; (ii) not justifying and quantifying emergence periods applied to incurred but not reported calculations; and (iii) using nominal or market rates rather than the effective interest rate. Data systems and quality Some banks lacked easily accessible financial information for debtors such as earnings before interest, taxes, depreciation and amortisation (EBITDA) and cash flows, making it difficult for them to assess the true financial health of borrowers. Trading book processes Banks were found to have weaknesses in model validation; credit valuation adjustment (CVA) calculation methodologies; fair value adjustments; independent price verification; and management information on P&L attribution. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 16

Regulatory developments 3. Comprehensive Assessment – immediate and longer-term impacts (continued) Stress tests The EBA stress test was applied to 124 banks across the EU, covering at least 50 percent of the national banking sector in each member state. The results of the AQR informed the starting point of the stress test for banks in the euro area. Comprehensive assessment adverse scenario impact on capital ratios 12% 11. 8% 0. 4% 2. 1% 10% 0. 8% CET 1 capital ratio 8. 4% 8% 6% 4% 2% 0% 2013 bank reported Source: AQR impact Stress test effect Stress test RWA effect 2016 adverse stress test European Banking Authority 2014. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 17

Regulatory developments 4. Supervision – a new world for large banks Large banks should expect a demand for more data at a very granular level, as regulators undertake large-scale programs and information collection activities that leverage technological advances for analyzing data. Implications for banks ■ Increasing data demands – so banks need a technical infrastructure which is both flexible enough to allow for changing requests and well-enough embedded in a bank’s risk management infrastructure to facilitate periodic exercises such as stress tests. ■ An increasingly pan-European approach to supervision and the phasing out of national discretions. ■ Rigorous supervisory assessment of key supervisory review and evaluation process (SREP) areas. ■ Higher Pillar 2 capital requirements. ■ Increasing number of inspections – both bank-specific and as part of horizontal reviews. ■ New ECB supervisory culture. ECB supervision Large banks supervised directly by the ECB will be supervised by joint supervisory teams, drawn together from the ECB’s own staff and staff from the relevant national supervisor(s). Key features of ECB supervision will include: ■ A common SREP, following the ECB’s Guide to Banking Supervision and the e. Ba’s SREP guidelines (December 2014). ■ A series of horizontal reviews, including a review of variations in risk-weighted assets across jurisdictions arising from differences in national requirements and supervisory approaches to banks’ use of internal models. ■ Rigorous risk analysis at a sector and systemic risk level, based on very detailed data from the banks. ■ Follow-up to the deficiencies uncovered in the AQR and the stress test. ■ Pressure from the ECB on national supervisory authorities to apply more consistent approaches to the banks they continue to supervise, in line with the ECB’s approach to directly supervised banks. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 18

Regulatory developments 5. TLAC and MREL – new kids on the block The FSB issued a consultative paper on TLAC (total loss absorbing capacity) just ahead of the G 20 Brisbane summit in November ■ The FSB proposals are limited to G-SIBs (excluding those from emerging economies) and will not apply until 2019. ■ The EBA proposals for EU credit institutions to hold minimum required eligible liabilities (MREL) will apply a similar approach to the TLAC proposal – and apply it much sooner – to a wider range of banks in Europe. Implications for banks ■ Banks subject to a TLAC and/or MREL requirement may need to raise additional debt that qualifies for inclusion, or to convert some existing long term debt into eligible debt instruments. ■ Banks funded primarily by customer deposits – may have to replace some of these deposits with long-term debt. ■ G-SIBs in the EU will have to meet whichever requirement is higher for them – the RWA-based TLAC or the total liability-based MREL. ■ In addition banks will need to take account of: – Strategic considerations; – Balance sheet management; – Risk management; and – Local requirements. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 19

Regulatory developments 5. TLAC and MREL – new kids on the block (continued) What do TLAC and MREL provide? What is included in TLAC and MREL? TLAC and MREL take the resolution powers of national authorities one step further, by requiring systemically important banks to hold a minimum amount of ‘junior’ liabilities that could be bailed in ahead of ordinary ‘senior’ creditors, and without disrupting the provision of critical functions or giving rise to material risk of successful legal challenge or compensation claims. The TLAC and MREL proposals differ slightly in their eligibility criteria, with the MREL proposals based on the provisions of the Bank Recovery and Resolution Directive (BRRD), which do not require eligible liabilities to be subordinated to all other non-TLAC liabilities. TLAC Tier 1 and tier 2 regulatory capital MREL More than one year remaining maturity Unsecured and uninsured Debt that is: Not subject to any depositor preference Contractually (or under governing law) subject to bail-in in a resolution Subordinated to all other non-TLAC liabilities Source: KPMG International Survey, 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 20

Regulatory developments 6. Culture/Conduct As regulators believe cultural deficiencies were a key contributor to the financial crisis, fostering a sound risk culture that emanates from the top of the house and cascades downward will continue to be a focus ■ Banks are struggling to instill a sustainable risk culture and manage conduct risk ■ Cultures are not always consistent across divisions, business lines, or legal entities ■ Effectively monitoring culture and conduct risk is also posing a challenge ■ Key indicators for measuring culture can include attrition, level of Board engagement, demonstration of effective challenge, and willingness of Boards to quickly address risk appetite breaches Implications for banks ■ Regulators will likely continue to looking for evidence that banks are reinforcing a consistent risk culture through: – Training and awareness programs – An active communications strategy – Alignment of their compensation policies with their risk appetite © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 21

Regulatory developments 6. Culture/Conduct (continued) A “good culture” is marked by specific values - integrity, trust, and respect for the law – carried out with the spirit of a fiduciarytype duty toward customers and a moral obligation toward market integrity. It fosters an environment conducive to timely recognition, escalation, and control of emerging risks and risk-taking activities that are beyond a bank’s risk appetite statement. A culture is influenced by multiple facets, though indicators of a “good culture” include: 1 2 3 4 5 Focus on the “customer” – Doing what is “right” (i. e. , right price, right allocation, equal treatment) and keeping the customer’s best interests at the heart of the business model Tone from the top – The board and senior management set the core values and expectations for the firm and their behavior is consistent with those values and expectations Accountability – All employees know the core values and expectations as well as that consequences for failure to uphold them will be enforced Effective Challenge – Decision making considers a range of views, practices are tested, and open discussion is encouraged Incentives – Financial and nonfinancial compensation available to all levels of employees reward behaviors that support the core values and expectations © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 22

Impact of regulatory pressures on bank structure

Numerous issues are driving changes for banks A number of regulatory pressures are driving changes in bank structure. Some of the commercial and operational synergies that many bank business models were based upon are being undermined by these pressures, especially at universal and cross-border banks. Regulatory pressures on bank structure Capital The regulatory pressures on bank structures include: Central counterparty clearing ■ Higher costs of doing business (higher of minimum requirements for capital, leverage, eligible bail-in liabilities, liquidity, risk governance, and the trading, clearing and reporting of derivatives); Macro- prudential Liquidity Securitizations Bank ■ Constraints on balance sheet composition, business activities, and legal and operational structure; and structure Capital markets union ■ Supervisory intervention in banks’ business models and strategy. Localization Resolution and recovery planning MREL and TLAC Structural separation Supervisory Governance review of and risk business management model viability Source: KPMG International 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 24

Numerous issues are driving changes for banks Banks also face a variety of economic and commercial pressures. Together, these pressures are driving changes in bank structure. The rules of the game have changed and the business model needs to change accordingly. Banks need to focus on: 1. Product and customer propositions and pricing; 2. Balance sheet size and composition, and capital planning; 3. Legal structure, across types of business and across jurisdictions; and 4. Operational structure, including governance, management, organisational structure, risk management and compliance, distribution channels, payment and settlement arrangements, trade and other transaction booking, and the provision of services to support critical economic functions. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 25

Other pressures on banks Complying with ever more complex and extensive regulatory requirements has increased costs significantly at a time when many banks are struggling with the impact of the weak economic environment and falling revenues. European banks are struggling with high costs and low profitability Percent 80 70 Banks need to develop and implement viable and sustainable business strategies in order to meet the expectations of their investors, regulators and customers. 60 50 20 Percent 10 0 -10 -20 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Cost to income ratio Source: Dec-11 Dec-12 Dec-13 Jun-14 Return on equity (Ro. E) ECB consolidated banking data for all EU banks. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 26

Other pressures on banks Customers Banks need to respond to multiple pressures Customers ■ Fewer, more expensive, products and services ■ Regulatory constraints on product and service offerings ■ Less liquid securities ■ Driven to alternative channels of intermediation ■ ■ ■ Investors ■ Looking for adequate returns ■ Prepared to accept lower returns if risk is correspondingly lower ■ Debt coupons will reflect threat of bail-in KPMG International, April 2015. Cultural change Rebuild trust Simplicity Digital channels Effective use of data CHALLENGES FOR BANKS Regulators ■ Banks and the financial system sounder and more stable ■ Higher costs for banks and their customers ■ Lack of trust in banks ■ Promotion of non-bank sources of financing Source: Customer focus ■ Drive Ro. E above cost of equity ■ Meet capital, liquidity, ■ Viable and sustainable business model ■ Identify profitable opportunities ■ Cost reduction ■ Ability to issue new capital and bail-inable long-term debt ■ ■ resolvability & governance requirements Effective risk management Viable and sustainable business model Cultural change Rebuild trust Investors © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 Regulators 27

Regulatory pressures on banks’ balance sheets: Assets Regulatory pressures Regulatory pressure for change Impacts HQLAs ■ LCR ■ Low yielding ■ Unattractive to banks facing leverage ratio constraint ■ Shortage of eligible assets in some countries Other securities ■ Higher capital charges, margins and haircuts ■ Structural separation and resolvability ■ Leverage ratio (constraint on holdings of lower risk weight assets) ■ NSFR constraints on securities financing transactions ■ Reduced secondary market liquidity, especially in corporate bonds ■ Supervisory pressures on booking of trades across a banking group ■ More expensive for customers issuing and trading securities Interbank lending ■ LCR and NSFR ■ Large exposure rules, especially on SIBs ■ Leverage ratio ■ Contraction in interbank market Residential mortgage lending ■ ■ ■ More expensive for borrowers ■ Will margins be sufficient for banks to achieve a respectable return on equity? Unsecured credit to households ■ Limited impact of changes in sector-specific risk weights ■ NSFR Note: Higher risk weights on IRB model approaches Revised standardised approach Leverage ratio NSFR Lower capital charges on simple securitisations? ■ More expensive for borrowers, especially where maturity above one year The number of arrows indicates the extent of regulatory pressure. Upward arrows indicate regulatory pressure on banks to increase a type of asset or liability, while downward arrows indicate regulatory pressure on banks to reduce a type of asset or liability. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 28

Regulatory pressures on banks’ balance sheets: Assets (continued) Assets (cont. ) Regulatory pressures Regulatory pressure for change impacts Unsecured credit to households ■ Limited impact of changes in sector-specific risk weights ■ NSFR ■ More expensive for borrowers, especially where maturity above one year Corporate lending ■ ■ ■ More expensive for customers to borrow from banks ■ Uneconomic for banks to lend to highest quality corporates Revised standardised approach for credit risk Tougher supervisory classification of non-performing loans Stress tests Simple securitisation proposals include SME lending Competition from non-banks and capital markets Infrastructure ■ NSFR lending ■ Potential leverage constraint if low risk weighted (e. g. government guaranteed) Off-balance sheet activities Note: ■ Leverage ratio ■ Central clearing, exchange trading and reporting of OTC derivatives ■ Structural separation proposals ■ Limited bank involvement in infrastructure lending ■ More expensive for customers ■ Reduced availability and higher cost of risk management products and services The number of arrows indicates the extent of regulatory pressure. Upward arrows indicate regulatory pressure on banks to increase a type of asset or liability, while downward arrows indicate regulatory pressure on banks to reduce a type of asset or liability. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 29

Regulatory pressures on banks’ balance sheets: Liabilities Regulatory pressures CET 1 capital ■ Higher minimum, buffer and macro-prudential capital requirements ■ Higher risk weights and capital floor ■ Stress tests ■ Leverage ratio AT 1 capital ■ Limited role of AT 1 capital, but relevant if leverage ratio calibrated using total tier 1 capital Tier 2 capital ■ Diminished role of tier 2 capital, but important for TLAC and MREL requirements Regulatory pressure for change impacts ■ Higher cost of funding, not fully offset by reduced cost of other liabilities ■ Location of issuance increasingly constrained ■ Local requirements for subsidiaries of international banks Other debt ■ TLAC and MREL meeting TLAC and MREL requirements Other medium ■ LCR and NSFR and long-term ■ Structural separation wholesale funding (unsecured) Note: ■ Smaller banks may struggle to raise longer-term unsecured wholesale funding – high cost and limited availability ■ Impact of structural separation on cost and availability of trading entity funding The number of arrows indicates the extent of regulatory pressure. Upward arrows indicate regulatory pressure on banks to increase a type of asset or liability, while downward arrows indicate regulatory pressure on banks to reduce a type of asset or liability. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 30

Regulatory pressures on banks’ balance sheets: Liabilities (continued) Liabilities (cont. ) Regulatory pressures Secured medium and long-term funding ■ ■ Unsecured short- term wholesale (and large corporate) funding ■ LCR and NSFR ■ Tighter large exposure limits for lending between SIBs ■ Possible use of wholesale funding as a criterion for setting capital buffers ■ Regulatory pressure to reduce structural funding gaps LCR and NSFR Capital requirements still evolving for issuers and holders Regulatory pressure for change impacts ■ Investors keen to hold secured liabilities to avoid threat of bail-in Regulatory concerns over excessive asset encumbrance In EU, covered bonds attractive to other banks as HQLAs ■ Contraction of short-term wholesale funding ■ Higher cost of alternative sources of funding Secured short ■ Capital, haircuts and NSFR constraints on securities term funding financing transactions ■ LCR constraint on very short term repo funding Retail funding Note: ■ LCR and NSFR ■ Depositors better protected under deposit protection schemes and creditor hierarchy in bail-in ■ Structural separation and RRP pressures to move retail deposits into a separate and ring-fenced legal entity ■ Moves to make IRRBB a Pillar 1 requirement ■ Tougher consumer protection measures ■ More competition for retail deposits ■ Shifts to less stable types of retail deposit will reduce the share of deposits that ■ count for the most favourable (stable) LCR and NSFR treatments ■ Higher cost to banks of retail deposits The number of arrows indicates the extent of regulatory pressure. Upward arrows indicate regulatory pressure on banks to increase a type of asset or liability, while downward arrows indicate regulatory pressure on banks to reduce a type of asset or liability © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 31

Other pressures on banks In the euro area in particular, weak (or even negative) economic growth has increased the level of non-performing exposures, reduced the demand for borrowing from banks, and made it more difficult for banks to increase their lending margins. Non-performing exposures European banks’ costs and margins 80 Percent Weak economic environment The AQR identified the need for major banks across the euro area to reclassify 18% of reviewed loans from performing to nonperforming. 70 60 50 5 High costs 4 Complying with ever more complex and extensive regulatory requirements has increased costs significantly, at a time when many banks are also struggling with the impact of the weak economic environment and falling revenues. Percent Low margins 3 2 1 0 Dec-06 Dec-07 Dec-08 Cost to income ratio Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Jun-14 Net interest margins Loan impairments (doubtful and non-performing loans as a percentage of total loans and advances) Source: ECB consolidated banking data for all EU banks. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 32

What are banks doing?

What are banks doing? Balance sheet adjustment Consolidated banking data for the EU show: Total assets, loans and advances ■ European banks have re-focused on core activities and markets, and on domestic activities – many banks have retrenched selectively from international markets, both within the EU and especially from outside the EU. 35, 000 70 ■ Loans and advances flat, but increasing as a proportion of total assets. 30, 000 60 ■ Within loans and advances, increase in mortgage lending but fall in corporate lending. 25, 000 50 20, 000 40 15, 000 30 10, 000 20 5, 000 10 ■ Increased holdings of cash and sovereign debt. ■ Some signs of a pick-up in loans and advances in the first half of 2014. € billions 80 0 Dec-08 Dec-09 Total assets Source: ECB consolidated banking data for all EU banks. Source: Dec-10 Dec-11 Loans and advances Dec-12 Dec-13 Jun-14 Percent 40, 000 0 Loans and advances as % total assets ECB consolidated banking data for all EU banks. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 34

What are banks doing? (continued) Trading assets and derivatives ■ Substantial reduction in financial assets held for trading (30 percent decline) and derivatives held for trading (50 percent decline) between 2008 and 2013 – this accounts for most of the € 4 trillion reduction in total assets. 7, 000 6, 000 € billions ■ Shift by some banks to more fee-based and less capital intensive activities, including mergers and acquisitions, securities underwriting, and asset and wealth management. 8, 000 5, 000 4, 000 3, 000 2, 000 1, 000 0 Dec-08 Dec-09 Dec-10 Financial assets held for trading Dec-11 Dec-12 Dec-13 Jun-14 Derivatives held for trading Note: Data for derivatives for June 2014 was not available. Source: ECB consolidated banking data for all EU banks. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 35

What are banks doing? (continued) Capital ratios 15 1879 ■ Improvement in tier 1 capital ratios (up from 8. 5% in 2006 to 13. 3% in 2014). ■ Improvement in leverage ratio through combination of higher capital and deleveraging. 1794 13. 11 10. 53 1385 9 13. 32 12. 02 12 Percent ■ Decline in RWAs from combination of smaller balance sheets, expanding use of internal model based approaches for calculating capital requirements, and shift in asset composition to lower risk- weighted assets. 1811 1760 2000 1878 1500 10. 65 9. 92 8. 9 8. 45 8. 3 1000 6 5. 18 4. 3 4. 46 4. 34 € billions ■ Banks holding more equity capital. 5. 28 4. 67 500 2. 94 3 0 0 Dec-06 Dec-07 Dec-08 Equity Source: Dec-09 Tier 1 ratio Dec-10 Dec-11 Dec-12 Dec-13 Jun-14 Tangible equity/tangible assets ECB consolidated banking data for all EU banks. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 36

What are banks doing? (continued) Deposits ■ Substantial decline in deposits from other credit institutions. 16, 000 ■ Substantial increase in deposits from non- credit institutions. 12, 000 € billions ■ So rising customer deposit to loan ratio and fall in wholesale funding. 14, 000 10, 000 8, 000 6, 000 4, 000 2, 000 0 Dec-08 Dec-09 Dec-10 Deposits from credit institutions Source: Dec-11 Dec-12 Dec-13 Jun-14 Deposits from non-credit institutions ECB consolidated banking data for all EU banks. The picture is different for many banks in the Middle East, where difficult conditions in traditional domestic markets (relatively small populations, highly competitive markets for lending to large corporates, and problems in some large borrowers) have led to attempts to expand lending to SMEs, and to an expansion of overseas activity, including in support of trade between the Middle East and Turkey, Africa and Asia. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 37

What do banks need to do?

What do banks need to do? Banks need to build a viable and sustainable business model, which At the center: Sustainability and viability of banks’ delivers adequate returns, adequate capital and liquidity resources, business models and acceptable resolvability. Profitability • Ro. E more than covers cost of equity • Successful provision of profitable Viable and sustainable business model business lines • Cost control A fundamental overhaul of a bank’s business model requires: ■ A clear understanding of performance, including at business activity level; ■ Managing out non-performing exposures; ■ Capital optimisation; ■ Re-pricing; ■ Cost reduction; and ■ The development of a revised strategy. 1 Liquidity Capital • Meet all regulatory liquidity requirements • Meet internally assessed liquidity and funding requirements • Liquidity planning • Ability to access additional liquidity as and when required 4 Viable and sustainable business model 2 capital and leverage requirements • Meet internally assessed capital requirements • Capital planning • Ability to access fresh equity as and when required 3 Resolvability • Meet all legislative requirements on structure and resolution • Credible and effective recovery and other contingency planning • Facilitate resolution planning by the authorities • Legal and operational structure, continuity of critical economic functions and of the se rvices that support them • Sufficient loss absorbing capacity Source: KPMG International 2015 © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 39

What do banks need to do? (continued) Re-pricing Repricing to cover return on equity shortfalls Banks need to improve their net interest and operating margins as one element of improving profitability. 63 8. 7 8. 5 60 9 7. 8 54 50 8 7 6. 4 41 Percent This amount of re-pricing is unlikely to be achievable. Banks attempting to deliver such an increase would lose business to other, less pressured, banks and to non-banks. The IMF therefore uses this measure not to predict how far margins will actually rise, but as an indicator of how far banks still have to move in their transition to new business models. 63 40 5. 2 6 5. 0 32 30 23 5 4 22 Basis points The IMF estimates that banks in some countries would need to increase their margins by more than 50 basis points on average across all their assets in order to generate a 10% return on equity in 2015 – and these estimates assume that these banks do not face capital constraints and are able to increase their customer lending. 10 70 3 20 2 10 1 0 0 Smaller vulnerable euro area Germany Italy France Austria Spain UK IMF estimated Ro. E (percent) for sample of banks(a) Repricing (in basis points) of net interest margin required to increase Ro. E to 10% Note: Source: (a) Based on analysts' forecasts for 2015 IMF Global Financial Stability Report, October 2014 © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 40

What do banks need to do? (continued) Cost reduction Banks also need to cut costs. Some progress has been made here since the financial crisis, but the rising cost to income ratio for European banks shows that significantly more progress needs to be made. Banks in the Middle East (where cost to income ratios are generally lower than in Europe) are also focusing increasingly on cost reduction, not least in response to the sharp decline on oil prices. Five areas provide significant scope for many banks to reduce costs Salary costs On average, bank salaries have continued to rise more rapidly than in most other sectors of the economy, and have not reflected the declines in bank income and profitability since the financial crisis. Staff numbers The closure of, or reduction in, some business lines, branch closures, and greater reliance on digital delivery channels for products and services all provide scope for a further reduction in staff numbers. Simplification Some of the cost base of banks reflects the complexity of their products, services, legal and operating structures, operating platforms and systems, and booking models. There is scope to simplify in all these areas, and to drive down costs accordingly. Investment in technology Combined with less complexity, IT investment is capable of reducing costs over the longer term, while also improving (or at least protecting) income through improved customer service, risk management and cyber security. Outsourcing/shared services Banks should be able to benefit from centralised and streamlined infrastructure platforms capable of supporting multiple business and customer propositions, on either an internal or outsourced basis. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 41

What do banks need to do? (continued) Strategy Banks are pursuing different strategies. There is no unique path to a viable and sustainable future. Five approaches can be identified: Some banks already have a successful business model which has proved to be robust during the financial crisis, delivering across the dimensions of profitability, capital and liquidity. A small number of banks have moved decisively to a different and viable business model in response to the financial crisis, not least by moving quickly to identify and develop successful core business activities, shedding activities deemed to be insufficiently profitable, and simplifying and rationalising legal and operational structures. Some banks are adopting a proactive approach to strategic change, but without a very clear sense of an end point. The jury is still out on whether this will be sufficient to generate a viable and sustainable future. Many banks have been forced to contract and restructure to survive, but very reactively in response to losses and capital shortfalls. This may have enabled these banks to meet minimum regulatory requirements, but it remains uncertain whether they have a viable and sustainable future in terms of profitability. Too many banks are hoping that a battered model will somehow pull through in the end, without the need for significant strategic change. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 42

What do banks need to do? (continued) Conclusion Pressures on banks Banks face a myriad of commercial and regulatory pressures, as illustrated in the Pressures on Banks graphic below. All banks face higher costs from regulatory reforms and commercial pressures to become more profitable. Improve profitability Expand Successful Return on equity All banks face higher costs from regulatory reforms and commercial pressures to become more profitable. Large banks face various regulatory pressures to become smaller and, in some cases, to restructure. Expand Successful Smaller separated Higher costs Cost of equity (10 -12%) Improve profitability Retrench and improve profitability Unsuccessful Exit? Higher costs Smaller banks and niche players Regulatory pressures Improve profitability Unsuccessful Smaller separated Higher costs Larger banks Bank size and complexity Commercial pressures and opportunities Source: KPMG International 2015. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 43

Questions?

Hugh Kelly KPMG LLP Principal & U. S. Lead Partner for Bank Regulatory Advisory Hugh is a KPMG U. S. Principal and the Lead National Partner for Bank Regulatory Advisory Services. He is the U. S. Co-Lead Partner for KPMG’s Global Regulatory Center of Excellence and member of KPMG’s Global Basel & Global FS Regulatory Steering Committees. Key responsibilities and accomplishments: • Governance, Risk & Compliance: • Lead partner on engagements assisting large systemically important financial institutions enhance governance, risk and compliance management frameworks, including risk culture, capital and liquidity planning, risk appetite process, operational risk management, third party risk oversight and internal audit processes. Hugh C. Kelly Principal & National Lead Partner – Bank Regulatory Advisory KPMG LLP 1801 K Street, NW Washington, DC 20006 Tel 202 533 5200 Cell 301 938 5423 hckelly@kpmg. com • Conducts independent “Get to Strong / Heightened Expectations” assessments focused on meeting regulatory expectations, enhancing effectiveness and clarity of roles/responsibilities across the “three lines of defense” and promoting sustainability and effective challenge of the risk governance framework. • Assists numerous bank and non-bank prepare for OCC and Federal Reserve examinations as well as effectively address regulatory matters ( i. e. , MRA, MRIA, enforcement actions). • Operational Risk Management and Third-Party Risk Management • Industry leader in designing and implementing enhanced Risk & Control Self Assessment (RCSA) and Third -Party Risk Assessment frameworks to meet the heightened regulatory expectations and need for consistent risk intelligence to improve decision-making, reporting and practical integration with risk appetite. • Leading driver for KPMG International being been named “Best Overall Consultancy” by Operational Risk Education, Licenses & Certifications § Bachelor’s degree in Finance from Loyola Marymount University, Los Angeles, CA § Graduate of Pacific Coast Graduate Banking School; ABA International Banking School § Commissioned National Bank Examiner and Regulation magazine, whose annual awards recognize companies that demonstrate innovative thinking and provide useful solutions to the operational risk management challenges faced by the financial services industry. • Led KPMG/RMA’s Operational Risk Management Excellence - Get to Strong Survey of large financial institutions to provide benchmarking intelligence on leading industry ORM practices in support of enhanced business value, heightened regulatory expectations for “strong” risk management and Basel AMA “use test” requirements. • Led KPMG’s assistance to BITS and The Financial Services Roundtable on a study on Reconciliation of Regulatory Overlap for Management and Supervision of Operational Risk in U. S. Banks, which identified overlapping regulatory compliance requirements in SOX 404, FDICIA, GLBA 501 b and the Basel II AMA Guidance for Operational Risk Management. (continued) © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 146134 45

Hugh Kelly KPMG LLP Principal & U. S. Lead Partner for Bank Regulatory Advisory (continued) • Bank/BHC Charters/Licenses , IHC and Cross-Border Regulatory Challenges: • Assists numerous U. S. and foreign institutions apply for and establish US branch and bank licenses, plan for and implement legal entity and governance frameworks for an Intermediate Holding Company (IHC) under Section 165 - Enhanced Prudential Standards and Early Remediation Requirements for FBO’s, including focus on risk appetite, risk culture, credible challenge, regulatory reporting, and Regulation W compliance • Co-leader of KPMG’s Global Regulatory Center of Excellence (COE), which is focused on providing clients with timely and insightful thought leadership on emerging global regulatory developments and challenges. • Assists numerous global financial institutions manage cross-border “home-host” regulatory challenges. • Member of the Institute of International Finance’s (IIF) Effective Supervision Advisory Group and Shadow Banking Working Group. • Active speaker and participant in international regulatory groups and fora sponsored by the IIF, Group of 30, Institute of Institutional Bankers (IIB), Risk Management Association (RMA), The Clearing House, BITS, ORX, etc. Prior to joining KPMG in 2004, Hugh had a 26 year career with the U. S. Office of the Comptroller of the Currency (OCC). Key responsibilities and accomplishments: • Hugh joined the OCC in 1977 and was commissioned as a national bank examiner in 1980. He examined complex community, regional and money center banks from the OCC’s Los Angeles Office, until he was assigned in 1985 to the OCC’s London Office to examine European operations of large U. S. national banks. From 1988 -1998, Hugh was a lead capital markets specialist, the Executive Assistant to the Senior Deputy Comptroller for Bank Supervision in Washington, DC, a Large Bank Examiner-in-Charge, and led domestic and international examinations at numerous large national banks, including Bank of America, Bank of Boston, Banc One, Chase Manhattan, Citibank, Continental Illinois, First Chicago, Mellon Bank, Nations Bank, Norwest, Security Pacific, and Wells Fargo. • From 1998 - 2004, Hugh was the Senior Advisor for Global Banking and Head of the Global Banking Division responsible formulating the OCC’s supervisory plans for emerging global risks affecting U. S. large banks. During this time, Hugh was: • OCC representative to U. S. and global multilateral supervisory groups and associations, including the Basel Committee on Banking Supervision (BCBS), for which Hugh represented the OCC on several working groups/task forces, FFIEC IT Technology Working Group; U. S. Interagency Critical Infrastructure Working Group; U. S. Interagency Country Exposure Review Committee (ICERC); Shared National Credit (SNC) Program; Association of Supervisors of Banks of the Americas (ASBA); Asia-Pacific Economic Cooperation (APEC) Bank Supervisors Committee; Caribbean Group of Banking Supervisors (CGBS); President’s Council on Y 2 K; Global 2000 Coordinating Committee; IIF; Group of 30; IIB; FSR/BITS; and RMA Operational Risk Management Discussion Group. • Co-leader in the development of OCC and U. S. Inter-agency and BCBS guidance implementing the Basel II Operational Risk Advanced Measurement Approach (AMA), and supervisory guidance on third party risk management and off-shoring, Internet banking, IT risk management, information security programs, country risk management, capital markets and foreign exchange trading. © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 146134 46

Lisa Newport KPMG LLP Associate Director Professional and Industry Experience Lisa has more than 18 years of experience in the financial services industry. She currently serves as an associate director in KPMG’s Americas Financial Services Regulatory Center of Excellence, working with engagement teams and clients to provide analysis and insights into the implications of regulatory changes, distill the impact of regulatory developments on clients’ businesses, and advise them on adapting their business models to thrive in this dynamic environment. Areas of focus include Basel III capital and liquidity standards; the Dodd-Frank Act (e. g. , the Volcker Rule, enhanced prudential standards, heightened standards, and CFTC/SEC-regulated swap, security-based swap, and mixed swap markets); risk data aggregation, systems, and reporting; and operational risk management. LISA M. NEWPORT Associate Director KPMG LLP 1801 K Street NW Suite 12000 Washington D. C. 20006 Tel 202 -533 -3075 Fax 202 -315 -3460 Cell 202 -365 -8875 lisanewport@kpmg. com Function and Specialization Lisa’s focus is financial risk management specializing in policy analysis and research related to quantitative and qualitative risk management, banking safety and soundness, and capital markets. Education n MBA degree, Massachusetts Institute of Technology n BA degree, mathematics, Mills College Prior to joining KPMG, Lisa served as director of capital markets at Grant Thornton LLP for six years, leading the group’s quantitative and qualitative research and analytical efforts analyzing debt and equity market trends. Prior to that, she worked for the Federal Reserve Board for over five years, leading policy initiatives, rulemaking, and supervisory reviews related to Basel II operational risk management and measurement in the Division of Banking Supervision and Regulation. Lisa also spent more than seven years at The NASDAQ Stock Market, specializing in financial industry research and equity market structure. Sample Publications n “Regulatory Practice Letters, ” KPMG (2015). http: //www. kpmg. com/us/regulatorypracticeletters n “Meeting the Liquidity Requirements Without Breaking the Bank, ” Bloomberg BNA (2015). n “The Volcker Rule: A Deeper Look into the Prohibition on Sponsoring or Investing in Covered Funds, ” KPMG (2015). http: //www. kpmg. com/US/en/Issues. And. Insights/Articles. Publications/Documents/volcker-covered-funds-pov. pdf n “The Changing Face of Regulatory Reporting: Challenges and Opportunities for Financial Institutions, ” KPMG (2014). http: //www. kpmg. com/Global/en/Issues. And. Insights/Articles. Publications/regulatory-challenges/Documents/changing-face-regulatory-reporting-fs. pdf n “Operational Risk Management: Getting to Strong, ” The RMA Journal, May 2014. http: //www. kpmg. com/US/en/services/Advisory/risk-and-compliance/financial-risk-management/Documents/rma-journal-orm-survey. pdf n Weild, D. , E. Kim and L. Newport (2013), "Making Stock Markets Work to Support Economic Growth: Implications for Governments, Regulators, Stock Exchanges, Corporate Issuers and their Investors, " Organization for Economic Cooperation and Development (OECD) Corporate Governance Working Papers, No. 10, OECD Publishing. http: //dx. doi. org/10. 1787/5 k 43 m 4 p 6 ccs 3 -en © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 47

Americas Financial Services Regulatory Center of Excellence KPMG’s Americas FS Regulatory Center of Excellence (Co. E) is based in Washington, DC and is comprised of key industry practitioners and regulatory advisors from across KPMG’s global network. These individuals work with engagement teams and clients to provide insights into the implications of regulatory changes, distill the impact of regulatory developments on clients’ businesses, and advise them on how to adapt their models to better thrive in this dynamic environment. Recurring Publications Visit Us www. kpmg. com/us/thewashingtonreport www. kpmg. com/regulatorychallenges www. kpmg. com/us/regulatorypracticeletters www. kpmg. com/us/regulatoryalerts www. kpmg. com/us/pointsofview Contact Us / Subscribe regulationfs@kpmg. com © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 48

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. NDPPS 366348 The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).