In This Issue: Can Global Banking's Golden Age Continue?: The global financial sector is in robust health. As for global investment banking, the past three years have been among the best in the industry's history. We believe that structural improvements-resulting from global consolidation, improved risk management processes, tightening of costs, and better regulation-position the industry well to ride out a number of future risk scenarios.Outlook: European Banks Set To Maintain Strong Fundamentals Despite Cyclical Softening: Sustained growth in all business lines feeding interest margins and commissions-together with buoyant capital markets activities, controlled cost growth, and cost of credit risk at cyclical lows-confirmed the trend of increasing profits for the largest European banks during the first half of 2006. Why Asian Banking Systems Are Now More Shock-Resistant: Asia's banking systems continue to face medium to high economic and industry risks, unexpected shocks, and the inevitable cyclical slowdown. Visible threats include weakening U.S. consumer demand, persistently high oil prices, and rising interest rates. U.S. Banking Industry Faces Uncertainty From A Position Of Strength In 2007: Despite numerous industry challenges, banking institutions have been able to record increased profitability. Standard & Poor's anticipates profit momentum to slow in 2007, but the typical U.S. bank should continue to record healthy profitability levels by historical standards. U.S. Mortgage Banking Outlook 2007: Navigating Through Correcting Housing Markets: Lenders, consumers, and investors are accepting higher risk Alt-A and subprime loans in greater numbers. This layering of credit risk in mortgage lending practices has generated loans whose performance has not been tested in a weak housing and economic cycle. Global Investment Banks Appear Ready To Ride Out The Next Down Cycle: A key risk arising from adverse market conditions for investment banks is that it could lead to a sharp fall in market activity and customer demand. In such an environment, investment banks would need to act quickly, adjusting their cost bases accordingly to the changing conditions. Market Liquidity Is Changing Leverage Dynamics For U.S. Finance Companies: For many finance companies, the trend toward higher leverage that became evident in 2006 is likely to continue into 2007. The success of alternative investment vehicles once again proved the old adage that everything old is new again. Aging Baby Boomers Are U.S. Asset Managers' Best Friends: The baby boom generation comprises 78 million Americans and the oldest of them will be eligible to collect Social Security in two years. Nevertheless, the transition to retirement should not result in a massive outflow of funds from asset managers. Despite Challenges, 2007 Looks Healthy For U.S. Asset Managers: Standard & Poor's expects the U.S. asset management industry to continue to perform well during the next year, despite a challenging environment. The problem: Growing fee pressure and rising competitive threats will contribute to less robust growth in asset gathering. Why Is Enterprise Risk Management In The Spotlight?: Financial institutions face ever-growing pressure to formalize their risk management processes and governance. A holistic approach is needed, and the challenges for the banking community are immense. Evaluating Risk Appetite: A Fundamental Process Of Enterprise Risk Management: The robustness and integrity of a firm's enterprise risk management practices hinge to a great extent on its articulation of the various risk tolerances or risk limits established through its risk appetite process. What Potential Analytical Hurdles Come From Fair Value Option Accounting?: Assets and liabilities recorded on a company's balance sheet can be presented using differing measurement bases depending on the applicable accounting rules governing a specific item or group of items. Moderate Pressure On U.S. Financial Institutions' Capital Is Expected From New Pension Accounting Standard: Significant changes in the accounting for defined-benefit postretirement plans that will mandate full recognition of pension and other postretirement obligations on the balance sheet will negatively affect the amount of GAAP capital reported by many U.S. financial institutions at year-end 2006. | 
