Banking, Investment Banking And Securities

F I N A N C I A L S E R V I C E S

T H E S T A T E O F

T H E B A N K I N G I N D U S T R Y

B a n k i n g a n d

I n v e s t m e n t B a n k i n g & S e c u r i t i e s

A p r i l 1 – J u n e 3 0 ,

2 0 0 3

A p r i l 1 t h r o u g h J u n e 3 0 ,

2 0 0 3

P u b l i s h e d A u g u s t 2 0 0 3

The State of the Banking Industry is published by KPMG’s Banking practice for members of the Banking
and Investment Banking and Securities Industries. Information and statistics contained in this document
were obtained from publicly available materials. The information provided here is of a general nature and
is not intended to address the circumstances of any particular individual or entity. Although we endeavor
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 upon such
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particular situation.

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F I N A N C I A L S E R V I C E S

T H E S T A T E O F T H E B A N K I N G I N D U S T R Y

B a n k i n g a n d I n v e s t m e n t B a n k i n g & S e c u r i t i e s

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

T A B L E O F C O N T E N T S

Q u a r t e r l y U p d a t e s

General Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounting Standards and Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

M a r k e t F o r c e s

Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidation and Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Focus and Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

e-Business and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

K P M G ’s B a n k i n g I n s i d e r

Analysis and Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

Q U A R T E R L Y U P D A T E S

G e n e r a l H i g h l i g h t s

On May 8, 2003, the Public Company Accounting
Oversight Board announced that Thomas Ray is joining
the Board’s staff as Deputy Chief Auditor who will work
closely with Chief Auditor Douglas R. Carmichael. Mr.
Ray, a partner in KPMG LLP’s Department of
Professional Practice – Assurance, has been the
chairman of the International Auditing Standards
Subcommittee of the AICPA, a member of the AICPA
Internal Control Reporting Task Force, and a member of
the International Auditing and Assurance Standards
Board Quality Control Task Force. (PCAOB press
release, May 8, 2003)

On June 2, 2003, NASD announced that it has agreed to
principle terms to sell the American Stock Exchange to
GTCR Golder Rauner LLC, a Chicago based private
equity firm for approximately $110 million, subject to
completion of definitive sale documents and various
approvals. In line with NASD’s key goals to exit
ownership of exchanges and focus on its core mission as
a regulator to promote market integrity and protect
investors, NASD began the process by spinning off
Nasdaq in 2000. (NASD press release, June 2, 2003)

The final report and recommendations of the
NYSE/NASD IPO Advisory Committee was issued on
May 29, 2003 and proposes 20 steps to enhance public
confidence in the integrity of the IPO process. The
Committee, formed in October 2002 by the New York
Stock Exchange and NASD at the request of the SEC,
included corporate, financial and academic leaders.
Recommendations of the Committee are intended to
complement the numerous recent legislative and
regulatory initiatives, including the Global Settlement
among regulators and major investment banks. Overall:

– The IPO process must promote transparency in

pricing and avoid aftermarket distortions.

– Abusive allocation practices must be eliminated.

– The flow of, and access to, information regarding

IPOs must be improved.

(NASD/NYSE press release, May 29, 2003)

On June 5, the NYSE’s board of directors adopted initial
recommendations of its Special Committee on
Governance of the NYSE that would annually disclose
director and senior executive compensation, prohibit
NYSE officers from serving on the boards of listed
companies, and provide that the NYSE’s compensation
committee consist only of non-securities industry
directors. These were among ten initial steps to be put
into effect immediately to ensure that the NYSE’s
governance structure and practices best serve the 85
million people who invest, directly or indirectly, through
the NYSE. (NYSE press release, June 5, 2003)

New Tillinghast-Towers Perrin research indicates that
there is going to be a considerable increase in the sale of
financial services products through the workplace,
particularly in the areas of critical illness, health
insurance, and banking products such as personal loans,
credit cards and mortgages. Reasons behind the expected
growth include the relatively low customer acquisition
costs; the increasing interest in flexible benefit schemes
of employers as they look to reduce their costs while
adding choice; the need to educate consumers on
financial issues as the Government seeks ways in which
to reduce the retirement savings gap; and the potential
change from occupational pension schemes to individual
plans. (Tillinghast press release, June 2, 2003)

Weiss Ratings, Inc. noted that in 2002 the banking
industry set a new record for profits, earning $105.3
billion, outpacing its previous record of $87.5 billion in
2001. With interest rates at near record lows, the surge
in consumer demand for loans more than offset the
decline in commercial lending. Banks saw more
profitable net interest margins, higher values for bond
holdings and increased consumer demand for mortgages,
home equity and credit card loans and other consumer
borrowing. There was a 9.7 percent increase in both
home mortgage lending and consumer loans and a 39.1

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BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

Q U A R T E R L Y U P D A T E S

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percent increase in home equity loans in 2002, while
commercial and industrial lending saw a decline of 5.3
percent for the year. For the week ended June 27, 2003,
the U.S. 30-year fixed rate mortgage averaged 5.24
percent vs. 6.55 percent a year ago; 15-year rates
averaged 4.63 percent vs. 5.99 percent at this time last
year; and one-year adjustable rate mortgages averaged
3.45 percent vs. 4.61 percent a year ago. (Weiss Ratings,
Inc. press release, May 12, 2003; Freddie Mac press
release, June 26, 2003)

The Office of Federal Housing Enterprise Oversight
reports in its latest quarterly House Price Index that
average prices for U.S. homes increased 6.48 percent
from the first quarter of 2002 through the first quarter of
2003. At the same time, the quarterly national average
price appreciation continued deceleration at 0.94 percent
from 1.3 percent last quarter. In the current quarter, all
U.S. states experienced positive growth, with California
continuing to dominate the ranks of the Top 20. (Office
of Federal Housing Enterprise Oversight press release,
June 9, 2003)

On July 16th Sanford I. Weill announced his decision to
step down as head of Citigroup, effective in January
2004. Charles O. Prince will become Citigroup’s new
Chief Executive Officer and Robert B. Willumstad,
President, will become Chief Operating Officer. Mr.
Weill will remain Chairman of the Board until the 2006
Annual Meeting of Citigroup shareholders. (Citigroup
press release, July 16, 2003)

E a r n i n g s

U. S . B a n k E a rn i n g s

B a n k o f A m e r i c a C o r p . :

With a strong

performance in most product lines such as mortgage,
debit and credit cards, deposits and loans, Bank of
America reported record earnings of $2.74 billion in the
second quarter of 2003, compared to $2.22 billion for
the same quarter a year ago. Net income for Bank of
America's consumer and commercial banking segment

was $1.87 billion, compared to $1.59 billion in the
second quarter of 2002. Total revenue for BofA's credit
card operation in the second quarter of 2003 was $1.04
billion, compared to $806 million a year earlier. Return
on assets was 1.42 percent, compared to 1.38 percent in
the second quarter 2002, while return on equity was
21.86 percent, compared to 18.47 percent for the year-
earlier quarter. Assets on June 30 were $769 billion.

B a n k o f N ew Yo rk :

The closing of Pershing

lowered Bank of New York’s reported net income to
$295 million for the second quarter, compared to $361
million in the second quarter of 2002. Return on assets
was 1.30 percent, compared to 1.82 percent a year
earlier, while return on equity was 15.56 percent,
compared to 22.59 percent a year ago. The bank's non-
interest income was $996 million, compared to $855
million in the second quarter last year, while net interest
income was $398 million, compared to $423 million a
year earlier. Assets on June 30 were $99.8 billion.

B a n k O n e C o r p . :

Reported 2003 second-quarter

net income of $856 million, compared to $803 million in
the second quarter of 2002 (excluding a $40 million
after-tax benefit from a restructuring charge reversal in
the second quarter of 2002). Bank One's retail line of
business recorded net income of $373 million (excluding
$11 million after-tax benefit from a restructuring charge
reversal a year earlier), compared to $371 million a year
earlier, while its commercial banking business had net
income of $249 million (excluding the $3 million after-
tax benefit from a restructuring charge reversal in the
prior year), compared to $147 million in the second
quarter of 2002. Return on assets totaled 1.24 percent,
compared to 1.32 percent a year earlier, while return on
equity was 15.3 percent, compared to 15.7 percent in the
year-ago quarter. Reported total assets on June 30 were
$299 billion.

C i t i g ro u p :

Helped by its strong consumer business,

the nation's largest financial services company reported
second-quarter operating earnings of $4.3 billion,
compared to $3.83 billion a year earlier. Net income was

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

Q U A R T E R L Y U P D A T E S

earnings for J.P. Morgan's investment bank operation was
$1.09 billion, up 114 percent from second quarter 2002,
and its Chase Financial Services business reported record
operating earnings of $883 million, an increase of 36
percent from 2002's second quarter. Return on assets was
0.96 percent, compared to 0.56 percent in the year-ago
quarter, and second-quarter return on equity was 17
percent, compared to 10 percent a year ago. Assets on
June 30 were $803 billion.

M e l l o n F i n a n c i a l C o r p . :

Reported second

quarter operating income of $173 million, compared to
$106 million for the second quarter last year. Net income
was $175 million, compared to $109 million in the year-
ago quarter. Total non-interest revenue was $874 million,
compared to $923 million in the second quarter of 2002;
investment management fee revenue was $334 million in
the quarter, compared to $355 million a year earlier.
Return on equity was 19.5 percent, compared to 12.6
percent in 2002's second quarter. Assets on June 30 were
$38.9 billion.

M e r r i l l Ly n c h :

Reported second quarter 2003 net

earnings of $1.02 billion, compared to $634 million for
the comparable quarter in 2002, an increase of 61 percent
mainly due to strong bond trading, cutting costs and
increasing profit margins. The earnings per diluted share
were $1.05 compared to $0.66 in last year’s quarter. Non-
interest expenses declined by 3.7 percent or $150 million
in the quarter. The Global Markets and Investment
Banking group produced quarterly pre-tax earnings of
$1.11 billion, 72 percent over last year’s second quarter.
Return on average common equity was 17.0 percent in the
second quarter 2003, compared to 12.0 percent a year
earlier.

M o r ga n S t a n l ey

Reported second quarter 2003

net income of $599 million, including a pre-tax asset
impairment charge of $287 million from Morgan
Stanley’s aircraft financing business, compared to $797
million for the comparable quarter in 2002, a decrease of
25 percent. The earnings per diluted share were $0.55

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also $4.3 billion, compared to $4.08 billion a year earlier.
Citi's consumer cards operation had income of $768
million for the quarter, compared to $722 million a year
ago, while its retail banking operations had income of
$1.05 billion, compared to $645 million in 2002's second
quarter. Income for Citigroup's total global corporate and
investment bank was $1.34 billion, compared to $1.32
billion a year earlier. Return on equity was 19.2 percent,
compared to 19.5 percent in the second quarter of 2002.
Assets on June 30 were $1.19 trillion.

F l e e t B o s t o n F i n a n c i a l :

Reported net income of

$624 million for the second quarter of 2003, compared to
a net loss of $386 million for the second quarter last year,
mainly due to the bank’s position of becoming more
consumer-oriented after suffering losses from its
Argentine business and reducing its risk. Net chargeoffs to
average loans was 1.59 percent, compared to 3.29 percent
in the second quarter of 2002. Return on average assets
was 1.27 percent and return on equity was 14.47 percent.
Assets on June 30 were $197.1 billion.

G o l d m a n S a c h s

Reported second-quarter 2003

net earnings of $695 million, compared to $563 million
for the comparable quarter in 2002, an increase of 23
percent resulting from solid operations from the Fixed
Income, Currency and Commodities franchise. The
earnings per diluted share were $1.36 compared to $1.06
in last year’s quarter. According to Goldman Sachs, Fixed
Income, Currency and Commodities (FICC) produced
quarterly net revenues of $1.59 billion, 39 percent over
last year’s second quarter. Annualized return on average
tangible shareholders’ equity was 18.7 percent, and
annualized return on average shareholders’ equity 14.1
percent for second quarter 2003. Total capital as of May
30 was approximately $71.3 billion.

J. P. M o r ga n C h a s e & C o . :

Boosted by bond

trading and consumer banking, J.P. Morgan Chase
reported operating earnings and net income of $1.8 billion
in the second quarter, compared to operating earnings of
$1.18 billion and net income of $1.0 billion a year earlier
that included merger and restructuring costs. Operating

First quarter ended May 31, 2003

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

Q U A R T E R L Y U P D A T E S

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quarter. Net chargeoffs to average loans was 0.44
percent, compared to 0.62 percent in the second quarter
of 2002. Return on average assets was 1.11 percent,
compared to 1.29 percent in the same quarter last year,
and return on equity was 14.95 percent, compared to
15.77 percent in 2002's second quarter. Assets on June
30 were $120.9 billion.

U. S . B a n c o r p :

Reported second-quarter net

income of $954 million, compared to $823 million a
year ago. Net interest income in the second quarter was
$1.81 billion, compared to $1.69 billion in the same
quarter last year; non-interest income was $1.67 billion,
compared to $1.44 billion in 2002's second quarter.
Return on assets was 2.04 percent, compared to 1.95 a
year earlier, while return on equity was 20.0 percent,
compared to 20.0 percent in the second quarter of 2002.
Assets on June 30 were $195 billion.

Wa c h ov i a C o r p . :

Reported second-quarter net

income of $1.03 billion, compared to $849 million for
the same quarter a year ago. Non-performing assets as a
percentage of total loans was 1.04 percent for the
quarter, compared to 1.24 percent a year earlier;
chargeoffs were 0.43 percent, compared to 0.97 percent
in the second quarter of 2002. Average core deposits
were $179 billion during the second quarter, compared
to $165 billion a year ago. Return on assets was 1.21
percent, compared to 1.09 percent in the year-ago
quarter; return on equity was 12.78 percent, compared to
11.52 percent in the second quarter of 2002. Assets on
June 30 were $364 billion.

Wa s h i n g t o n M u t u a l I n c . :

Boosted by branch

growth and mortgage lending, Washington Mutual
reported net income in 2003's second quarter of $1.02
billion, compared to $990 million for the same quarter a
year ago. Net interest income after provisions for loan
and lease losses was $1.91 billion for the quarter,
compared to $1.94 billion in the second quarter of 2002.
Wamu's non-interest income was $1.63 billion for the
second quarter of 2003, compared to $1.21 billion a year
earlier. Return on assets was 1.44 percent, compared to

compared to $0.72 in last year’s quarter. Institutional
Securities posted quarterly net income of $298 million,
33 percent below last year’s second quarter. The Fixed
Income Sales & Trading net revenues increased year-
over-year by 48 percent to $1.3 billion. Return on
average common equity was 10.6 percent in the second
quarter 2003, compared to 15.1 percent a year earlier.
Total capital as of May 31, 2003 was $78.7 billion.

N a t i o n a l C i t y C o r p . :

Helped by a strong core

deposit, consumer loan and mortgage results, National
City Corp. reported net income of $617 million for the
second quarter, compared to $393 million for the same
period a year earlier. Net interest income after provisions
for loan losses was $919 million, compared to $806
million in 2002's second quarter, and fees and other
income totaled $1.03 billion, compared to $729 million
for the year-ago quarter. Return on assets was 2.08
percent, compared to 1.61 percent a year ago, and return
on equity was 28.10 percent, compared to 19.98 percent
for the second quarter of 2002. Assets on June 30 were
$123.4 billion.

S t a t e S t re e t C o r p . :

State Street reported net

loss of $23 million on revenue of $1.1 billion that
included pre-tax restructuring charges of $292 million
from its expense-reduction program, a $13 million pre-
tax charge relating to an agreement to sell some real
estate in suburban Boston and a $18 million pre-tax
merger and integration cost related to the business it
acquired from Deutsche Bank. State Street also finished
a tax issue relating to its REIT with the Massachusetts
Department of Revenue that produced a tax benefit of
$13 million. For second quarter 2002, net income was
$178 million, and revenue was $1.0 billion. Assets on
June 30 were $83.1 billion.

S u n Tr u s t B a n k s I n c . :

SunTrust reported net

income of $330 million for the second quarter of 2003,
compared to net income of $344 million for the second
quarter of 2002. The bank holding company reported net
interest income after loan loss provisions of $717
million, compared to $702 million in the year-ago

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or any KPMG member firm.

Q U A R T E R L Y U P D A T E S

1.48 percent in 2002's second quarter, while return on
equity was 19.25 percent, compared to 20.37 percent for
the same quarter a year ago. Assets on June 30 were
$283 billion.

We l l s Fa r go & C o . :

With strong results in

consumer lending, Wells Fargo reported net income of
$1.53 billion in the second quarter of 2003, compared to
net income of $1.42 billion for the same quarter a year
ago. Return on assets was 1.63 percent, compared to
1.83 percent a year ago, while return on equity was
19.60 percent, compared to 19.72 percent in 2002's
second quarter. Net interest income after loan losses was
$3.62 billion, compared to $3.23 billion a year earlier,
while non-interest income was $2.71 billion in the
second quarter, up from $2.38 billion in the second
quarter of 2002. Assets on June 30 were $370 billion.

C a n a d i a n B a n k E a rn i n g s *

B a n k o f M o n t re a l

announced a second quarter

net income of $409 million compared to $301 million
during the same period a year ago. Revenues for the
quarter decreased by 1 percent over the second quarter
of 2002 to $2.2 billion due to the fact that volume
growth and improved net interest margins in Canadian
retail and business banking were offset by the effects of
low client transaction volumes in other operating groups
and the weaker U.S. dollar. Net interest income after
provision of credit losses was $1.09 billion. Return on
equity was 15.2 percent, compared to 11.6 percent in the
year-ago quarter. Assets on April 30, 2003 were
$258 billion.

C I B C

announced a second quarter net income of $320

million compared to $227 million during the same
period a year ago. Total revenues reported on a tax
equivalent basis were $2.7 billion in the quarter. Net
interest income rose to $1.36 billion in the second
quarter of 2003 from $1.32 billion in the same quarter of
2002 due to increases in loan volume, residential
mortgages and volume growth and improved spreads in
cards and President’s Choice Financial which were

moderately counteracted by lower West Indies revenue
as a result of the change to equity accounting and lower
trading revenue. Return on equity was 11.9 percent,
compared to 8.0 percent in the year-ago quarter. Assets
on April 30, 2003 were $280 billion.

R oya l B a n k o f C a n a d a

announced second

quarter record net income of $689 million compared to
$710 million during the same period a year ago. Net
income from U.S. acquisitions (RBC Centura, RBC
Dain Rauscher and RBC Liberty Insurance) was $58
million. Total revenues dropped by 4 percent in the
quarter to $3.75 billion from $3.91 billion in the second
quarter of 2002, due to a net gain on credit derivatives
that was recorded in last year’s second quarter, and a
decline in revenue this quarter due to the appreciation of
the Canadian dollar in comparison to the U.S. dollar.
Interest income was $1.70 billion for the quarter down
from prior year’s quarter of $1.72 billion. Return on
equity was 15.4 percent, compared to 16.8 percent in the
year-ago quarter. Assets on April 30, 2003 were
$398 billion.

S c o t i a b a n k

announced second quarter net income

of $596 million compared with $598 million during the
same period a year ago. Revenues for the quarter were
$2.57 billion compared to $2.77 billion in the second
quarter of 2002. This decline mainly resulted from lower
securities gains and foreign currency funding spread as
well as the sales of Scotiabank Quilmes and the Bank’s
merchant acquirer business last year. Net interest income
was $1.54 billion compared to $1.65 billion in the prior
year’s quarter. Return on equity was17.2 percent,
compared to 18.3 percent in the year-ago quarter. Assets
on April 30, 2003 were $292 billion.

T D B a n k F i n a n c i a l G ro u p

reported a net

income on operating cash basis loss of $146 million in
the second quarter of 2003, compared to net income on
an operating cash basis of $316 million in the same
quarter of 2002 which reflects the steps the Bank is
taking to restructure its wealth management business
outside North America and the U.S. equity option arm of

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BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

Q U A R T E R L Y U P D A T E S

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is the subject of the lease stripping transaction. The fact
that parties that were unrelated up to and including the
time of a transaction engage in that transaction in an
attempt to arbitrarily shift income or deductions among
themselves does not by itself evidence the type of
control necessary to satisfy the ‘acting in concert or with
a common goal or purpose’ requirement of section
1.482-1(i)(4).”

The IRS also noted that it will challenge lease stripping
transactions on other legal grounds. Rev. Rul. 2003-96
will appear in Internal Revenue Bulletin 2003-34, dated
August 25, 2003.

(KPMG’s TaxNewsFlash, No. 2003-234, July 21, 2003)

IRS Identifies Lease Stripping Transactions as

"Listed Transactions"

On July 21, 2003, the IRS released an advance copy of
Notice 2003-55, relating to lease strips and other
stripping transactions. With this notice, the IRS stated
that transactions that are the same as or substantially
similar to the lease strips described in the notice are
"listed transactions" for purposes of the tax shelter
regulations.

Listed Transaction - The IRS concluded that lease
strips improperly separate income from related
deductions and generally do not produce the tax
consequences desired by the participants.

Therefore, transactions that are the same as, or
substantially similar to, the lease strips described in
Notice 2003-55 are "listed transactions" for purposes of
Reg. sections 1.6011-4(b)(2), 301.6111-2(b)(2), and
301.6112-1(b)(2). Moreover, according to the notice,
these transactions may already be subject to the
disclosure requirements, the tax shelter registration
requirements, or the list maintenance requirements under
the regulations. Finally, the IRS warns that accuracy-
related penalties may be imposed on participants in lease
strip transactions.

its wholesale banking operation. Net interest income
(TEB) grew from $1.37 billion in the second quarter of
2002 to $1.47 billion in this year’s second quarter.
Return on equity on an operating cash basis was negative
6.0 percent, compared to 9.7 percent in the year-ago
quarter. Assets on April 30, 2003 were $322 billion.

* Canadian financial information reported in Canadian currency.

Second quarter ended April 30, 2003.

(Source: Company financial reports)

The information contained in this Earnings section was obtained from
the individual company financial statements. KPMG LLP has not
verified any information stated herein and does not endorse any of the

numerical information provided.

Ta x a t i o n

IRS Rules Section 482 Cannot Be Used to Allocate

Income, Deductions From Lease Stripping

Transactions

On July 21, 2003, the IRS released an advance copy of
Rev. Rul. 2003-96, concerning whether the transfer
pricing rules can be used to allow allocations of income
and deductions under a lease stripping arrangement
entered into among unrelated parties, under a plan
promoted to realize tax benefits for one or more of the
parties, solely on the basis that at the time the parties
entered into the transaction, they had a common goal to
shift income or deductions among themselves.

The IRS ruled that under the facts presented, section 482
could not be used to allow the allocation of income and
deductions arising from property that is the subject of a
lease stripping transaction. According to the IRS, the
facts in the revenue ruling:

“. . . described up to and including the time the income is
stripped from the leases do not support the application of
section 482 to allow the allocation among the parties of
the income and deductions arising from the property that

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(1) A book method, under which the inducement fee

is recognized for federal income tax purposes in
the same amounts and over the same period in
which that fee is included in income by the
taxpayer for financial reporting purposes
(provided that period is not shorter than the period
over which the REMIC is expected to generate
taxable income).

(2) A method under which the inducement fee is

recognized for federal income tax purposes ratably
over the remaining anticipated weighted average
life of the REMIC determined as of the time the
noneconomic residual interest is transferred to the
taxpayer.

– Provide a rule that applies if a holder of a residual

interest sells or otherwise disposes of the residual
interest.

– Include a rule clarifying that an inducement fee is

income from sources within the United States.

If the regulations are finalized as proposed, the timing
for including inducement fees in income would apply
for tax years ending on or after the publication of final
regulations in the Federal Register. Comments are
requested.

The proposed rules also note that a taxpayer may not
change its method of accounting for inducement fees
without securing the prior consent of the Commissioner.
Treasury and the IRS request comments as to how best
to effect any change in method of accounting under
these regulations.

REG-162625-02 is scheduled to be published in the
Federal Register, July 21, 2003.

(KPMG’s TaxNewsFlash, No. 2003-230, July 18, 2003)

The IRS further stated that it was currently evaluating
other situations in which tax benefits are claimed as a
result of transactions in which the ownership of property
has been separated from the right to income from the
property. For example, the IRS reported that it is
evaluating situations in which, in exchange for
consideration, one participant assigns its interest in
property but retains the right to income from the
property, and, by allocating all of its basis to the
transferred property and none to the retained future
payments, the transferor claims a loss on the transfer.

Notice 2003-55 modifies and supersedes Notice 95-53,
and will appear in Internal Revenue Bulletin 2003-34,
dated August 25, 2003.

(KPMG’s TaxNewsFlash, No. 2003-233, July 21, 2003)

Proposed Accounting Rules for REMIC

Inducement Fees

On July 18, 2003, the Treasury Department and IRS
released proposed regulations (REG-162625-02) with
accounting rules for taking into income any fees received
to induce the acquisition of noneconomic residual
interests in real estate mortgage investment conduits
(REMICs). Under the proposed accounting rules,
inducement fees would be taken into income over a
period that is related to the period during which the
applicable REMIC is expected to generate taxable
income or net loss allocable to the holder of the
noneconomic residual interest. In general, the proposed
regulations:

– Provide that an inducement fee may not be taken into

account in a single tax year, but must be included in
income over a period that is reasonably related to the
period during which the REMIC is expected to
generate taxable income or net loss allocable to the
holder of the noneconomic residual interest.

– Establish two safe harbor methods of accounting for

inducement fees:

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procedure is effective for leases in effect or entered into
on or after January 1, 2001, and will appear in Internal
Revenue Bulletin 2003-33, dated August 18, 2003.

(KPMG’s TaxNewsFlash, No. 2003-223, July 16, 2003)

IRS Establishes Safe Harbor for Loan by REIT to Be

Treated as Real Estate Asset

On July 11, 2003, the IRS released an advance copy of
Rev. Proc. 2003-65, establishing a safe harbor for a loan
made by a real estate investment trust (REIT) to be
treated as a real estate asset for purposes of sections
856(c)(4)(A) and 856(c)(5)(B), even though the loan is
not directly secured by a mortgage on real property. In
addition, if the criteria for the safe harbor are satisfied,
the IRS states that interest on such loans will be treated
as interest on an obligation secured by a mortgage on
real property or on an interest in real property for
purposes of section 856(c)(3)(B).

Background - Many REITs invest in real estate by
making loans that are secured by real property. In certain
cases, because of financing arrangements and restrictive
loan covenants, REITs make loans to the owners of
entities that hold real property, instead of making loans
that are secured directly by real property. The loans are
secured by a pledge of the borrowers' ownership
interests in the property-owning entities.

Section 856, however, requires that certain tests must be
met for the entity to qualify as a REIT. These tests
include requirements that:

– 75 percent of the value of the REIT's total assets is

represented by real estate assets (including mortgages
on real property), cash and cash items, and
government securities.

– 75 percent of the REIT's gross income is derived

from certain items including interest on obligations
secured by mortgages on real property or on interests
in real property.

IRS Issues Guidance for REITs and Taxable REIT

Subsidiaries

On July 16, 2003, the IRS released the following
guidance concerning real estate investment trusts
(REITs):

– Rev. Rul. 2003-86 addresses whether a joint venture

partnership between a taxable REIT subsidiary and a
corporation that qualifies as an independent
contractor of the REIT can provide noncustomary
services to tenants of the REIT without causing the
rents paid to the REIT to fail to qualify as rents from
real property under section 856(d).

– Rev. Proc. 2003-66 describes the conditions under

which payments to a REIT from a joint venture
between a taxable REIT subsidiary and an unrelated
third party for space at property owned by the REIT
will be treated as rents from property under section
856(d).

Rev. Rul. 2003-86 - Under the facts considered in the
July 16th revenue ruling, the IRS ruled that the joint
venture partnership between the unrelated independent
contractor and the taxable REIT subsidiary may provide
certain noncustomary services (primarily for the
convenience of the REIT tenants) to such tenants without
causing the related rents paid to the REIT to fail to
qualify as rents from real property.

Rev. Rul. 2003-86 will appear in Internal Revenue
Bulletin 2003-32, dated August 11, 2003.

Rev. Proc. 2003-66 provides the rules under which the
IRS will treat rents from a qualifying joint venture as
rents from real property, where the amounts paid to the
REIT by the joint venture are substantially comparable to
rents paid by other tenants at the REIT's property for
comparable space and at least 90 percent of the leased
space of the REIT's property is rented to persons other
than (1) taxable REIT subsidiaries and (2) related parties
as described in section 856(d)(2)(B). The revenue

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Q U A R T E R L Y U P D A T E S

Rev. Proc. 2003-65 - With the July 11th revenue
procedure, the IRS provides a safe harbor for treating a
loan as a qualified real estate asset under the REIT
qualification rules, even though the loan is not directly
secured by a mortgage on real property. To qualify for
the safe harbor, the following requirements must be met:

– The borrower is either a partner or a partnership, or

the sole member of an eligible entity that has not
elected to be treated as a corporation for federal tax
purposes (and therefore is disregarded as an entity
separate from its owner).

– The loan is nonrecourse.

– The lender has a first priority security interest in the

pledged ownership interest.

– On default and foreclosure of the secured loan, the

lender will replace the borrower as a partner in the
partnership or as the sole member of the disregarded
entity.

– On the date that the lender's commitment to make the

loan is binding, the partnership or disregarded entity
holds real property and if any of this property is sold
or transferred, the loan is immediately due and
payable.

– On each testing date, the value of the subject real

property is at least 85 percent of the value of all of the
assets of the partnership or disregarded entity.

– The loan value of the real property owned by the

partnership or disregarded entity equals or exceeds
the amount of the loan as determined under Reg.
section 1.856-5(c)(2).

– Interest on the loan includes only an amount that

constitutes compensation for the use or forbearance of
money.

A loan that satisfies these eight requirements will be
treated as a real estate asset for purposes of sections
856(c)(4)(A) and 856(c)(5)(B), and the interest on the
loan will be treated as interest on an obligation secured

by a mortgage on real property or on an interest in real
property for purposes of section 856(c)(3)(B).

Rev. Proc. 2003-65 is effective August 11, 2003, and will
appear in Internal Revenue Bulletin 2003-32, dated
August 11, 2003.

(KPMG’s TaxNewsFlash, No. 2003-219, July 11, 2003)

Final IRS Guidance on Withholding Rules for

Foreign Partnerships and Foreign Trusts

On July 10, 2003, the IRS issued Rev. Proc. 2003-64,
concerning the withholding and reporting obligations for
payments of income made to foreign partnerships and
foreign simple or grantor trusts. The IRS stated that the
purpose of this guidance is to simplify these withholding
and reporting obligations. Accordingly, Rev. Proc. 2003-64:

– Provides final withholding foreign partnership (WP)

and withholding foreign trust (WT) agreements, as
described in Reg. section 1.1441-5(c)(2)(ii) and
(e)(5)(v), and the application procedures for entering
into such agreements.

– Amends the Qualified Intermediary (QI) withholding

agreement of Rev. Proc. 2000-12 by including new
section 4A -i.e., additional rules for QIs for
withholding and reporting on certain small or related
foreign partnerships and foreign simple or grantor
trusts that do not enter into WP or WT agreements.

Similar rules are part of the final WP and WT
agreements. Rev. Proc. 2003-64 provides that a WP or
WT agreement entered into during a calendar year may
be made effective as of the first day of that calendar
year. Therefore, a QI may apply the provisions of section
4A as of the beginning of the 2003 calendar year.

Background - In Notice 2001-4, the IRS provided
important transitional relief and guidance related to the
section 1441 regulations (as amended in May 2000) for
foreign partnerships for calendar year 2001 (see
KPMG’s TaxNewsFlash 2000-207). The transitional
relief was extended through calendar year 2002.

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or any KPMG member firm.

In Notice 2002-41, the IRS proposed WP and WT
agreements with streamlined procedures designed to
simplify documentation and reporting (see KPMG’s
TaxNewsFlash 2002-120). As proposed, a WP or
WT was to provide the withholding agent with a
Form W-8IMY as a WP or WT without attached
documentation from partners, beneficiaries, or owners.
The WP or WT would receive gross payments from the
withholding agent, and then withhold and deposit tax (if
any) based on the Forms W-8 or W-9 received from the
partners, beneficiaries, or owners. The WP or WT would
report payments to, and tax withheld from, its direct
foreign partners, beneficiaries, or owners on Form 1042-
S on an individual basis or, by election, on a pooled
basis. Thus, a WP or WT would be relieved of having to
disclose to a withholding agent any documentation and
payment information for partners, beneficiaries, or
owners. A withholding agent would be relieved of the
responsibility for collecting documentation, withholding,
and reporting payment information for partners,
beneficiaries, or owners of a WP or WT.

Rev. Proc. 2003-64 - According to the July 10th revenue
procedure, no further extensions of the transitional relief
for foreign partnerships are required. With respect to the
documentation and reporting relief for foreign simple
and grantor trusts, comprehensive guidance is included
in the revenue procedure; however, for the year 2003, a
QI may apply the earlier rules of Notice 2001-4 or the
rules of this revenue procedure.

Concerning WP and WT agreements, several provisions
of the WP and WT agreements have been amended, and
a new set of provisions for certain smaller foreign
partnerships and trusts and for certain foreign
partnerships and trusts that are related to a QI, WP, or
WT have been developed. Other changes concern the::

– Term of the Agreement: The six-year renewable term

is still available, but the WP or WT may elect to use a
longer non-renewable term of up to 15 years.

– Automatic Termination: The final WP or WT

agreements (1) extend the date for curing

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documentation failures from January 31 to March 15
and (2) add an alternative method for curing failure.

– Withholding on Distributions: The WP or WT may

compute the amount of withholding on a distribution
by using a reasonable estimate of the partner,
beneficiary, or owner's distributive share of income
subject to withholding for the year.

– Application to Direct Partners, Beneficiaries, or

Owner: The final WP and WT agreements contain
two new provisions for application to indirect
partners, beneficiaries, or owners (1) that are small
partnerships and trusts (streamlined rules similar to
the U.S. rules for joint account holders) and (2) that
are partnerships or trusts that are related to the WP or
WT (rules similar to those for private arrangement
intermediaries (PAIs) under the QI agreement)

– Frequency of Audit: The WP and WT agreements

have been amended to conform the audit cycle for the
six-year agreement to the audit cycle under the QI
agreement. If the WP or WT elects pooled reporting
and a six-year term, it must agree to have the external
auditor conduct an audit of the second and fifth full
calendar year that the agreement is in effect. The two-
year audit cycle is retained for a WP or WT that
elects pooled reporting and a non-renewable term of
up to 15 years.

Yet, for the most part, the final WP and WT agreements
are substantially the same as originally proposed in
Notice 2002-41. For example, the WP and WT
agreements continue to require payments to partners,
beneficiaries, or owners to be documented solely with
Forms W-8 and W-9 and do not permit reliance on the
presumption rules. Rev. Proc. 2003-64 also includes new
rules for:

– A small foreign partnership or simple or grantor trust

that is an account holder of a QI.

– A foreign partnership or trust that is related to a QI,

WP, or WT to provide information necessary for the
QI, WP, or WT to withhold and report on reportable
amounts.

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Q U A R T E R L Y U P D A T E S

Rev. Proc. 2003-64 is effective, July 10, 2003, and will
appear in Internal Revenue Bulletin 2002-32, dated
August 11, 2003.

(KPMG’s TaxNewsFlash, No. 2003-217, July10, 2003)

New Regulations Governing Section 338(h)(10)

Elections and Multi-Step Transactions -

A Brave New World

On July 8, 2003, the Treasury Department and IRS
released an advance copy of final and temporary
regulations (T.D. 9071) and, by cross reference, proposed
regulations (REG-143679-02), giving effect to section
338(h)(10) elections in certain multi-step transactions as
contemplated by Rev. Rul. 2001-46.

The regulations provide that the step-transaction doctrine
will not be applied if a taxpayer makes a valid section
338(h)(10) election with respect to a step in a multi-step
transaction, even if the transaction would otherwise
qualify as a reorganization, if the step, viewed
independently, is a qualified stock purchase.

Background - Rev. Rul. 2001-46 applied the step-
transaction doctrine to treat a series of transactions
occurring pursuant to a single plan - encompassing a
first step acquisition merger of a subsidiary of Acquiring
into Target that would otherwise constitute a qualified
stock purchase, followed by a second step upstream
merger of Target into Acquiring - as a single statutory
merger of Target into Acquiring (see KPMG’s
TaxNewsFlash 2001-187).

Final and Temporary Regulations - As contemplated
by Rev. Rul. 2001-46, the July 8th release adopts new
final and temporary regulations to give effect to section
338(h)(10) elections in multi-step transactions where the
purchasing corporation's acquisition of the target's stock,
viewed independently, constitutes a qualified stock
purchase.

The regulations provide that if a section 338(h)(10)
election is made in these circumstances, the purchasing

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corporation's acquisition of target's stock will be treated
as a qualified stock purchase for all federal tax purposes,
even if the overall transaction would be integrated and
treated as a single reorganization qualifying under
section 368(a) in the absence of a section 338(h)(10)
election.

Effective Date - The final and temporary regulations are
applicable to acquisitions of stock occurring on or after
the date of publication of the regulations in the Federal
Register (scheduled to be July 9, 2003).

KPMG Observation - The regulations provide
taxpayers flexibility in structuring and planning the tax
consequences of an acquisition, and represent a novel
approach by the Treasury in which tax-free
reorganization treatment is, in certain circumstances,
elective. One may wonder if this may be an initial foray
into a check-the-box regime for tax-free reorganization
treatment.

(KPMG’s TaxNewsFlash, No. 2003-214, July 8, 2003)

For electronic versions of the releases mentioned above or for additional
tax-related information, see KPMG’s TaxNewsFlash publications at
www.kpmgtax.com.

Re g u l a t i o n

FinCEN and the SEC issued joint final rules that require
broker-dealers and mutual funds to take steps to verify
the identities of their customers. They became effective
on June 9. These institutions must fully implement their
customer identification programs (CIPs) by October 1.
These rules were issued concurrently with other final
regulations affecting banks, savings associations, credit
unions, and certain non-federally regulated banks, as
well as futures commission merchants and introducing
brokers. Collectively, the rules are intended to be
uniform throughout the financial services industry.
FinCEN and the SEC collaborated on the broker-dealer
and mutual fund CIP rules, which are intended to
implement Section 326 of the United and Strengthening
America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA

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on Sound Practices to Strengthen the Resilience of the
U.S. Financial System. The paper identifies three new
business continuity objectives that are of special
importance to financial institutions in the post-
September 11 environment, and four sound practices
which are intended to strengthen the resilience of critical
U.S. financial markets by minimizing the immediate
systemic effects of a wide-scale disruption. The paper
applies most directly to core clearing and settlement
organizations and firms that play significant roles in
critical financial markets. The agencies expect these
institutions to adopt the sound practices discussed in the
paper within designated time frames.

The SEC issued a notice that it approved an order to
extend the temporary exemption of banks, savings
associations and savings banks from the definitions of
“broker” under Section 3(a)(4) of the Securities and
Exchange Act of 1934 (Exchange Act) until November
12, 2004.

The SEC adopted an amendment to Rule 15c3-3(b)(3)
under the Exchange Act, which provides that broker-
dealers must provide full collateral consisting of certain
specified financial instruments or cash when they
borrow fully paid and excess margin securities from
customers. The rule change will allow firms to pledge
other collateral as the SEC designates as permissible by
order of the SEC’s Division of Market Regulation. The
change became effective on April 16.

The SEC issued an interpretive release regarding its
books and records regulations (Rules 17a-3 and 17a-4
under the Exchange Act) in order to clarify certain issues
raised by industry participants. Amendments to these
rules, which were adopted on October 26, 2001, recently
became effective on May 2. The interpretation became
effective on May 29.

NASD announced a proposal to amend Rule 3010 to
require the Chief Executive Officer and Chief
Compliance Officer of each member firm to make
annual, joint certifications regarding the adequacy of

PATRIOT Act). They aim to strengthen ongoing efforts by
these agencies to prevent, detect and prosecute money
laundering and the financing of terrorism.

FinCEN issued a notice of proposed rulemaking that
would amend Bank Secrecy Act (BSA) rules to add
futures commission merchants and introducing brokers
in commodities to the regulatory definition of financial
institution, and require that they report suspicious
transactions to FinCEN. These institutions are considered
at risk for certain money laundering activities due to
their respective business activities and importance in the
global economy. The proposal is intended to implement
provisions of the BSA in order to further the efforts of
Treasury and other financial regulators to prevent, detect
and prosecute money laundering and the financing of
terrorism. In developing the proposed and amended
rules, FinCEN consulted extensively with the Chicago
Futures Trading Commission, which, with designated
self regulatory organizations, would be responsible for
oversight and enforcement of the rules. The changes
would become effective 180 days after the final version
of the rule is adopted.

The SEC, New York Attorney General, North American
Securities Administrators Association, NASD, NYSE,
and state securities regulators jointly announced the
finalization of an approximate $1.4 billion settlement
with ten large broker-dealers, in connection with
allegations of conflicts of interest between research and
investment banking interests at these firms, supervisory
deficiencies and allegations of “spinning.” The action
represents finalization of the so-called “global
settlement” that was reached in principle in December
2002. The terms require payments of penalties,
disgorgement and funds for independent research and
investment education, as well as significant structural
reforms to increase the integrity of equity research.

The SEC, the Board of Governors of the Federal Reserve
System (Fed), and the Office of the Comptroller of the
Currency (OCC), in cooperation with the Federal
Reserve Bank of New York, issued an Interagency Paper

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the firm’s compliance and supervisory procedures.
NASD also proposed the adoption of related
interpretive material to describe the purpose of the
proposed rule and provide clarification regarding the
obligations and liabilities associated with the
certification requirement.

The SEC requested public comment on a petition
filed by The Nasdaq Stock Market, Inc., relative to
trading in Nasdaq-listed securities. Nasdaq has asked
the SEC to take multiple actions in order to address
“unequal and inadequate regulation by various
national and regional exchanges that trade these
securities.”

NASD established a “one-time global extension” for
all firms subject to the requirement to complete a
self-assessment of front-end load mutual fund
transactions. This review was required in connection
with recent regulatory, Congressional and industry
attention to potential problems in this area.

Sources: KPMG’s Compliance & Regulatory Focus, April-July 2003;
KPMG’s Washington Report, March-July 2003. Federal Register and Web
sites of the issuing agencies including: www.treas.gov/fincen,
www.sec.gov, www.nasd.com, www.nyse.com, www.nasaa.org and
www.gao.gov.

KPMG hosts Regulatory Perspectives, a quarterly teleconference
briefing for clients on important legislative and regulatory activities
specific to the financial services industry. For more information about
Regulatory Perspectives, or to register for future teleconferences, please
send an e-mail to kwall@kpmg.com. The e-mail should include your
name, title, company name, and your e-mail address. You will be
notified via e-mail regarding future teleconferences.

L e g i s l a t i o n

Basel Bill Passes House Subcommittee

The House Financial Services Subcommittee on
Financial Institutions passes H.R. 2043, the United
States Financial Policy Committee For Fair Capital
Standards Act, by voice vote on July 16.

The bill would create an interagency financial policy

committee that would include the Treasury secretary as
chairman, the chairman of the Board of Governors of the
Federal Reserve System, the comptroller of the currency,
the chairman of the Federal Deposit Insurance
Corporation, and the chairman of the Office of Thrift
Supervision.

The Financial Policy Committee would be responsible
for constructing uniform United States positions on
proposals made to, and issues before, the Basel
Committee on Banking Supervision that may affect U.S.
financial institutions.

If the bill passed tomorrow, it would force regulators to
form a uniform policy on the Basel II accord. According
to a committee press release, several members of the
Committee questioned the wisdom of making
operational risk a mandatory capital charge under Pillar I
of the Basel Accord – a provision which is included
under the current Basel proposal. Several members also
expressed their desire for continued Congressional
oversight of the Basel process.

The House Committee on Financial Services has yet to
schedule a markup on the bill. Further, there is no
companion legislation in the Senate as of yet.

The text of H.R. 2043 is available on the Library of
Congress Web site.

(KPMG’s Washington Report, July 21, 2003)

FACT Act Passes House Financial Services

Committee

The House Committee on Financial Services passed
H.R. 2622, the Fair and Accurate Credit Transactions
Act (FACT), by a 61-3 vote. H.R. 2622 would renew
preemption provisions in the Fair Credit Reporting Act
(FCRA) that allow financial and retail firms to share
certain customer data among their affiliates. These
provisions are set to expire on January 1, 2004. The bill
also strengthens rules to fight identity theft. The
Committee passed a number of amendments to the bill

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that would:

– Require consumer reporting agencies to employ a

fraud alert system to help victims of identity theft to
ensure that credit is not extended to identity thieves.

– Ban businesses from sharing negative information

about a consumer if they have received a copy of a
police report indicating an illegal transaction
following an identity theft.

– Require the General Accounting Office to conduct a

study on the role of race and gender in the credit
granting process.

– Require credit bureaus to notify users of consumer

reports when discrepancies exist in connection with
addresses.

– Require federal bank regulators to issue guidance on

how lenders should treat credit reports when there is
confusion about a consumer’s address.

– Ban the passing on of consumer information to credit

bureaus if the information furnisher has substantial
doubts about the accuracy of the information.

– Permit consumers to reinvestigate consumer disputes

directly through “resellers” of credit reporting
information.

– Define a fraud alert as a statement that notified users

of the file that the consumer does not want credit
offered without permission through a preauthorized
procedure.

The fraud alert system created by the bill is composed of
three tiers: an initial alert; an extended alert; and a
special military alert.

When a consumer reporting agency creates an alert, it
would automatically be communicated to other consumer
reporting agencies and would exclude the consumer from
pre-screened offers of credit or insurance. Further, no
user of a consumer report with a fraud alert in it may
issue or extend credit in the name of the consumer to a

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person other than the consumer without first attempting
to obtain the authorization or preauthorization of the
consumer in the manner contained in the fraud alert.

The FACT Act now heads to the House Floor for
consideration. Congressman Oxley (R-OH), Chairman
of the House Committee on Financial Services, would
like the House to complete action on the bill before the
end of September. Congressman Frank (D-MA)
predicted the bill would pass the Senate before
January 1, 2004.

The text of H.R. 2622 is available on the Library of Congress
Web site at http://thomas.loc.gov.

(KPMG’s Washington Report, July 28, 2003)

To subscribe to KPMG’s regulatory and legislative reports, please
send an e-mail message to fsregpubs@kpmg.com for any of the
following publications:

– Washington Reports

– Regulatory Practice Letters

– Legislative Practice Letters

– Compliance and Regulatory Focus

These reports can also be accessed through KPMG’s Web site at
www.us.kpmg.com (Financial Services industry). Back issues may be
obtained by sending an e-mail message to pajones@kpmg.com.

A c c o u n t i n g S t a n d a r d s a n d
D e v e l o p m e n t s

Financial Accounting Standards Board (FASB)

The FASB has issued for public comment an Exposure
Draft, Qualifying Special-Purpose Entities and Isolation
of Transferred Assets, which would amend FASB
Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. The purpose of the proposal is to provide
more specific guidance on the accounting for transfers
of financial assets from a company to an off-balance
sheet structure known as a qualifying special-purpose
entity (QSPE).

The Board’s objective is to improve the accounting for

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Q U A R T E R L Y U P D A T E S

QSPEs in several key respects. First, it would prohibit an
entity from being a QSPE if a company that transfers
assets to the entity enters into a commitment (such as a
financial guarantee, liquidity commitment or total return
swap) to provide additional cash or other assets to fulfill
the QSPE’s obligations to its beneficial interest holders.
Second, if an entity can reissue beneficial interests, the
proposed Statement would prohibit that entity from
being a QSPE if any party involved with the entity has
certain risks or combinations of risks and decision-
making abilities. Third, the proposed Statement would
prohibit an entity from being a QSPE if it holds equity
instruments, such as shares or partnership interests.
Finally, the proposed Statement would clarify certain of
the requirements in Statement 140 related to legally
isolating assets and surrendering control of assets. The
comment period ends July 31, 2003.

FASB has issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of
both Liabilities and Equity. The Statement improves the
accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be
classified as liabilities (or, in certain circumstances, as
assets) in statements of financial position.

Statement 150 affects the issuer’s accounting for
mandatorily redeemable shares that the issuing company
is obligated to buy back in exchange for cash or other
assets, instruments that do or may require issuers to buy
back shares in exchange for cash or other assets, and
obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with
the value of the issuers’ shares. Statement 150 does not
apply to features embedded in a financial instrument that
is not a derivative in its entirety.

Most of the guidance in Statement 150 is effective for
financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003,

except that for private companies, mandatorily
redeemable financial instruments are subject to the
provisions of this Statement for the fiscal period
beginning after December 15, 2003.

FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. The Statement amends and clarifies
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and
for hedging activities under Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities.

The amendments set forth in Statement 149 are intended
to improve financial reporting by requiring that contracts
with comparable characteristics be accounted for
similarly. In particular, this Statement: (1) clarifies under
what circumstances a contract with an initial net
investment meets the characteristic of a derivative as
discussed in paragraph 6(b) of Statement 133;
(2) clarifies when a derivative contains a financing
component; (3) clarifies the definition of an underlying
to conform it to language used in FASB Interpretation
No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others; and (4) amends
certain other existing pronouncements. In addition to
other changes, this Statement:

– Removes from the scope of Statement 133 contracts

for the purchase or sale of securities referred to as
when-issued securities or other securities that do not
yet exist if the contracts meet all three criteria in
paragraph 59(a) of Statement 133.

– Significantly modifies DIG Issue C13 by excluding

from the exemption from Statement 133, as well as
from the automatic inclusion, commitments to
purchase loans. Holders and issuers of commitments
to purchase loans now will need to evaluate the terms
of the contracts to conclude whether they otherwise
meet the characteristics of a derivative.

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Q U A R T E R L Y U P D A T E S

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– Clarifies the use of the short-cut method by requiring

that the interest rate swap has a fair value of zero at
inception of the hedging relationship if the hedging
instrument is solely an interest rate swap. If the
hedging instrument is a compound derivative, that is
when the hedged item is callable, the premium for
the mirror-image call option compounded with the
swap must be paid or received in the same manner as
the premium on the call option embedded in the
hedged item.

– Clarifies the accounting for option-based contracts

used as hedging instruments in a cash flow hedge of
the variability of the functional-currency-equivalent
cash flows for a recognized foreign-currency-
denominated asset or liability that is remeasured at
spot exchange rates.

– Clarifies those financial guarantee contracts within

the scope exception.

This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and
for hedging relationships designated after June 30, 2003.
The guidance should be applied prospectively.

The provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their
respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should
be applied to existing contracts as well as new contracts
entered into after June 30, 2003.

The FASB decided on April 22, 2003 to require all
companies to expense the value of employee stock
options. Companies will be required to measure the cost
according to the fair value of the options.

At the May 7, 2003 Board meeting, the Board decided
that: (1) compensation cost would be recognized over

the service period; (2) stock-based compensation awards
would be accounted for using the modified grant-date
measurement approach in FASB Statement No. 123,
Accounting for Stock-Based Compensation; therefore,
compensation cost would be adjusted to reflect actual
forfeitures and outcomes of performance conditions;
(3) the method of attribution would be consistent with
the approach presented in Statement 123 which requires
attribution over the period the employee provides the
service; and (4) for awards with service conditions, an
enterprise would base accruals of compensation cost on
the best available estimate of the number of equity
instruments that are expected to vest and to revise that
estimate, if necessary, if subsequent information
indicates that actual forfeitures are likely to differ from
initial estimates.

Securities and Exchange Commission (SEC)

Companies will be delisted if they fail to comply with
the audit committee requirements of the Sarbanes-Oxley
Act and implementing SEC regulations, according to a
recent release that mandates changes in the listing
standards. The release contains new audit committee
requirements; conforming provisions by the national
securities exchanges and the national securities
association must be approved by the SEC by December
1, 2003; and listed issuers other than small-business and
foreign-private issuers must be in compliance with the
new provisions by the date of their first shareholder’s
meeting after January 15, 2004, but in any event no later
than October 31, 2004. Foreign-private and small-
business issuers are given more time.

The exchanges and securities association will be
obligated to delist companies that are not in compliance
with several sets of requirements and do not successfully
cure violations. The requirements cover audit
committees’ independence; responsibilities with respect
to public accounting firms; procedures for handling
complaints on auditing, accounting, and control matters;
authority to engage independent counsel and other
advisors; and funding.

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Q U A R T E R L Y U P D A T E S

The SEC has released final rules governing
management’s report on internal control over financial
reporting and revisions to certifications of disclosure in
Exchange Act periodic reports. The rules pertaining to
Section 302 and Section 906 certifications, including
changes relative to registered investment companies,
become effective on August 14, 2003 (the due date for
June 30, 2003 quarterly filings). The Commission staff
has indicated their intent to apply the revised Section
302 certification to all quarterly filings for the quarter
ended June 30, 2003, regardless of the date actually
filed. Section 302 certifications may temporarily omit
certain references to internal control over financial
reporting until the compliance date for management’s
report on internal control over financial reporting.

Management’s report on internal control over financial
reporting will be required by issuers, other than foreign
private issuers, that meet the definition of an
“accelerated filer” in Exchange Act Rule 12b-2, for
fiscal years ending on or after June 15, 2004 (December
31, 2004, for calendar-year accelerated filers).
Accelerated filers are generally U.S. companies that have
“public float” over $75 million and have filed an annual
report with the Commission. All other issuers, including
small-business and foreign-private issuers, will be
required to comply with the requirements of Section 404
for their fiscal years ending on or after April 15, 2005
(December 31, 2005, for calendar-year issuers).
Voluntary early compliance is permitted.

On April 24, 2003, the SEC voted to require that reports
by insiders disclosing their securities holdings be filed
electronically with the SEC. The Commission also voted
to adopt rules prohibiting company officials from
improperly influencing auditors of financial statements.
These new rules and amendments will become effective
on June 30, 2003.

American Institute of Certified Public

Accountants (AICPA)

The AICPA’s Accounting Standards Executive
Committee has issued an exposure draft of a proposed
Statement of Position (SOP), Allowance for Credit
Losses. The proposed SOP addresses the recognition and
measurement by creditors of the allowance for credit
losses related to all loans, as that term is defined in
FASB Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan,
with certain exceptions. The proposed SOP would apply
to all creditors other than state and local governmental
entities and federal governmental entities.

The provisions of the proposed SOP would be effective
for financial statements for fiscal years beginning after
December 15, 2003, with earlier application permitted.
The effect of initially applying the provisions of the
proposed SOP would be reported as a change in
accounting estimate.

Federal Financial Institutions Examination Council

(FFIEC)

James E. Gilleran, Director of the Office of Thrift
Supervision, has been named Chairman of the FFIEC
for a two-year term beginning April l, 2003. Director
Gilleran succeeds Donald E. Powell, Chairman of the
Federal Deposit Insurance Corporation. The Council also
named NCUA Chairman Dennis Dollar, as its new Vice
Chairman.

The FFIEC announced several appointments to its State
Liaison Committee. The Council has appointed Richard
C. Houseworth, Superintendent of Banks, Arizona, to fill
the vacancy created by the resignation of Elizabeth
McCaul, former Superintendent of Banking, New York.
The National Association of State Credit Union
Supervisors appoints Jerrie J. Lattimore, Credit Union
Division, North Carolina Commerce Department to the
Committee to replace Iowa Superintendent of Credit
Unions James E. Forney. The American Council of State

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Savings Supervisors has appointed Jonathan Smith,
Review Examiner, State Banking Department,
Delaware, to replace Texas Savings & Loan
Commissioner James L. Pledger.

(Sources: FASB, SEC, AICPA, and FFIEC Websites)

KPMG’s Audit Committee Institute (ACI) has been serving audit
committee members, interacting with thousands of directors and
officers, since its inception two years ago. ACI’s initiatives include
semiannual roundtables, conference and board presentations, a toll-
free hotline, the Audit Committee Quarterly Update, periodic
distribution of time-sensitive information and its Web site. ACI has
received positive feedback from directors and officers who have used
the Web site, which is dedicated to providing tools to meet the needs of
audit committee members. ACI’s Web site address is
http://www.us.kpmg.com/auditcommittee. ACI can be reached at 877-
KPMG-ACI (877-576-4224) or via e-mail at
auditcommittee@kpmg.com.

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M A R K E T F O R C E S

B r o k e r / D e a l e r s

Thomson Financial announced on June 4th the
introduction of a suite of brokerage solutions designed to
add transparency to the research process and facilitate
broker compliance with the recently announced Global
Analyst Settlement. The solutions, which can be grouped
together and customized to meet individual
requirements, include the newly created Thomson
proprietary In Context™ reports that are designed to
educate individual investors and add context to
brokerage and boutique research, broker infrastructure
outsourcing opportunities and Thomson’s independent
analyst rankings and monitoring services. (Thomson
press release, June 4, 2003)

On May 13th, Charles Schwab & Co., Inc. announced
public disclosure of performance reporting on all its
stock ratings. The company launched its Schwab Equity
Ratings™ on May 6, 2002, and with one year of
performance data available the public can now have
access to the performance of Schwab’s equity ratings
during rolling 52-week periods through the company’s
Web site. A survey sponsored by Schwab found that the
majority of those polled want objective research
combined with performance information. According to
the results of the survey, research conducted by
independent research firms is more valuable than
research conducted by Wall Street firms that are
financially tied to the companies they evaluate. Also, the
majority surveyed said they would like to know how
well stock analysts’ recommendations compare to
subsequent stock performance. (Charles Schwab & Co.,
Inc. press release, May 13, 2003)

Charles Schwab’s newly launched Charles Schwab Bank
has entered into the home mortgage loan area for clients
and clients of independent investment advisors.
Responding to consumers’ requests for greater
transparency in mortgage rates and terms, the bank is
offering three guarantees. First, Schwab will top any
competitor’s price by $100 or will give homebuyers
$500 ($750 in California) if they choose another lender.

Second, the bank will approve a loan decision within 24
hours or pay consumers $250. Third, if it does not meet
the designated closing dates, Schwab will lower a
consumer’s interest rate by 1/8 of one percent for the life
of the loan. (Charles Schwab press release,
April 28, 2003)

With the launch of its “Mortgage on the Move”
program, E*TRADE Mortgage will allow its consumers
to lock into current low portable home mortgage rates
that they may later transfer to the next home they buy in
the future. Rather than paying off an existing loan and
applying for a new loan, the program allows the
borrower to transfer the terms of the loan to the new
residence, thus potentially saving a considerable amount
of money in interest. This program is available for a
limited time to U.S. borrowers. (E*TRADE Financial
press release, June 9, 2003)

C o n s o l i d a t i o n a n d C o nv e r g e n c e

While merger and acquisition deal value improved in the
banking and thrift and securities and investments sectors
during the first quarter of 2003 with a few major deal
announcements, overall the number of new deals
announced declined from the fourth quarter of 2002.
The volume by total deal value for banks and thrifts
increased by 240.5 percent to $5.4 billion from the
fourth quarter 2002, however, the number of deal
announcements fell by 6.3 percent to 45 from 48 in the
prior quarter. Deal value for securities and investment
increased considerably to $3.8 billion with the Bank of
New York Co.’s agreement to acquire Pershing from
Credit Suisse, and Wachovia Corp.’s and Prudential
Financial Inc.’s agreement to merge retail brokerage
operations. The number of deal announcements declined
17 percent to 30 from the last quarter. In the insurance
sector the number of deals announced declined by 33
percent to 55 from 82 in the fourth quarter 2002. Deal
value was also down 68 percent to $647.7 million from
$2.0 billion last quarter. (SNL Financial press release,
April 9, 2003)

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An agreement was announced on May 30, 2003 in
which Bank One Corporation would acquire most of
Zurich Life, a large U.S. life insurance group, from
Zurich Financial Services Group. According to Bank
One the acquisition will provide the opportunity to
leverage Zurich Life’s distribution channel and its
capability to manufacture high quality life insurance and
annuity products. Pending regulatory approval, Bank
One will pay Zurich approximately USD 500 million in
cash. Zurich is retaining Kemper Investors Life
Insurance Co. Bank One will provide administration and
assume through reinsurance certain lines of business
now underwritten by Kemper Investors Life Insurance
Company. (Bank One and Zurich press releases,
May 30, 2003)

Swiss Re, Deutsche Bank and Sal. Oppenheim are
jointly acquiring 90 percent of credit insurer Gerling
NCM Credit and Finance AG in a transaction that is
expected to close this summer. The deal, which includes
a EUR 120 million cash payment from Deutsche Bank
and EUR 60 million in cash from Swiss Re, will reduce
Gerling’s stake in the company from 55.9 percent to
3.04 percent. When the transaction is complete, Swiss
Re will own 47.5 percent of Gerling NCM and Deutsche
Bank, 35.2 percent. Sal. Oppenheim and Gerling NCM
pension trust will own 7.0 percent and 7.1 percent
respectively. (Swiss Re press release, May 7, 2003)

Thomson Financial announced the launch of its
Thomson Deals, which is a component of Thomson
ONE Banker. This web-based interface resource will
initially provide in-depth, timely M&A data, and over
the next year, will expand to provide deal data across
five distinct asset classes including Capital Markets New
Issues data, Project Finance and Venture Economics,
according to Thomson Financial. The M&A component
of Thomson Deals will offer access to more than
400,000 M&A deal records from the last 30 years of
market activity worldwide and allows users to select the
deal data, custom rankings and league tables from over
700 search criteria. (Thomson Financial press release,
April 28, 2003

On June 23rd, John Manley, Canada’s Deputy Prime
Minister and Minister of Finance, tabled the Federal
Government’s response to the recommendations of the
House of Commons Standing Committee on Finance
and the Standing Senate Committee on Banking, Trade
and Commerce on the public interest considerations in
reviewing merger proposals among large financial
institutions. According to Minister Manley the work
done by the committees raised broader issues regarding
the sector’s future that need to be addressed. He
indicated that a policy framework is needed, given the
importance of financial services to Canada’s competitive
advantage, to allow the sector to play a significant role
in the country’s economic growth. The Government’s
response has three elements:

– It sets out new public interest considerations for large

bank mergers. The merging financial institutions need
to demonstrate how the merger will support long-
term growth and the creation of high quality jobs.
Also, the institutions would be required to
demonstrate that small and medium-sized businesses
and individual Canadians would continue to have
access to a wide range of financial products and
services.

– It reviews broader issues such as the restriction on

cross pillar mergers, the need for structural
guidelines, the process for assessing multiple merger
proposals in order to eliminate the first mover
advantage, and measures to ensure robust
competition in the sector.

– It sets out a clear timetable for future developments

related to the financial sector. Comments will be
accepted until December 31, 2003. The Government
will release its policies on the issues and revised
merger review guidelines by June 30, 2004, after
which there will be a three-month transition period
until September 30, 2004 to provide institutions with
a reasonable period to position them in the new
environment. Until these steps have been completed,
the Government will not accept nor consider mergers
involving large financial institutions (including

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commercial or investment banks, trust companies,
brokerage houses, insurance companies or credit
unions that participate in financial transactions
involving cash or financial products, normally in the
role of intermediary).

(Department of Finance Canada press release,
June 23, 2003)

RBC Mortgage Company and Bank One Corporation
announced an agreement for RBC Mortgage to acquire
the bank’s wholesale first mortgage and broker home-
equity origination capabilities. The transaction, for
which terms have not been disclosed, is expected to be
completed in summer 2003. Bank One has decided to
exit the wholesale first mortgage and broker home-
equity businesses to focus on direct consumer residential
lending. With this acquisition, RBC anticipates more
than doubling its wholesale loan volume at the same
time that it hopes to grow a national home equity
business. (RBC Financial Group and Bank One press
releases, May 28, 2003)

Royal Bank of Canada’s RBC Insurance unit completed
an acquisition of certain assets of Business Men’s
Assurance Co. of America, including its in-force block
of about 135,000 traditional life insurance policies and
annuities, from Italy’s Generali Group for approximately
USD 210 million in May. BMA becomes a subsidiary
of RBC Liberty Life Insurance, and will relocate its life
and annuity operations from Kansas City to RBC
Liberty’s headquarters in Greenville, South Carolina,
where it will operate under the name of RBC Insurance.
RBC’s marketing functions will remain in Kansas City.
(RBC Financial Group press release, May 1, 2003)

As part of a strategy to focus on its three home markets –
the Netherlands, the Midwest U.S., and Brazil – ABN
AMRO announced that its Brazilian subsidiary, Banco
ABN AMRO Real, would acquire Banca Intesa’s 94.57
percent stake in Banco Sudameris. Located in the
southeast, a region that accounts for 58 percent of

Brazil’s GDP, Banco Sudameris will significantly
enhance ABN AMRO Real’s position in the region,
according to the bank. The acquisition will be funded
partly by a cash amount of BRL 527 (EUR 158.1
million) and by shares in Banco ABN AMRO Real to
the value of BRL 1,766 million (EUR 529.8 min).
(ABN AMRO press release, April 16, 2003)

Barclays PLC has announced that Barclays Bank SA
(Barclays Spain) will acquire all of the issued share
capital of Banco Zaragozano for EUR 12.7 per share in
cash, which represents a total consideration of EUR
1,143 million. The merger of the two banks will create
Spain’s sixth largest banking group by assets. The deal,
which is expected to be completed in July, 2003 must be
approved by Spain’s central bank as well as by the
Spanish Securities Market Commission. The transaction
is also contingent on 75.01 percent of Zaragozano’s
shareholders accepting Barclays offer. (Barclays press
release, May 8, 2003)

UBS (France) S.A. announced that it will acquire Lloyds
Bank S.A., the French wealth management business of
the British bank Lloyds TSB, for an undisclosed price.
Lloyd’s Bank S.A., which manages approximately EUR
1 billion in invested assets, serves high net worth clients
in the French market. Subject to regulatory approvals,
Lloyd’s Bank S.A. will be renamed UBS Wealth
Management (France) S.A. (UBS press release,
May 16, 2003)

Credit Suisse’s Winterthur Insurance subsidiary has
agreed to sell Churchill, its direct insurance business, to
the Royal Bank of Scotland Group plc for approximately
GBP 1.1 billion in cash. The Churchill transaction,
which Winterthur Group CEO Leonhard Fischer has said
will have no strategic implications or negative
repercussions for Winterthur’s U.K. life insurance
business is expected to be completed in the third quarter
of 2003. (Credit Suisse press release, June 11, 2003)

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I n t e r n a t i o n a l Fo c u s a n d G l o b a l i z a t i o n

Effective June 9, 2003, UBS implemented its single
brand strategy and will no longer market its services
under the UBS Warburg and UBS PaineWebber brands.
According to UBS, this move more accurately reflects
the organization’s integrated business model of
delivering services to clients as one firm. (UBS press
releases, June 9, 2003; November 12, 2002)

Following a strategic review of its business initiatives,
products and services the Nasdaq Stock Market, Inc.
indicated that it will support the closing of the market
operated by NASDAQ Europe located in Belgium in
which NASDAQ has a majority stake. Additionally,
NASDAQ plans to forgo its stake in NQLX, a joint
venture with the London International Financial Futures
Exchange, and transfer its ownership interest to LIFFE
which will assume financial and management
responsibility for the business. NQLX is a joint venture
to create a market for single stock futures and other
futures products. These and other steps are being taken
by NASDAQ in line with its intent to concentrate on the
U.S. equities market. (NASDAQ press release,
June 26, 2003)

In a move to restore investor confidence in Canada’s
capital markets in light of the financial reporting
scandals in the U.S., the Ontario Securities Commission
issued three proposed rules for comment on June 27th.
These rules closely parallel the requirements of the U.S.
Sarbanes-Oxley legislation, while specifically addressing
Canadian issues. These deal with:

– CEO and CFO certification of annual and interim

disclosures.

– The role and composition of audit committees.

– Support for the work of the Canadian Public

Accountability Board in its oversight of auditors of
public companies.

(Ontario Securities Commission press release,
June 27, 2003)

Canada’s housing market remained strong in the first
quarter of 2003, but according to RBC’s Housing
Affordability Index released by RBC Economics,
affordability has slightly declined. The index, which
measures the percentage of pre-tax household income
needed to maintain the costs of home ownership, inched
up to 32.5 percent from 32.1 percent in the first quarter
of 2002. In dollar terms, this means that on average,
CAD 1,264 in Canadian ownership costs this quarter –
ranging from CAD 923 in the Atlantic region to CAD
1,586 in British Columbia. A BMO Financial Group
Economic report indicates that the real estate market will
continue to be robust for the rest of the year despite
recent higher interest rates and home prices. According
to a TD Economics report, over the next decade the
national average for resale home prices will outpace
inflation and rise at a modest annual rate of 3.2 percent.
Taking various tax benefits into consideration, this
translates into a 5.8 percent return on investment.
(RBC Financial Group press release, May 29, 2003;
BMO Financial Group press release, May 8, 2003; TD
Bank Financial Group press release, June 4, 2003)

A new research report by TowerGroup’s Consumer
Credit service finds that the revised Basel Capital
Accord (Basel II) will have a wide-reaching impact on
mortgage lending in the U.S. and Europe. The new
regulations will increase transparency of credit risk
information, as well as facilitate greater accuracy and
equitable valuation of mortgage credit. Cross-border
mortgage lending by global financial services
institutions is expanding through mergers and joint
ventures, thereby creating global risks for individual
financial institutions and countries, and the international
banking system. As a result, mortgage lenders will
increasingly be subjected to international banking
regulations that monitor cross-border risk. (TowerGroup
press release, April 17, 2003)

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After a decade of stalled economic growth, Japan’s
banks may be impacted by new criteria for capital
adequacy ratios, dividend payouts and performance that
could potentially pave the way for the government to
nationalize portions of the banking sector. The draft
rules proposed by the country’s Financial Services
Agency outlined the standards the banks now must
meet. If they fail to meet the standards, the government
could exercise its right to convert the preferred shares it
bought by injecting JPY 7.45 trillion ($62.59 billion) in
public funds in 1999 to recapitalize Japan’s top 15
banks. The 15 banks are now consolidated into seven
groups, of which one, Mitsubishi Tokyo Financial
Group, has repaid its debt to the government. Japan’s
Economics and Financial Services Minister Heizo
Takenaka also said that after a round of inspections, the
FSA had identified the need for JPY 1.3 trillion ($10.85
billion) in loan loss charges at the seven banking groups.
In anticipation of the FSA’s findings, the groups had
forecast bad loan charges for the year ended in March at
about JPY 5 trillion, after a November forecast of JPY
3.1 trillion. In the previous financial year, bad loan
charges reached JPY 7.8 trillion. Minister Heizo
Takenaka indicated progress has been made in disposing
non-performing loans. (Reuters April 3 and 25, 2003)

As of May 2003, 33 percent of the U.K. public favors
entering the EMU according to the results of the latest
report by Credit Suisse First Boston’s U.K. economic
research team on the U.K. public’s use of the euro and
support for EMU entry. The CSFB report also notes that
the current percentage of the public supporting EMU
entry has declined from 42 percent in January 2002.
(Credit Suisse Group press release, May 28, 2003)

With the growing importance of euro-denominated trade
flows, The Bank of New York has launched its Euro
Reimbursement service that will provide clients with
access to an extensive range of trade processing features.
The service, which is directly linked to the inter-bank
euro payment system through BNY’s Frankfurt branch,
will provide pre-debit notification to clients of
reimbursement claims, value-added reporting on euro-
denominated transactions, and transaction execution

through a central processing hub. (The Bank of New
York, June 3, 2003)

One June 2nd, Citibank announced the launch of its U.S.
stock investment service in Taiwan in order to offer
customers more choices with easy access to investing in
the NYSE, Nasdaq, ASE, ETF, and ADR/GDR markets.
Results of a survey of its wealth management banking
customers in Taiwan showed that almost three-fourths of
the respondents said they were interested in directly
investing in the U.S. stock market. (Citigroup press
release, June 2, 2003)

e - B u s i n e s s a n d Te ch n o l o g y

Despite prevalent cost-cutting measures throughout the
global financial services industry, financial services
companies are forecast to increase IT expenditures by
2.3 percent this year over last year to $333.7 billion.
Even in the European Union, where IT spending is
expected to decline just over one percent in 2003,
TowerGroup predicts that technology spending by
financial institutions will gradually increase over the
next three years. It also estimates that about a third of all
IT investments made by financial services companies
worldwide are earmarked for new technologies. With
this in mind, TowerGroup is launching its new
consulting practice, IT Value Management, designed to
help financial institutions align their business strategies
more effectively with their IT investments while
increasing return on investment. (TowerGroup press
releases, May 12 and 21, 2003)

During April 2003, Wachovia announced three new
initiatives:

– CyberImport, released by Wachovia’s International

Division, is the company’s proprietary Web-based
product designed to automate a customer’s access to
the life cycle of Letters of Credit. CyberImport is
designed to make the Letters of Credit transaction
process more efficient – from issuance/acceptance,
discrepancy resolution, drawdown to final settlement.

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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– Online FX, rolled out by Wachovia Bank N.A., is a

proprietary online foreign exchange trading platform
for executing spot, forward, and cross-currency
transactions in more than 25 currencies.

– Dropbox ARC, introduced by Wachovia’s Treasury

Services Division, and developed with San
Francisco-based BankServ, the new electronic check
conversion service is designed to help customers be
more efficient in collecting, centralizing, tracking,
and researching their accounts receivable
transactions.

(Wachovia press releases April 7, 21, and 24, 2003)

Wells Fargo & Company, which announced the launch
of its online banking services for blind and visually
impaired consumers, became the first financial
institution to have its Web site certified by the National
Federation of the Blind. Other such certified
organizations include the U.S. Social Security
Administration and global technology provider HP.
Enhancements to the Web site include screen readers
capabilities that read the contents of the screen out loud,
as well as magnifiers which enlarge the screen’s font
size. (Wells Fargo press release, May 12, 2003)

A report by Celent predicts a decline in IT spending by
the U.S. securities industry in 2003, representing the
first running two-year decline in the industry’s history.
According to Celent, even during the market crash of
the late 1980s and the early 1990s recession, there has
never been a year-on-year decline in securities industry
IT spending levels. In the past, individual firms may
have cut IT outlays but on an industry level spending
had grown continuously since the 1970s. While
outlining priorities and challenges facing U.S. securities
firms, the Celent report notes that lower technology and
operations budgets may be exposing some firms to
serious risks in terms of processing trades correctly. In
contrast with the U.S., banks in Japan, though coping
with a stagnant economy and heavy bad debt portfolios,
are maintaining a strategic focus on technology
investments as a way to reduce costs, increase efficiency

and enable value-added and competitive products and
services. In the current fiscal year, Japan’s banks, both
large and small, spend USD 11.9 billion on technology.
(Celent press releases, April 3 and 28, 2003)

As banks endeavor to control costs in the current
economic environment, outsourcing services for ATM
(Automated Teller Machine) operations are becoming
more popular, and have considerable room for growth,
according to a new Celent report, “ATM Outsourcing
Services: A Global View,” that estimates in 2003
financial institutions and ISOs worldwide spent $4.9
billion on these services. Celent estimates steady growth
ATM outsourcing, reaching $6.5 billion by the end of
2007. The report analyzes ATM outsourcing trends in
North America, Europe and Asia-Pacific. (Celent press
release, June 4, 2003)

The Bank of New York (Delaware), a subsidiary of The
Bank of New York Company, Inc., became one of the
first banks in the U.S. to convert from physical paper
checks to electronic presentment for its corporate
customers. The electronic image capability that has been
enabled by the installation of an image archive at the
bank’s mainframe data center and by the electronic
capture of check images at the Federal Reserve Bank of
Philadelphia, allows all of the steps in the Bank’s check
processing procedures, while providing customers with
immediate service enhancements such as same day
online viewing of images of all checks and an online
seven-year archive capability to retrieve and view all
check images. (The Bank of New York, June 3, 2003)

R i s k M a n a g e m e n t

According to Moody’s KMV, a firm that tracks credit
risk, credit risk models point to improvement across
most industries. This can be attributed to fewer default
or bankruptcy risks for the average U.S. company which
is down 20 percent to 50 percent this year; and
important to investors in high-grade corporate bonds, a
smaller danger of falling bond prices. An equity-based
model created by CreditSights Inc., a fixed-income

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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research service, found that credit risk for U.S.
companies has fallen by 40 percent to 50 percent on
average since August 2002. Although models are
providing early glimpses of improvement, some experts
indicate that troubled times have not entirely passed.
(Reuters, June 11, 2003)

JPMorgan announced the launch of is Credit Navigator
in April 2003. Responding to the increasing integration
of the credit markets, with market makers and investors
aggregating the trading of all formats of credit risk into a
single risk management system, this new user-friendly
analytical tool is designed to help investors identify
relative value and opportunities in the credit markets.
According to JPMorgan, Credit Navigator provides
comprehensive data for more than 50 European and U.S.
names, including, among other features, an asset
universe and basis history chart for each name.
Company executives say the product is a step forward
toward greater transparency in the credit derivative and
corporate bond markets. (JPMorganChase press release,
April 23, 2003)

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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K P M G ’ S B A N K I N G I N S I D E R

w w w . k p m g i n s i d e r s . c o m

O v e r v i e w

In response to the increasing demand for easily accessible
industry information and value-added insights that financial
services industry professionals can leverage to achieve a
competitive market advantage, KPMG publishes the
Banking Insider, an easy-to-use industry news and
information service delivered directly to registered viewers
by e-mail.

A dedicated editorial staff oversees the content, providing
the top stories of the day – daily, weekly, and/or as breaking
news occurs. The Banking Insider saves time by offering
focused, industry-specific news and information on the
industry with a simple mouse click and includes:

Links to premium content from a wide range of news

and information services.

Exclusive KPMG-authored analysis and

commentary that provide an in-depth perspective
on the issues that have an impact on today’s
business.

A searchable archive of KPMG-authored articles

accessible from any KPMG-Analysis page.

In today’s merging world of business, KPMG also offers the
following Insiders providing quick access to the latest news
and information of other industries.

Consumer Markets Insider
Electronics Insider
Health Care Insider
Insurance Insider
Pharmaceuticals Insider

In the following section, we offer KPMG analysis and
commentary reprinted from the Banking Insider. These
articles provide information on recent issues and trends
impacting the financial services industry.

This complimentary service is available through the Internet
at www.kpmginsiders.com.

The information provided in the following articles is of a
general nature and is not intended to address the specific
circumstances of any individual or entity. In specific
circumstances, the services of a professional should be
sought. The views and opinions are those of the author
and do not necessarily represent the views and opinions
of KPMG LLP.

Analysis and Commentary

N e w O u t s o u r c i n g M a n t r a : T r u s t ,

b u t V e r i f y

By Christopher Westfall, Managing Editor, Banking Insider

As outsourcing grows, financial services executives are
demanding greater oversight of technology vendors,
establishing penalties for service failures and often hiring
other firms to oversee the relationship.

At the same time, management teams are anxious not to
alienate vendors, fearing that damaging a relationship could
come back to haunt them in additional back-office headaches.

"You need to have a high-level person or team following
outsourced activities--almost as customer service reps to the
outsourcees," said Will Gibson, global chief operating officer
for ING Investment Management, at a recent meeting of the
National Investment Company Services Association
(NICSA). "It's the cost you are going to have to pay to keep
up a healthy outsourcing deal."

Financial services companies have long outsourced internal
functions, but now outsourcing seems to be hitting a fever
pitch. The TowerGroup estimates that $120 billion of the
$340 billion in IT spending in 2003 will be outsourced.

How financial services companies outsource varies greatly.
Some of the nation's largest broker/dealers and banks have
announced huge IT outsourcing deals, including J.P. Morgan
Chase's $5 billion contract with IBM, Bank of America's 10-
year, $4.5 billion agreement with Electronic Data Systems,
and a $400 million outsourcing deal between Unisys and
Washington Mutual.

Meanwhile, mutual fund companies and mid-tier and small
banks are outsourcing back office operations incrementally,
says Eric Panepinto, president of Sanchez Data Systems in
Malvern, Pa. "The large deals are about carving out entire IT
departments," he says. "It is probably more of a piecemeal
approach in the mid-tier banks."

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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Greater regulatory oversight has also put a spotlight on
vendor performance, said Richard Hisey, treasurer and senior
vice president for MFS Investment Management, at the
NICSA meeting.

Many common outsourced functions of mutual funds are
coming under increased scrutiny from management. "There
could be an argument that, given Sarbanes-Oxley, financial
reporting could be considered a core competency [that fund
executives will be held liable for]," Hisey said.

Sanchez's Panepinto agrees, saying his clients are looking
closely at benchmarks and third-party providers in light of
regulatory issues. "The regulators have really come down on
[oversight]," he says. "Just because you outsource, you can't
turn a blind eye to what is going on."

(KPMG’s Insiders, May 20, 2003)

B a n k e r s S t r u g g l e t o C o m p l y W i t h
T e r r o r R e g u l a t i o n s

By Christopher Westfall, Managing Editor, Banking Insider

Regulators are promising that an overhauled system for
requesting terror suspects' bank records will address financial
industry criticisms that the system was confusing and
unmanageable.

"The entire [request] process is being revamped and has
come a long way since December [of 2002]," said Albert
Zarate, senior regulatory counsel for the U.S. Department of
the Treasury's Financial Crimes Enforcement Network
(FinCEN) in Vienna, Va.

Zarate and other regulatory representatives spoke at the
American Bankers Association Regulatory Compliance
Conference in Washington, D.C.

As part of the USA Patriot Act of 2001, Congress included a
provision that allowed FinCEN to send banks the names of

But whether it's farming out check processing or moving the
entire computer staff to a third party, banks are just now
trying to determine how to measure the success of
outsourcing deals, says David DiCristofaro, partner and
financial services industry leader for KPMG's Information
Risk Management practice in Charlotte.

"Most of the time, companies will outsource because they
want the economic benefit, and they want to improve
operations," DiCristofaro says. "But how to determine
[success] is still a challenge."

DiCristofaro explains that many banks have a hard time
"getting dollars into the business case" while trying to sign
the deal. That makes performance measurement and
monitoring important in justifying an outsourcing deal to
upper management and the board of directors.

Sanchez's Panepinto says that many banks have been relying
on service level agreements (SLAs), which are contractual
benchmarks that set predetermined measures that the vendor
needs to meet. For example, an SLA allows a fund company
to dock part of the payments to a custody vendor that allows
too many failed trades. The fund company may even say the
vendor defaulted on a contract if it violates too many SLAs.

Banks and fund companies, which are becoming more adept
at outsourcing, need to have a plan in place for those
uncomfortable moments when vendors don't live up to the
terms of the contract, ING's Gibson said.

"Someone who has not outsourced should know how they
can get extricated," he said. "For example, when we do an
outsourcing agreement, it will always [look] like a prenup."

As a result, many firms are hiring third parties to oversee
outsourcing arrangements; they are also having non-technical
staff monitor vendor performance, DiCristofaro says. "It is
becoming increasingly common in the industry to have an
outside firm oversee all vendors," he says.

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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suspected terrorists and organizations to see if there was a
match in bank records.

The process, called "314(a) requests" for the corresponding
section of the Patriot Act, compels banks to conduct a one-
time search of their deposit accounts, funds transfer records,
loan documentation and other material at the behest of
FinCEN.

But following implementation, bank compliance staff
complained that requests arrived too fast, while they were
unclear about how to conduct searches. They also didn't
know when and how to report back to the government.

From February until the end of May, FinCEN made 77
requests about 374 suspects to over 20,000 financial
institutions, resulting in about 2,300 matches.

Zarate said that FinCEN, a liaison between banks and the
government, has made changes in the 314(a) request process
in response to complaints. "The biggest improvement has
been narrowing of the 314(a) records to be searched," he
said.

This includes narrowing the definition of what types of
people qualify for a search, and limiting law enforcement to
request information on terrorism and the most significant
money laundering cases.

Regulators have also started sending batch requests every
two weeks and giving the institutions two weeks to reply.
FinCEN is also working to create a better system of reporting
positive matches, which currently comprises sending a form
reply to an e-mail address.

Complaints have come from the whole spectrum of American
banks, but often the 314(a) requests hit regional and small
banks hardest. Many small banks lack experienced
compliance professionals, putting them under a strain with
the rise in anti-money laundering regulations. A recent ABA
survey said that 90 percent of respondents found it "very
difficult" to find qualified compliance officers.

Laurie Bender, senior special anti-money laundering
examiner for the Federal Reserve Board, said that the Office
of Foreign Asset Control (OFAC) will give some time for
banks to adjust to the new regulatory environment, but they
will need to comply with all regulations.

While both FinCEN and OFAC focus on money laundering,
their approaches are different. OFAC keeps a list of
institutions and banks that are known launderers that U.S.
firms cannot work with, as part of an ongoing program.
FinCEN, meanwhile, assists law enforcement in individual
investigations.

"OFAC is not the result of the Patriot Act, it has been around
for a number of years," she said, noting that there are
additional compliance requirements for OFAC under the
Patriot Act.

"There will be a modest grace period for compliance, but
given the risk and what could happen, we are looking at
[compliance] very seriously," she said.

This means having bank examiners reviewing OFAC
compliance "much like a program requirement" that could
result in sanctions if banks are lacking, Bender said.

Even smaller banks, which often complain that they do not
have the resources to comply with myriad anti-money
laundering regulations, are expected to keep up to speed.
Terrorists like those involved in the September 11 attacks
will often use smaller institutions in several different regions
to escape detection.

Bender said that the Sept. 11 hijackers moved several times
within the U.S., changing addresses and banks, because law
enforcement and financial institutions alike did not have
systems to follow individuals' movements from region to
region.

"We have seen a lot of banks doing OFAC manually, which
is virtually impossible with all the records that are involved,"
Bender said. "Some vendors are offering [compliance]

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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systems for as little as $700, so you need to look at the cost-
benefit [analysis] of that."

Banks should also take advantage of the Patriot Act's
provision that allows financial institutions to share
information on suspect accounts, said Lisa Grigg, a manager
in the anti-money laundering investigative service
department of Wachovia Bank in Charlotte.

Griggs said that banks can take advantage of the provision,
called 314(b), if they meet four requirements: they give
notice to FinCEN; re-file the notice annually; only share with
financial institutions that have also filed notice to share; and
ensure that they have procedures to safeguard the
information.

(KPMG’s Insiders, June 19, 2003)

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

oseph Mauriello

Vice Chairman, Financial Services
New York, NY
Phone: (212) 954-3727
e-mail: jmauriello@kpmg.com

Jerry Licari
Partner and Banking Industry Sector Leader
Charlotte, NC
Phone: (704) 335-5311
e-mail: jrlicari@kpmg.com

Robert F. Arning
New York Office Managing Partner
New York, NY
Phone: (212) 872-3202
e-mail: rarning@kpmg.com

Robert T. McCahill
Partner, Tax Services
New York, NY
Phone: (212) 872-6776
e-mail: mccahill@kpmg.com

Editor:
Mary Ann Bramer
Director, Special Projects - Markets
Montvale, NJ
Phone: (201) 505-3570
e-mail: mabramer@kpmg.com

Contributing Authors:

Taxation
Washington National Tax
Washington, D.C.
Phone (202) 533-3800
e-mail: ldyor@kpmg.com

Legislation and Regulation

Steve Roberts
Partner in Charge
National Regulatory Advisory Services Group
Washington, D.C.
Phone: (202) 533-3018
e-mail: sroberts@kpmg.com

Michael Flood
National Regulatory Advisory Services Group
Washington, D.C.
Phone: (202) 533-3264
e-mail: mflood@kpmg.com

Laura Haywood-Leigh
Senior Financial Analyst
Washington, DC
Phone: (202) 533-5424
e-mail: lauraleight@kpmg.com

Accounting
T. J. Scallon
Senior Manager – Audit
New York, NY
Phone: (212) 954-7059
e-mail: tscallon@kpmg.com

For additional information on KPMG, please visit our Web site at
www.kpmg.com

To submit changes to our mailing list, please send an e-mail message to
Kathy Wall at kwall@kpmg.com.

BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International
or any KPMG member firm.

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