Dr. Amine Awad - Group Advisor BLOM Bank S.A.L.

LATEST TRENDS IN BASEL ACCORD
How Regulatory Reforms will affect Bank’s
Business Model
Dr. Amine Awad
Group Advisor
BLOM Bank S.A.L.
Beirut, May 18, 2016
1
Outline
I- Evolving Basel III Accord
* New Capital Adequacy (Quality & Quantity of Equity)
* Capital Buffers (Conservation, Countercyclical, Leverage Ratio)
* Special Treatment for S.I.B. (G-SIB v/s D-SIB)
* New Liquidity Rules (L.C.R., N.S.F.R.)
II- Basel III a Forward Looking Approach in Banks’ Risk
Management (Focus on Pillar II)
* ICAAP, an Internal Tool for Capital Planning
* Provisions Based on E.C.L. (convergence between Basel &
I.F.R.S.9)
2
* Focus on Stress Tests as a Protection Tool against Risks
* New Pillar III Disclosure Requirements
* Less Reliance on Internal Models
a) Revisions to the S.A. for Credit Risk
b) More Restrictions on I.R.B. for Credit Risk
c) New S.M.A. (former Standardized Approach) for Operational
Risk in preparation for canceling the reliance on A.M.A.)
III- Impact of Basel Accord on Banks’ Business Models
3
Introduction
Sir John Vickers, the architect of the UK’s post-crisis banking
reform, declared that BoE is setting low equity capital requirement
for the British banking system which lead to some doubts around the
resilience of this system.
The best way to inspire confidence in banks is to ensure that they
have clear capacity, primarily in the form of Equity, to absorb large
losses when a crisis hits.
Regulators must weigh the benefits of more resilient banks against
the higher costs of equity funding, which are likely to entail higher
borrowing costs in the real economy.
4
I- Evolving Basel III Accord
5
New Capital Adequacy
(Quantity & Quality of Equity)
Just after the big hit of the Global Financial Crisis, in late
2009, as part of its work to strengthen global capital
requirements, the BCBS conducted a “top-down”
assessment of the overall level of capital that should be
held in banks. The experts were asked to undertake
empirical analysis to perform a calibration of the common
equity and Tier 1 risk-based ratios and the Tier 1 leverage
ratio, as well as the regulatory buffers above the common
equity and Tier 1 risk-based ratios.
6
New Capital Adequacy
(Conceptual Framework)
The following high-level concepts were adopted:
“The regulatory minimum requirement is the amount of
capital needed for a bank to be regarded as a viable going
concern by creditors and counterparties, while a buffer can
be seen as an additional amount of Equity, sufficient for
the bank to withstand a significant downturn period and
remain above minimum regulatory levels”.
7
Strengthening
global capital
framework
Transitional
arrangements
for Capital &
Liquidity
Forward Looking
Introducing
Global Liquidity
standards
Basel III
Stress Tests
&
E.C.L.
Larger
Scope of
Application
New
Macroprudential
Regulations
8
New Capital Adequacy
(Quantity & Quality)
1. Raising the Quality, Consistency & Transparency of the Capital base:
•
•
•
3 Capital Adequacy Ratios (C.A.R.) – Instead of one
More emphasize on Common Equity
No more Tier III
In addition, Basel III introduces more stringent Qualitative rules:
- New Risk Management Practices
- New rules on Corporate Governance, Boards’ Structure and Business Ethics
- New Rules on Compensation/Remuneration in the financial sector, with more
Disclosures
- New Rules on Consumer Protection (and financial literacy)
- New Rules on Supervisory Improvements:
 Supervisory Colleges
 New Basel Core Principles
9
New Capital Adequacy
(Capital Minima)
Tier 1 Capital
6%
Total Regulatory
Capital
8%
Tier 2 capital
8%
Common Equity Tier 1
CAR I: 4.5%
Additional Tier 1
CAR II: 6%
Tier 2 Capital
CAR III: 8%
10
Capital Buffers & Leverage Ratio
Two types of Buffers were added:
A. Conservation Buffer
An additional 2.5% of Common Equity against the Risk Weighted
Assets should be maintained permanently by banks, bringing the
Total Common Equity Standard to 7%.
This additional amount of capital aims at receiving the first hit of
any future losses.
When a bank falls into the buffer range, the supervisor may put
constraints on the bank’s discretionary distribution of dividends,
in order to build-up again the “fall” of the Common Equity level
4.5 + 2.5 (%).
11
B. Countercyclical Buffer
Another buffer, between 0% and 2.5% of Common Equity can be
imposed by the Supervisors when they judge that credit growth is
resulting in a build-up of system wide risk.
It aims at ensuring that banking sector capital requirements take
into account the macro-economic environment in which banks
operate.
Its main goal is to protect banks from period of Excess Aggregate
Credit Growth.
In downtown, this regime should help to reduce the risk that the
supply of credit will be constrained by the regulatory capital
requirement which could undermine the performance of the Real
Economy and result in additional credit losses in the banking
sector.
N.B.: It is a Macro Prudential, Forward Looking Instrument
12
LEVERAGE RATIO
C. Leverage Ratio
The Leverage Ratio main objective is to prevent damage to the
financial system and the economy by containing build-ups of
leverage in banks that could ultimately result in destabilizing
deleveraging spirals.
The Basel III leverage ratio (LR) is designed to restrict the build-up
of leverage in the banking sector and to backstop the existing riskweighted capital requirements (RWRs) with a simple, non-riskweighted measure.
There is considerable room to raise the LR requirement above its
original 3% level, within a range of 4% to 5%. Doing so, should
help to constrain banks’ risk-taking earlier during financial booms.
13
LEVERAGE RATIO DESIGN
The leverage ratio is the ratio of Tier 1 capital (numerator) over the
sum of the following items (denominator):
• On-balance sheet exposures (i.e. loans)
• Derivatives exposures at replacement cost (net of cash variation
margin, with a set of eligibility criteria) plus an add-on for
potential future exposure
• Exposures from securities financing transactions, with limited
recognition of netting of cash receivables and cash payables with
the same counterparty under strict criteria
• Off-balance sheet items (i.e. L/C’s, L/G’s standby L/C’s etc…).
14
LEVERAGE RATIO LOGIC
Given its broad scope and the fact that it does not try to account
for the riskiness of assets, the LR ensures greater robustness of
capital requirements against uncertainties and risks that are
difficult to model within the risk weighted framework. That said,
the LR does not provide information about banks’ underlying risk
profiles. This insensitivity to risk may incentivize banks to take
on riskier positions.
Therefore, Risk-Weighted Capital Requirements and LR, are
complements and not substitutes
15
SPECIAL TREATMENT for S.I.B.S’s
There is renewed scrutiny on the impact that the failure of large
financial institutions could have on the financial system as a
whole. The interconnected nature of today’s systemically
important banks (SIB’s) has contributed to a system where the
potential failure of a single large institution can have wider effects
that reverberate throughout the global economy.
Over and above the higher Capital Requirements , the BCBS sets
standards requiring additional going-concern loss absorbency for
SIB’s.
16
S.I.B.’s Indicators
Indicators and their weights
Category
Indicator
Indicator weight
Size
Total exposures
1/5= 20%
Interconnectedness
Intra-financial system assets
1/15=6.6 %
Intra-financial system liabilities
1/15=6.6 %
Substitutability/financial
institution infrastructure
Securities outstanding
Payment activity
Assets under custody
1/15=6.6 %
1/15=6.6 %
Complexity
Underwritten transactions in debt and
equity markets
Notional amount of OTC derivatives
1/15=6.6 %
1/15=6.6 %
Trading and AFS securities
1/15=6.6 %
Level 3 assets
Cross-jurisdictional claims
1/15=6.6 %
1/10=10 %
Cross-jurisdictional liabilities
1/10=10 %
Cross-jurisdictional
activity
1/15=6.6 %
17
S.I.B.’s Additional Requirements
Based on the score computed by the supervisor, the S.I.B. will be
required to have the following additional Capital Requirement.
Category
Additional Capital Requirement
5
+3.5% CET1
4
+2.5% CET1
3
+2.0% CET1
2
+1.5% CET1
1
+1.0% CET1
18
Common Equity Tier1 (CET1)
Additional Tier 1
Tier 2
Minimum Requirement
%
(2015)
%
Gradually since Dec.
2012 (until 2015)
Total Equity
9.5
8
2%
TE
Tier 1
2%
6
4.5
T1
CET
1
0.5% Add. BDL
1.5%
1.5%
1% Add. BDL
4.5%
4.5%
Basel III
BDL
CET
1
7.5
5.5
19
Common Equity Tier1 (CET1)
Additional Tier 1
Tier 2
Minimum Requirement + Capital Conservation Buffer (2.5%)
%
%
(2019)
(2015)
Total Equity
12
10.5
TE
2%
Tier 1
2%
8.5
7
T1
CET1
1.5%
1.5%
10
0.5% Add. BDL
1% Add. BDL
4.5% + 2.5%
4.5% + 2.5%
Basel III
BDL
CET
1
8
20
Basel III: Capital Requirements
%
(Gradually till 2019)
%
(Gradually till 2019)
16.5
SIB’S Buffer (03.5%)
13
SIB’S Buffer (03.5%)
Systemically
Important Financial
institutions Buffer
CCB (0-2.5%)
10.5
8
6
TE
Conservation Buffer
(2.5%)
Countercyclical Capital
Buffer
18
14.5
CCB (0-2.5%)
12
Conservation Buffer
(2.5%)
T1
7.5
Tier 2
T1
CET1
5.5
4.5
Tier 1
CET1
CETI
Basel III
BDL
21
NEW LIQUIDITY RULES
( L.C.R. & N.S.F.R. )
•
When times are good it is hard to force banks to
respect liquidity risk.
•
Liquidity has a cost and banks have short memories
and significant competitive pressures.
•
Borrowing capacity is not a substitute for balance
sheet liquidity in times of crisis but is the lowest
cost source in good times.
22
Common Themes of Troubled Banks in
2008
•
Reliance on short – term funding
•
Low levels of liquid assets
•
High Leverage
•
Interconnectedness with other banks
•
Reliance on off – balance sheet funding
•
Overestimated the liquidity value of less liquid assets
23
Rationale for Liquidity Requirements
•
Banks perform an important role in converting demand deposits
into long – term loans “Maturity Transformation”.
•
•
This means they are inherently illiquid.
•
Banks are integral to the economy, so there are large public costs
associated with bank problems, both in terms of taxpayer support
and reduced economic growth (credit contraction).
•
Liquidity regulation seeks to address insufficient incentives for
banks to self – insured against liquidity stresses.
In conjunction with high leverage, this makes them vulnerable to
creditors’ confidence.
24
Why Authorities start regulating
Liquidity & Transfer Pricing
•
•
Cash markets are fragile and can disappear quickly
•
•
Interconnected financial sectors can collapse like a house of cards
•
There is bad banking business (proprietary trading, derivatives,
casino)
Too much maturity transformation is unhealthy for the financial
system
There is good banking business (loans, deposits, service to real
economy)
25
Basel Liquidity Framework
Principles for Sound Liquidity Risk Management and Supervision
Qualitative document arranged around seventeen principles for managing
and supervising liquidity risk (BCBS document Sept. 2008 & BCCL Circular
275 Jan. 2013)
Liquidity Coverage Ratio (LCR)
30 day stress test that establishes a minimum amount of liquid assets to be
held by banks
Net Stable Funding Ratio (NSFR)
Structural metric that measures amount of longer term, stable source of
funding relative to asset mix and off – balance sheet exposures.
Intraday Framework for Liquidity Risk Measurement, Standards &
Monitoring
26
Key Takeaways from the 17 Principles
• Hold liquid assets
• Establish FTP (That helps following maturity
mismatching & liquidity cost)
• Reduce Leverage
• Collateral and Intraday Management (including break
clause etc…)
• Public Disclosure
27
LCR - Calculation
Stock of high quality liquid assets (HQLA) ≥ 100%
Net cash outflows over a 30 day time period
Note: the LCR will be phased in between 2015 and 2019
Minimum
LCR
1 January
2015
1 January
2016
1 January
2017
1 January
2018
1 January
2019
60%
70%
80%
90%
100%
28
Net Stable Funding Ratio (NSFR)
The Structural Metric
Not yet Finalized
Also referred to as the
Nobody Seems to Focus on Ratio (NSFR)
29
NSFR - Definition
Available amount of stable funding (ie, sources) > 100%
Required amount of stable funding (ie, uses)
Assets with maturity > 1 year should be funded by
sources that are expected to be available for a period
> 1 year
30
MONITORING TOOLS FOR INTRADAY
LIQUIDITY MANAGEMENT
Managing Intraday Liquidity Risk is a corner-stone of
a bank’s overall Liquidity Risk Management
Framework.
The Intraday Liquidity Positions help the bank to meet
payment and settlement obligations on a Timely and
Inexpensive way under Normal and Stressed
conditions, (contributing to the smooth functioning of
the Global Payment System).
31
II - BASEL III, A FORWARD
LOOKING APPROACH
IN BANKS’ RISK MANAGEMENT
32
What is an ICAAP?
The ICAAP is a system of Sound, Effective and
Complete Strategies and Processes that allow the bank
to assess and maintain, on an ongoing basis, the
Amounts, Types and Repartition of Internal Capital
that he considers adequate to cover the nature and level
of risks to which he is or might be exposed.
P.S.: The “Internal Capital "complements the “Regulatory
Capital” set by the regulators.
33
ICAAP / SREP
Background
o
o
o
The Internal Capital Adequacy Assessment Process (ICAAP). Banks
must ensure they identify and assess all risks they are or maybe exposed
to (i.e., not only Pillar I risks), maintain sufficient capital to face these
risks and develop and better use risk management techniques in
monitoring and managing these risks.
The Supervisory Review and Evaluation Process (SREP). Supervisors
are responsible for evaluating how banks are assessing their capital
adequacy needs relative to their risks. Supervisors should take the
necessary actions, if they are not satisfied with the results of this process.
Pillar II should foster a Dialogue.
Between Banks and Supervisors so that when deficiencies are identified,
prompt and decisive actions can be taken to reduce risk and/or restore
capital
34
ICAAP Principles
The three principles of a good ICAAP are:
o
o
Completeness
any existing or potential risk
should be identified and taken into account when
assessing the Adequacy of the Internal Capital
Specificity
the ICAAP exercise is specific for
every bank.
o
the ICAAP should
proportional to the bank’s complexity and size
Proportionality
be
35
ICAAP Overview
Pillar I Risks
Other Risks
Credit Risk
Settlement Risk
Processes
Fairness
Business Risk
ICAAP
Improvement
Risk Management
Liquidity risk(*)
ICAAP
Stress Testing
Peer Group
Comparison
Model Risk
Market Risk
Concentration risk
Dialogue
Interest Rate Risk
Operational Risk
Capital
Increase
Risk
Exposure
reduction
Capital Planning
SREP
Supervisory
Action
Proportionality
Principle
Compliance Risk
Governance
Reputation Risk
Individual
Capital
Guidance
Provisioning
* The Liquidity has been addressed through 2 new ratios (LCR and NSFR) under Basel III.
36
Examples of Risks
not Covered by Pillar I
o Contagion & Related Party Risk
o Concentration Risk (Geography, Industry, types of
o
o
o
o
o
o
Product, degree of Granularity of the Regulatory Retail
Portfolio…)
Residual Risk
Strategic Risk (Environment, Regulatory…)
Business Risk
Reputational Risk
Stress Situation
Compliance Risk
37
Quantitative or Qualitative
“Pillar 2 inherent risk exposures are assessed quantitatively to the extent
possible but, where risks are not quantifiable, supervisory judgment is
necessary. Supervisory judgment is also necessary with respect to
qualitative assessments of the Bank’s ability to contain actual risk
exposures within prudent and planned levels, through effective Risk
Governance, Oversight, Management and Control Practices.”
“Since these exposures are generally not capable of quantification, a
degree of judgment about Capital Adequacy is required, by the Bank
and the Supervisors”.
38
EXPECTED CREDIT LOSSES
The B.C.B.S. issued in Dec. 2015 a paper setting out
supervisiory guidance on sound credit risk practices
associated with the implementation and ongoing application
of Expected Credit Loss (ECL) accounting framework.
P.S.: The term Allowances includes allowances on loans,
and allowances or provisions on loan commitments and
financial guarantee contracts.
39
E.C.L. Model
The ECL Accounting Model should interact with
a bank’s overall credit risk practices and
regulatory framework, but does not endeavour to
set out regulatory capital requirements on
expected loss provisioning under the Basel
Capital Framework.
40
E.C.L.
Historically, the incurred-loss model served as the basis
for accounting recognition and mesurement of credit
losses and was implemented with significant differences
from a jurisdiction to another, and among banks, due to
the development of national and/or entity-specific
practices.
In revising its 2006 guidance on the verge of a global
transition to ECL Accounting Framework, the BCBS
emphasis the importance of High Quality, Robust and
Consistent implementation of ECL Acounting
Framework in all juridictions.
41
I.A.S.B. Adopts E.C.L.
The move to ECL accounting framework by the IASB was
an important step forward in resolving the weakness
identified during the financial crisis, that credit loss
recognition was too little and too late.
The development of ECL framework is consistent with the
April 2009 call by the G20 leaders for IASB to « Strenghten
accounting recognition of loan loss provisions by
incorporating a wider range of credit information ».
42
SCOPE OF E.C.L.
The focus of ECL is on lending exposures; i.e.: Loans,
Loan Commitments and Financial Guarantees to which
an ECL framework applies.
The BCBS expects that a bank will estimate ECL for all its
lending exposures.
While the implementation of ECL framework may require
an
investment
in
ressources
and
system
development/upgrades, IASB have given banks a sufficient
time to transition to the updated accounting requirements
(Jan 1st 2018).
43
E.C.L. METHODOLOGY
Consideration of forward-looking information, including
macroeconomic factors, is a distinctive feature of ECL
framework and is critical to the timely recognition of
ECL. Banks will have to use sound judgement, consistent
with generally accepted methods for economic analysis
and forecasting.
As Credit Risk Management is a core competence of
banks, the BCBS expects that a bank’s consideration of
forward-looking information, will be supported by a
sufficient set of data.
44
SUPERVISORY GUIDANCE TO
BANKS APPLYING IFRS
In accordance with the IASB impairment standard for financial instruments,
« if, at the reporting date, the credit risk of a financial instruments has not
increased significantly since initial recognition, the bank shall mesure the
loss allowance for this instrument at an amount equal to 12 months ECL ».
The BCBS expects that the bank will always mesure ECL for all exposures ,
and that a zero allowance will be very rare because ECL estimates are a
probability-weighted amount that should always reflect the possibility that a
credit loss will occur.
45
12 MONTHS E.C.L.
In formulating the estimate of the amount equal to 12
months ECL, it is important to consider reasonable and
supportable information that affects credit risk,
especially forward-looking information, including
macroeconomics factors.
Every bank should exercise its experienced credit
judgement to consider both qualitative and quantitative
information that may affect the bank’s assessment of
credit risk.
46
ASSESSMENT OF SIGNIFICANT
INCREASE IN CREDIT RISK
IFRS9 states: « the objective of the impairment
requirements is to recognise a Lifetime Expected
Loss for all Assets for which there have been
significant increase in credit risk since initial
recognition (whether on an individual or on
collective basis), taking into consideration all
information ».
47
ASSESSMENT OF SIGNIFICANT
INCREASE IN CREDIT RISK
The BCBS understands that the rationale for this approach
is that the creditworthiness of the counterparty, and thus
the ECL anticipated upon inital recognition, is taken into
account in the pricing of credit at that time.
It follows, then, that a post-origination increase in credit
risk may not be fully compensated by the interest rate,
and consequently the bank should carefully consider
whether there has been significant increase in credit risk;
if so the lending exposure would be subject to LEL
measurement
48
LIFETIME EXPECTED LOSS
The BCBS endorses the IASB view that Lifetime Expected
Credit Losses must be recognised before a financial
instrument become « Past Due » and that credit risk
increases when the borrower lags in reimbursing
(Rescheduling, Restructuring…).
Therefore the bank should take into account the fact that the
determinants of credit losses begin to deteriorate very often
long time before any evidence of delinquency appears in the
lending exposure.
49
IFRS 9 THREE STAGES
*IFRS 9 THREE STAGES
50
IFRS9 THREE STAGES
*IFRS 9 THREE STAGES
51
Definition of Stress Test
S.T.’s are used to study the impact of one (or many)
shocks on the Assets, Liabilities, Equity and
Financial Results of a given bank.
There are many categories of S.T.:
- Simple Tests (of sensitivity)
- Complex Scenarios (based on historical data)
52
Stress Test Purpose
What ST can and should do?
•
Supplements other Risk Management tools
•
Provides forward - looking assessment of risks
•
Facilitates development of Mitigation /
Contingency Plans (Micro and Macro Prudential
Policy)
53
Purpose of Stress Test
In theory: S.T. serves to Identify the vulnerabilities in a Bank, which
cannot be identified while running the normal businesses.
In practice: S.T. serves to Evaluate already identified vulnerabilities
and their impact on the future situation of the Bank.
There are many types of S.T.
Specific:
- S.T. based on one type of Risk in one Bank
- S.T. based on one type of Risk in all Banks
Systemic:
- S.T. based on many types of Risks in all Banks
- Conducted by the Regulators
- Same test for all Banks
54
New Approach to Stress Test
(In Banks)
Major Changes:
–
–
–
Crisis Scenarios on «Liquidity & Market Risks», based on recent
events.
Focus on «Liquidity Risk» more than on « Interest Rate Risk» (i.e.
not only cost of liquidity)
Other improvements:
* Constant revisions of assumptions
* More recourse on «Reverse S.T.»
* Identification of «Correlated Risks»
* Taking into account the « second Round Effects» and the
«Crisis Duration»
55
New Approach to Stress Test
(By Regulators)
- Based on the capacity of banks to:
* Resist to the Recession
* Resist to a Financial Crisis
* Continue their Intermediation Role
- New Assumptions:
* On the changes of the Macro – Economic Indicators:
G.D.P., Unemployment, R.E. prices, Inflation, etc…
* On the Duration of the Recession
* On the capacity of banks to generate future profits that can absorb
present losses and add new capital
* On the Compensation Policy
* On the Distribution of Dividends Policy
* On the Quality (and not only volume) of Equity
56
Stress Test and Basel III
The international financial crisis led to major amendments in the Basel framework:
- Pillar 1:
* The Recession scenario during 2 consecutive quarters with a growth rate of 0%, is
modified.
* Special Treatment (more severe) for SIFI’s.
- Pillar 2:
* Market shocks are considered plausible
* More focus on Concentration Risk (example: Real Estate)
* New approach to «Global Credit Risk»:
Credit + Counterparty + Collaterals
* More focus on the diversification of Liquidity Funding Sources
(L.C.R. / N.S.F.R.)
- Pillar 3:
* More coherence between Accounting and Prudential Standards
57
REVISIONS TO THE S.A. FOR
CREDIT RISK
The BCBS seeks to improve the S.A. for Credit Risk in a number
of ways; these include:
*
*
*
*
*
Reducing (without excluding) reliance on External Credit
Ratings (Rating Agencies)
Increasing Risk Sensitivity
Reducing National discretion
Strengthening the link between S.A. and the I.R.B. Approach
Enhancing Comparability of Capital Requirements across banks
58
KEY ASPECTS OF THE REVISIONS
The major amendments are related to the following:
*
Banks Exposures, would no longer be risk-weighted
by reference to the external rating of the bank or its
country of incorporation, but they would be based on
a look-up table where risk weights range from 30%
to 300% on the basis of 2 risk drivers:
- Capital Adequacy Ratio of the bank
- Asset Quality ratio of the bank
59
KEY ASPECTS OF THE REVISIONS
Corporate Exposures, would no longer be riskweighted by reference to the external credit rating of
the Corporate, but they would be based on a look-up
table where risk weights range from 60% to 300%
on the basis of 2 risk drivers REVENUE &
LEVERAGE.
Further risk sensitivity would be increased by
introducing a specific treatment for Specialized
Lending.
60
KEY ASPECTS OF THE REVISIONS
*
Retail Category, would be enhanced by tightening the
criteria to qualify for the 75% preferential risk weight,
and by introducing a fallback subcategory for exposures
that do not meet the criteria.
*
Exposures Secured By Residential R.E.,would no
longer receive 35% risk weight. Instead, risk weights
would be determined according to a look-up table where
risk weights range from 25% to 100% on the basis of 2
drives:
1- Loan to Value
2- Debt Service Coverage Ratios.
61
KEY ASPECTS OF THE REVISIONS
*
Exposures Securecd By Commercial R.E., are
subject to further consideration with 2 options:
1. Either treating them as unsecured exposure to the
counterparty (with a possibility of national
discretion under certain conditions)
2. Or determining the risk weight according to a
look-up table where R.W. range from 75% to
120% on the basis of the Loan-to-value ratio.
62
CREDIT RISK MITIGATION
The proposed amendments would reduce
the number of approaches, recalibrating
Supervisory Haircuts, and updating
Corporate Guarantor Eligibility Criteria.
63
EXPOSURES TO SOVEREIGN
Credit
Assessme
nt
AAA
To
AA-
A+
To
A-
BBB+
To
BBB-
BB+
To
B-
Below
B-
UNRATE
D
RISK
WEIGHT
0%
20%
50%
100%
150%
100%
64
EXPOSURES TO BANKS
CET1
Ratio
>12%
12%>
CET1>
9.5%
9.5%>
CET1>
7%
7%>
CET1>
5.5%
5.5%>
CET1>
4.5%
CET1
<
4.5%
Net NPA
Ratio<
1%
30%
40%
60%
80%
100%
300%
1%< Net
NPA
Ratio< 3%
45%
60%
80%
100%
120%
300%
3%< Net
NPA Ratio
60%
80%
100%
120%
140%
300%
65
CORPORATE EXPOSURES
REVENUE
<
EUR 5 Mios
Eur 5 Mios<
REVENUE<
EUR 50 Mios
EUR 50 Mios<
REVENUE<
EUR 1 Bios
REVENUE
>
EUR 1 Bio
Leverage
1X – 3X
100%
90%
80%
60%
Leverage
3X – 5X
110%
100%
90%
70%
Leverage
>5X
130%
120%
110%
90%
Negative
Equity
300%
300%
300%
300%
66
RESIDENTIAL R.E. COLLATERAL
LTV
<
40%
40%<
LTV
<60%
60%<
LTV
<80%
80%<
LTV
<90%
90%<
LTV
<100%
LTV
>100%
Loans to
individuals
With Debt
Service
Coverage
< 35%
25%
30%
40%
50%
60%
80%
Other Loans
30%
40%
50%
70%
80%
100%
67
COMMERCIAL R. E.
Exposures
secured by
commercial R.E.
LTV
<
60%
60%<
LTV
<75%
LTV
>75%
75%
100%
120%
68
NEW STANDARDISED
MEASUREMENT APPROACH SMA
FOR OP. RISK
In March 2016, the BCBS issued a paper entitled
«Standardised Measurement Approach for Operational
Risk in Banks ».
This consultative document aims at replacing the AMA (that
was part of the Basel II) and which allows for the estimation
of regulatory capital to cover op. risk, based on internal
modelling practices.
69
AMA WEAKNESSES
The AMA’s principles-based framework was established
with a large degree of flexibility.
The inherent complexity of AMA and the lack of
comparability arising from different internal modelling
practices have exacerbated variability in Risk-Weighted
Asset calculations; This have eroded confidence in
Risk-Weighted Capital Ratios.
The BCBS therefore determined that the withdrawal of
the AMA for Op. Risk from the Basel framework is
warranted.
70
NEW S.M.A. APPROACH FOR OP.
RISK
The Standardised Measurement Approach (SMA)
combines the Business Indicator (B.I.), a simple
financial statement proxy of op. risk exposure, with
bank-specific operational loss data.
The B.I. is made up of almost the same P&L items
that are found in the composition of the Gross
Income (of the Standardised Approach); The main
differences relates to how the items are combined.
71
NEW PILLAR III DISCLOSURE
REQUIREMENTS
A few weeks ago, the BCBS issued a consultative
document aiming at consolidating and enhancing the
Pillar III (Disclosure) requirements, to become more
transparent and easily accessible to all banks’
stakeholders.
This new document in combination with the IFRS 7
requirements will improve transparency in the
banking industry leading to less Moral Hazards and
Misuse of Taxpayers Money in crisis time.
72
III- IMPACT OF BASEL
ACCORD ON BANKS’
BUSINESS MODELS
73
-
Capital is becoming rare and expensive,
* Banks must review their dividend policy (with lower
Pay-Out Ratio)
-
Liquidity is becoming rare,
* Banks must manage their Intraday/S.T./L.T. Liquidity in
a conservative way
-
More pressures on Profitability, by having more liquid
assets and implementing E.C.L. approach
* Banks must manage better their cost of funds by using
comprehensive F.T.P. models
-
New Types of Risks (mainly Op. Risks), due to
“Compliance” and “Cyber Crimes”,
* Banks must invest in improving their Expertise (H.R.)
and Technology, to avoid “Fines” and “Bad Reputation”.
74
There are several negative side effects of the compliance
(AML – CFT) efforts, including fighting Tax Evasion, on
“Financial Inclusion” and on “Trade and Growth”, in
particular in the Emerging Markets.
FATF continues to emphasize the “proper implementation”
of these new measures, without pushing Banks for “DeRisking” by withdrawing from specific sectors or countries.
Banks should continue to be vigilant and to carry out “Due
Diligence” and “Transaction Monitoring” on specific
entities.
Information sharing and continuous communication with
correspondent banks in Developed Countries are a Must.
75