Basel III challenges - MKVK

Basel III challenges

Péter Szalai

12 November 2012

[email protected]

Basel III challengesAgenda

• Introduction

• New capital ratios

• Liquidity standards

• Current market situation & further steps

• Appendix

© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1

IntroductionBasel III timeline - milestones

2008 Jun 2011 Jul 2011 May 2012 Jan 2013

Basel III

Dec 2010Nov 2010

CRD/CRR


2

IntroductionKey elements of the new Capital Requirements Regulation and Directive

Basel III

Capital reform Governance & SupervisionLiquidity standards

Long term: Net stable funding

Short term: liquidity coverage ratio (LCR)

Capturing all risks

Quality, consistency and transparency of capital base

Disclosure & regulatory

Maximum harmonisation

g gratio (NSFR)

Controlling leverage

Capturing all risks

Strengthened corporate & risk governance

g yreporting

Increase importance of the CROBuffers

R ti


3

Remuneration


• Introduction




• Appendix


4

New capital ratiosCapital reform – overview of key changes

New capital ratiosCommon equityTier 1Total capital

Raising the quality of capitalFocus on common equityStricter criteria for Tier 1Harmonised deductions from capital

C it l ti =Available Capital

Total capitalCapital conservation buffer

Harmonised deductions from capital

Capital ratios =Risk-Weigthed Assets (“RWA”)

Enhancing risk coverageCounterparty credit riskSecuritisation products


5

Securitisation productsOther risks

New capital ratiosIncreasing capital ratios

Core Tier 1 – 2% CET 1 – 4 5%Core Tier 1 – 2% CET 1 – 4,5%….Tier 1 – 4% Tier 1 – 6%

Tier1 + Tier 2 + Tier 3 – 8% Tier1 + Tier 2 – 8%........

Additi l it l b ff i tAdditional capital buffer requirement

Gradual introduction

6© 2012 KPMG Tanácsadó Kft., a magyar jog alapján bejegyzett korlátolt felelősségű társaság, és egyben a független tagtársaságokból álló KPMG-hálózat magyar tagja, amely hálózat a KPMG International Cooperative-hez (“KPMG International”), a Svájci Államszövetség joga alapján bejegyzett jogi személyhez kapcsolódik. Minden jog fenntartva.

New capital ratiosCapital Buffers

Capital conservationbuffer

Countercyclical capitalbuffer

Systemic riskbuffer

The build-up in good times of buffers can be drawn down in periods of stress.

buffer

• Against losses during periods of financial and economic stress

buffer

• To build up the protection of the banking sector in periods of excess aggregate credit

buffer

• To prevent and mitigate long term non cyclical systemic ormacro prudential risk not

d b th b ff• Shall be 2,5% with a

possible regulatory derogation

growth

• The long-term maintenance of the lending capacity of the banking sector

covered by other buffers

• May be 0-3% or more, set by the competent authority

• Strengthening of shock absorbing ability on institution level

banking sector

• Shall be 0-2,5% or more, set by the competent authority

Sh ll b b d th

• May also apply for exposures in other member states

• Shall be based on the deviation of the credit-to-GDP ratio in a long term trend

• The Common Equity Tier 1 capital used to cover Pillar 2 risk shall not be used to meet the buffer

7© 2012 KPMG Tanácsadó Kft., a magyar jog alapján bejegyzett korlátolt felelősségű társaság, és egyben a független tagtársaságokból álló KPMG-hálózat magyar tagja, amely hálózat a KPMG International Cooperative-hez (“KPMG International”), a Svájci Államszövetség joga alapján bejegyzett jogi személyhez kapcsolódik. Minden jog fenntartva.

The Common Equity Tier 1 capital used to cover Pillar 2 risk shall not be used to meet the buffer requirements.

• If buffer requirements are not met capital conservation measures shall apply.

New capital ratiosCapital requirements and capital buffers

Total Minimum Capital+ Conversation Buffer %Systemic to

10%

8% Additional Tier 1 2,5%

0-3%Risk Buffer

Countercyclical

Ri k B ff mig

ht ri

se t

high

er

Tier 2

Tier 1 including:

8%

6%

Additional Tier 1

Conservation

Buffer

0-2Risk Buffer

1 C

apita

l man

d ev

en h

4%

Common Equity Tier 1

Buffer

7%

ed fo

r CET

12,5

% a

2%

2012 2013 2014 2015 2016 2017 2018 2019

Nee


8

New capital ratiosLeverage ratio

Leverage ratios of major global banks,end-2006

Risk-based capital ratios of major global banks, end-2006

Source: BOE, 2012


9

New capital ratiosLeverage ratio

Wh i l i t t?

• Contributed to the global financial crisis• In the lead up to the crisis, many banks reported strong risk-based capital ratios while

f ff

Why is leverage important?

still being able to build high levels of on- and off-balance sheet leverage

Prudential purposes

• Build-up of excessive leverage in the system• Non-risk-based volume based• Additional safeguard against attempts to the risk-based requirements• Against model and measurement riskAgainst model and measurement risk

Implementation

2016 20172014 20182013 2015

Observation periodDisclosure

A li ti (Pill I)


10

Application (Pillar I)


• Introduction




• Appendix


11

Liquidity standardsLiquidity risk management failures

■ Rapidly growing mortgage portfolio from wholesale market funding

(70%)

Long term str ct ral balance sheet problems■ Long term, structural balance sheet problems

■ Risky assets and high leverage, lack of sufficient buffers

■ Short term liquidity crisis


12

Liquidity standards Quantitative minimum liquidity requirements

Combined idiosyncratic and market wide stress scenarioCombined idiosyncratic and market wide stress scenario


13

Liquidity standards Short-term resilience to liquidity disruptions

Liquidity Coverage Ratio = ≥ 100%Stock of high quality liquid assets1

Net cash outflows over a 30 day period2

Expectations for high quality liquid assets

Fundamental characteristics:Low credit and market risk

Market related characteristics:Active and sizeable market (broad and deep)

Easy and certain valuation

Low correlation with risky assets

Listed on developed exchange

Presence on market

Low market concentration

Flight to quality

Eligible at central banks as collateral

Level 1 assets Level 2 assets

g

Operational requirements: well diversified , legally and practically readily available during the next 30 days,

unencumbered assets, periodically testing market tradability, assets will not be used in other ongoing operations.

Level 1 assets Level 2 assetsCan be an unlimited share of the pool No more than 40% of the stock of liquid assets after

haircuts have been applied

Held at market value and not subject to a haircut Should be well diversified in terms of type of assets, type of issuer, counterparties


14

, p

A minimum 15% haircut is applied in each type


Level 1 →100% Level 2 →85%• Cash

• Central bank reserves

• Marketable securities to sovereigns, Central banks (…) that are:

– assigned 20% RW under Basel II standardized

• Marketable securities/claims on sovereigns, central banks (…).

– assigned 0 % RW under Basel II standardized– traded in large, deep and active repo or cash markets

ith l l l f t ti

gapproach

– traded in large, deep and active repo or cash markets with low levels of concentrations

– proven record as a reliable source of liquidity in stressed markets (repo and sale) (maximum decline i i i i h i t 30 d i d10%)with low levels of concentrations

– proven record as a reliable source of liquidity in the markets even during stressed conditions; and

– not an obligation of a financial institution or its affiliated entities

in price or increase in haircut over 30 day period10%)– not an obligation of a financial institutions or its

affiliated entities

• Corporate bonds and covered bonds:– not issued by a FI or a bank and their affiliated

• Government debt securities in domestic currency (non 0% RW) , issued by the sovereign or the central bank in the country in which the liquidity risk is being taken or in the bank’s home country

not issued by a FI or a bank and their affiliated entities

– both at least AA- or with no external rating and are internally assessed as AA- equivalent (using approved internal rating systems) - additional criteria will be developed during the observation period

• For non-0% RW sovereign or central bank debt securities issued in foreign currencies so that it matches the currency needs of the bank in that jurisdiction

– traded in large deep and active repo or cash market with low level of concentration

– proven record as a reliable source of liquidity in stressed markets (repo and sale) (maximum decline in price or increase in haircut over 30 day period10%)


15

10%)


Net cash outflows over a 30 day period = outflows – Min {inflows, 75% of outflows}2

No double counting – if assets are included in the numerator of the ratio (stock of liquid assets), do not count as inflows.

Only includes contractual inflows from outstanding exposures that are fully Only includes contractual inflows from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon.

„Stable” definition: part of an established relationship making withdrawal highly unlikely;

held in a transactional account, including accounts to which salaries are regularly credited;

fully covered by public guarantee or deposit insurance scheme.

Operational relationship definition: clearing, custody, cash management services in the context of an established relationship.


16


Cash outflows Factor Cash outflows Factor Retail deposits

• Stable• Less stable• Term deposits with residual maturity

5%10%0%

• Non financial corporate and central banks and PSEs liquidity facilities

• Other legal entity customer, credit and liquidity facilities

10%

100%• Term deposits with residual maturity

>30 days with a withdrawal with a significant penalty or no legal right to withdraw

Secured funding• Backed by level 1 assets

0%

0%

and liquidity facilities Additional requirements (…)

Cash inflowsBacked by level 1 assets• Backed by level 2 assets• Secured funding transaction with

domestic sovereign central banks or PSEs (max RW 20%) that are not backed by L1 or L2 assets

0%15%25% Reverse repos and securities borrowing

with the following as collateral:• Level 1 assets• Level 2 assets

0%15%

• All other secured funding transactions Unsecured wholesale funding

• Stable small business customers• Less stable small business customer • Legal entities with operational

relationships

100%

5%10%

25%

• All other assets Credit of liquidity facilities Operational deposits held at other financial Other inflows by counterparty

• Retail (e.g. repayments for fully performing loans)

100%0%0%

50%relationships

• Non-financial corporate, (…) • Other legal entity customers

Undrawn portion of committed credit and liquidity facilities to:

• Retail and small businesses clients

25%75%100%

5%

performing loans)• Non financial wholesale

counterparties • Financial institutions from

transaction other than the ones above

50%

100%


17

• Non financial corporate, sovereigns (..) 10% • Net derivative receivables 100%

Liquidity standards Medium and long-term crisis scenario

Significant deterioration of earning capacity due to the durable existence of credit,

Medium and long-term crisis scenarioMedium and long-term crisis scenario

g g p y ,market, operational or other types of risk.

Prospect of possible downgrades by credit rating agencies on bank’s bonds or counterparty risk rating.

Name related reputational crisis.

Net Stable Funding Ratio = > 100%Available amount of stable funding (ASF)

Net Stable Funding Ratio Required amount of stable funding (RSF)

„Stable funding” means as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon underfinancing expected to be reliable sources of funds over a one year time horizon under conditions of extended stress.

„Required funding”: Mainly assets and off balance exposures that an institution has to cover with additional resources.


18

Liquidity standards Medium and long-term funding of the assets and activities of banks

Available Stable Funding Factor Required Stable Funding Factor• Tier 1 & Tier 2 capital instruments

• Preferred shares and capital in excess of Tier 2

allowable amount with effective maturity >1 year 100%

• Cash• Securities with remaining maturity <1yr• Non-renewable loans to financials with remaining mat rit <1 rallowable amount with effective maturity >1 year

•Other liabilities with effective maturity >1 year100% remaining maturity <1yr

•(..) 0%

Stable deposits of retail and small business Debt issued or guaranteed by sovereigns, central banks ( ) with 0% risk weight under

customers (non-maturity or residual maturity <1yr) 90%central banks (..) with 0% risk weight under Basel II standardized. 5%

Less stable deposits of retail and small business customers (non-maturity or residual maturity <1yr)

80% Unencumbered non financial seniorcorporate bonds (..),maturity≥ 1 year

20%

Wholesale funding provided by non financial • Unencumbered listed equity securities ( )Wholesale funding provided by non-financial corporate customers, sovereign central banks, multilateral development banks and PSEs. (non maturity or residual maturity <1 yr)

50%

• Unencumbered listed equity securities (..) maturity ≥1 year• Gold• Loans to non-financial corporate clients, sovereigns, central banks, and PSEs with a maturity < 1 year

50%

y y

All other liabilities and equity 0% Unencumbered residential mortgages (..) 65%

Other loans to retail clients and small businesses having a maturity <1yr

85%

All th t


19

All other assets 100%


• Introduction




• Appendix


20

Current market situation & further stepsResults of the Basel III monitoring exercises - liquidity

Institution Banking group

Number of banks LCR Outflows* Inflows* NSFR

BCBS Group 1 102 91% 21 5% 5 7% 98%BCBS Group 1 102 91% 21,5% 5,7% 98%

BCBS Group 2 107 98% 13% 4,40% 95%

EBA Group 1 44 72% 20% 5,5% 93%

*as a percentage of balance sheet liabilities

EBA Group 2 112 91% 11,9% 3,9% 94%

47% of the banks in the Basel III monitoring sample already meet or exceed the minimum LCR requirement, and 62% have LCRs that are at or above 75% (BCBS).

€1.8 trillion liquid assets shortfall (€61.4 trillion total assets, BCBS)

The results show that banks in the sample had a shortfall of stable funding33 of €2.5 trillion at the end of December 2011 (BCBS)


21

December 2011. (BCBS)

Current market situation & further stepsResults of the Basel III monitoring exercises - capital

Institution Banking group

Number of banks

Average CET 1

CET 1 shortfall

Average leverage ratio

Changes in RWA

BCBS Group 1 102 7 70% €374 1 billion 3 50% 18 1%*BCBS Group 1 102 7,70% €374,1 billion 3,50% 18,1%

BCBS Group 2 107 8,80% €21,7 billion 4,40% 7,5%*

EBA Group 1 44 7,70% €198,6 billion 2,90% 18,40%

*BCBS includes trading book impacts

EBA Group 2 112 10,30% €25,6 billion 3,30% 8,80%

The analysis shows that Group 2 banks are generally less leveraged than Group 1 banks, and this difference increases under Basel III when the requirements are fully phased in.

As a point of reference the sum of profits after tax and prior to distributions across the same sample ofAs a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in 2011 was €356 billion.The sum of Group 2 banks' profits after tax and prior to distributions in 2011 was €24 billion.


22

Current market situation & further stepsCapital stress index

401 200%Mrd Ft

20

30

600

900

0

10

0

300

-10-300

2005

.II.

III.

IV.

2006

.I. II. III.

IV.

2007

.I. II. III.

IV.

2008

.I. II. III.

IV.

2009

.I. II. III.

IV.

2010

.I. II. III.

IV.

2011

.I. II. III.

IV.

2012

.I. II. III.

2 2 2 2 2 2 2 2

Tőkepuffer szabályozói követelmény fölöttTőkehiány szabályozói követelmény teljesítéséhezTőke Stressz Index (jobb skála)


23

Source: MNB.

Current market situation & further stepsForeign capital injection

55

60

300

400%Mrd Ft

35

40

45

50

100

0

100

200

20

25

30

35

-400

-300

-200

-100

20-400

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

. jún

Adózott eredményAdózott eredményFizetett osztalék (ellentétes előjellel)Tőkeemelés összegeOsztalékfizetési arány (jobb skála)


24

Source: MNB.

Current market situation & further stepsLiquidity stress index

50

75

1 000

1 500%Mrd Ft

-25

0

25

50

-500

0

500

1 000

-100

-75

-50

25

-2 000

-1 500

-1 000

500

-125-2 500

2009

.jan

.fe

br.

már

c.áp

r.m

áj.

jún. júl.

aug.

szep

t.ok

t.no

v.de

c.20

10.j

an.

febr

.m

árc.

ápr.

máj

.jú

n. júl.

aug.

szep

t.ok

t.no

v.de

c.20

11.j

an.

febr

.m

árc.

ápr.

máj

.jú

n. júl.

aug.

szep

t.ok

t.no

v.de

c.20

12.j

an.

febr

.m

árc.

ápr.

máj

.jú

n.

2 2 2 2

Likviditási többlet a szabályozói követelmény fölöttLikviditási szükséglet a szabályozói követelmény teljesítéséhezLikviditási Stressz Index (jobb skála)


25

Source: MNB.

Current market situation & further stepsOutflow of funds

34

36

38

140

144

148Mrd EUR%

28

30

32

34

128

132

136

140

20

22

24

26

112

116

120

124

20112

2009

.dec

2010

.jan

febr

már

cáp

rm

áj jún júl

aug

szep

tok

tno

vde

c20

11.j

anfe

brm

árc

ápr

máj jún júl

aug

szep

tok

tno

vde

c20

12.j

anfe

brm

árc

ápr

máj jún júl

aug

szep

tok

tno

vde

c

Külföldi források - előrejelzési sáv (jobb skála)Külföldi források (jobb skála)Hitel/betét arányHitel/betét arány - előrejelzés


26

Source: MNB.

Current market situation & further stepsDistance of the banking system’s Basel III ratios from the requirements (June 2012)

100100percentpercent

7575

5050

2525

00LCR NSFR


27

Current market situation & further stepsPreparation

Strategic gap analysis

Impact assesment

• Assumptions

Technical preparation

• Data collection

Liquidity risk management

• Measurement

Capital management

• Increased focus

Business model and strategy

• ConsumerAssumptions• Projections• Management

actions

Data collection• Processes• Monitoring• Reporting

Measurement• Contingency

funding plan• Stress test• Fund transfer

pricingLi idit b ff

Increased focus• Growing

complexity• Capital

optimization• Capital planning

and allocation

• Consumer relations

• Revise focus on business lines and segments

• BS adjustmentsP d t i i• Liquidity buffers

• Governanceand allocation

• Ex post and ex ante management

• Product pricing• Raising new

capital• Review funding

strategies• RAROC

measurement• Governance


28


• Introduction




• Appendix – Liquidity case studies


29

© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network ofcompany and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavour to provide accurateindividual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name, logo and ‘cutting through complexity’ areThe KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

Basel III challenges - MKVK

Documents

Transcript of Basel III challenges - MKVK