Vietnam bank_June 2013 (2)(1).pdf

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BASEL II ProjectThanachart Bank Public Company Limited

- Risk Policy & Capital Market –June 2013

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Content

• TBANK Risk Management framework

• Overview of Basel II

• Basel II Chronicle in Thailand

• TBANK implementation plan

� Pillar 1

� Pillar 2

• Issues to concern

• Committee and working group

• Overview of Basel III

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Content





� Pillar 1

� Pillar 2




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TBANK Risk Mananagement framework

Board of DirectorsBoard of Directors

Risk Management Committee

Credit CommitteeCredit Committee

Investment Portfolio CommitteeInvestment Portfolio Committee

ALCOALCO

CEOCEO

Audit Committee

Executive Committee

Chief Risk OfficerChief Risk Officer Audit DepartmentAudit Department

IT Security Management CommitteeIT Security Management Committee

Compliance Dept.Compliance Dept.

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Chief Risk Officer

Risk Policy & Capital Markets

Credit Risk Management 1

Risk Control

Credit Risk Management 2

Basel II & IRM

Credit Risk & Economic Capital

Operational Risk

Asset Liability Management

Market Risk

Fraud Management

Consolidated Risk Policy& Risk Reports

Retail Risk Mgmt.(under Retail Banking)


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BankingRisks

Strategic Risk

CreditRisk

MarketRisk

Liquidity Risk

Operational Risk

Risk Identification

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TBANK Risk Mananagement framework Strategic

Risk

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TBANK Risk Mananagement framework CreditRisk

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Credit CommitteeRisk Control UnitLending Officer Credit Analyst

Risk Limit Control Credit Analysis Risk Analysis Credit Approval


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Country Risk

Ceiling


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TBANK Risk Mananagement framework MarketRisk

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TBANK Risk Mananagement framework MarketRisk

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TBANK Risk Mananagement framework Interest Rate

Risk

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TBANK Risk Mananagement framework Liquidity Risk

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TBANK Risk Mananagement framework Operational Risk

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Credit Risk Market Risk

Operational Risk

Capital

Capital Allocation

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Content





� Pillar 1

� Pillar 2




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Pillar 1Pillar 1Pillar 1Pillar 1 Pillar 2Pillar 2Pillar 2Pillar 2 Pillar 3Pillar 3Pillar 3Pillar 3

Basel II : Overview

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- Pillar 1 :• Require minimum capital adequacy to support

• Implement from December 2008 onward

• Credit Risk

• Market Risk

• Operational Risk

Pillar 1Pillar 1Pillar 1Pillar 1 Pillar 2Pillar 2Pillar 2Pillar 2 Pillar 3Pillar 3Pillar 3Pillar 3

Basel II : Overview

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- Pillar 2 :• Require minimum capital adequacy to support

• Implement from December 2010 onward

Basel II : Overview

Pillar 1Pillar 1Pillar 1Pillar 1 PillarPillarPillarPillar 2222 Pillar 3Pillar 3Pillar 3Pillar 3

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- Pillar 3 :• Require the appropriate disclosure of bank’s information

• Allow market participant to assess key information of banksuch as : bank’s exposure to risks / risk & capital management

• Implement from June 2009 onward

Pillar 1Pillar 1Pillar 1Pillar 1 Pillar 2Pillar 2Pillar 2Pillar 2 PillarPillarPillarPillar 3333

Basel II : Overview

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Pillar I

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Capital AccordCalculation of minimum capital requirement

( BIS Ratio >= 8.5%)

Basel I ป 1988

Year 1996 (Current Accord)

Basel II

Total Capital

Credit Risk

Total Capital

Credit Risk + Market Risk

Total Capital

Credit Risk + Market Risk + Operational Risk

Basel II : Principles of Pillar 1

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Total Capital

Tier 1

= Paid-in capital+ premium on common share+ statutory reserve+ appropriated reserve+ retained earnings after appropriated reserve

Tier 2

= Subordinated debentures+ unrealized gain from

properties and plants+ specific reserve for normal

loans+ unrealized gain from equity

instrument in available for sale portfolio


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Minimum capital requirements

Credit Risk

Operational Risk

Market Risk (Trading Book)


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Credit Risk

Operational Risk



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SecuritisationFramework


Standardised Approach (SA)


ECAI Rating

Internal Ratings Based Approach (IRB)


Foundation IRBApproach(FIRB)


Advanced IRBApproach(AIRB)


� Internal Rating and PD

� regulatory LGD , EAD, and M

� Internal PD, LGD, EAD, and M


Credit Risk

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ECAI Rating







� Internal Rating and PD

� regulatory LGD , EAD, and M

� Internal PD, LGD, EAD, and M


Credit Risk

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On-balance Sheet

= Credit assets- Specific Provision

= Net exposuresx Risk weight

Risk from assets

Off-balance Sheet

Risk from obligations

= Credit obligationsx CCF

= Net exposuresx Risk weight


Credit Risk : SA

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Risk Weighted Assets

Asset type Asset class

Net exposures Risk weight

= Credit exposures

Performing Assets

Non-performing Assets

- Credit Risk Mitigation

- Specific Provision

x


Credit Risk : SA

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Asset type Asset class

Risk weight

Performing Assets

Non-performing Assets


Credit Risk : SA

1. Government / Central bank2. Non-central government PSEs3. MDBs4. Financial Institutions5. Securities company6. Corporate7. Retail8. Mortgage9. Other assets10. Off balance sheet items

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ECAI Rating Grade : Long term assessment


Rating Grade Rating Grade

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Risk weight classified by asset type : Performing assets


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1. Orientation criterion

� loans to a person / group of persons / small sized business

2. Product criterion

� Revolving credit

� Line of credit

� Personal loans

� Hire purchase loans

� Credit line / obligation to small sized business

Risk weight : criteria of retail assets receiving 75% risk weight


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3. Granularity criterion

� diversification of risk

� amount* not exceed 0.2% of total qualified 75% RW retail assets

4. Low value of individual exposures

� amount * not exceed 50 million baht

Risk weight : criteria of retail assets receiving 75% risk weight


Remark :

* : amount of exposures to a receivable and related persons/parties

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Risk weight classified by asset type : Non Performing assets

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Current Accord : Basel I Basel II Accord : SA

• Risk Weight applied :-

� Corporate : 50% - 150%

� Retail : 75%

� Mortgage : 35%

� Local FI : 20% , 50%

� Oversea FI : 20%- 150%

� Sovereign : 0% , 50%

• Risk weight for NPL = 150%

• credit line available :-

� uncommitted line : CCF= 0

� committed line : CCF=0.2 ,0.5

Credit Risk Capital

• Risk Weight applied :-

� Corporate : 100%

� Retail : 75% *

� Mortgage : 35% *

� FI : 20%

� Sovereign : 0%

• credit line available, CCF = 0

* limited credit exposure


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Current Accord : Basel I Basel II Accord : SA

• Credit Risk Mitigation is allowed by

using the followings:-

� Financial Collateral

� Guarantor

� On-Balance Sheet Netting

� Credit Derivatives

Credit Risk Capital

• Credit risk mitigation is allowed by

using the followings:-

� Government securities

� Deposit at bank

� Credit Derivatives


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Net exposures Risk weight

= Credit exposures


- Specific Provision

x


Credit Risk : SA

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CRM

FinancialCollateral

On-balance sheet netting

Guarantee and Credit derivatives

There are 3 types of Credit Risk Mitigation :-



Simple Approach Comprehensive Approach

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Simple Approach

Eligible collaterals for CRM : Simple Approach



** refer to the rating grade defined by the BoT

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Exposures covered by CRM

Exposures not covered by CRM

� apply collateral risk weight to substitute

receivable risk weight

� minimum risk weight is 20%

� must be pledged as collateral for the whole life of loan

� no maturity mismatch

� fair value appraisal at least semiannually

� apply receivable risk weight



Simple Approach

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Eligible collaterals for CRM : Comprehensive Approach

• Listed stocks not included in main index• Unit trust in above equities and debentures



Comprehensive Approach

** refer to the rating grade defined by the BoT

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Applying haircut to collaterals and exposure under the following rationales:-

� change in future market price

� fluctuation of exchange rate

� currency mismatch between collateral and credit exposures




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Exposures covered by CRM

Exposures not covered by CRM

� apply receivable risk weight




� apply 0% risk weight as the net exposure is adjusted to near-cash amount with the given haircut

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General transactions

Repo-styleTransactions

netting agreement




OTC Derivatives

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netting agreement




OTC Derivatives

E* = max {0,[(E x (1+He)) - (C x (1-Hc-Hfx)]}

E* = Net credit exposures after CRME = Net credit exposuresHe = Haircut for exposuresC = Collateral valueHc = Haircut for collateralHfx = Haircut for currency mismatch

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OTC Derivatives

E* = max {0,[(ΣΣΣΣ(E)– ΣΣΣΣ(C))+ ΣΣΣΣ(Es * Hs)+ΣΣΣΣ(Efx * Hfx)]}

E* = Net credit exposures after CRME = Net credit exposuresC = Collateral valueEs = Absolute value of net position in a security

Hs = Haircut for Es

Efx = Absolute value of net position in mismatch settlement currency

Hfx = Haircut for currency mismatch


netting agreement

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Standard supervisory Haircut




Own estimated Haircut

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� estimate from fluctuation of market price and

exchange rate

� estimate from VaR model

(for Repo style transaction with netting agreement)

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Credit Risk

Operational Risk



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Basic IndicatorApproach (BIA)

Basic IndicatorApproach (BIA)



Advanced Measurement

Approach (AMA)

Advanced Measurement

Approach (AMA)

Capital requiredment is calculated from risk model :� Qualitative info� Quantitative info

Standardised Approach


Internal Model Approach



Operational Risk

BIA and SA : capital required is calculated based on Gross Incomes

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11 Basic Indicator ApproachBasic Indicator Approach

� Capital requirement is calculated from Gross Income

� Alpha factor is 15%


Operational Risk Capital = 15% x Avg. Gross Income (3 years)

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Operational Risk Capital = S (b j x GIj )

2 Standardized Approach

� Capital requirement is calculated from Gross Income of business lines

� Beta factors are 12%, 15%, 18% depending on business lines

Business Line Beta Corporate finance 18%Trading and sales 18%Retail banking 12%Commercial banking 15%Payment and settlement 18%Agency services 15%Asset management 12%Retail brokerage 12%


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� Internal Model

� Internal Measurement Approach (IMA)

� Loss Distribution Approach (LDA)

� Scorecard Approach

Risk capital

Unexpected LossExpected Loss

Probability

Stress Loss

Aggregate Loss

3 Advanced Measurement Approaches (AMA)


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Credit Risk

Operational Risk



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Assets Classification

Trading Book Banking Book


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� Trading Book

� Investment position which the Bank intends

to hold for trading

� Short-term holding

� Resale

� Profit taking from price movement

� Arbitraging purposes

� Support customer’s activities


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� Market Risk on Trading Book

� Interest Rate Risk

� Equity Price Risk

� Foreign Exchange Rate Risk

� Commodity Price Risk


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General Market Risk

Specific Risk+



Risk arises from the movement of market factors such as interest rate or stock prices volatility

Risk arises from factors other than General Market Risk which related to the issuer such as changes in issuer rating

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General Market Risk

Specific Risk+



Net Equity Positionsx General market risk

Gross Equity Positionsx Specific risk

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Example of Market Risk calculation with Standardised Approach

Position Stock name US$ THB RateLong Microsoft 2 million 80 million 1 US$ : 30 THBShort Intel 1 million 40 million

Specific RiskGeneral Market

RiskTotal Market

RiskEquity price risk = (60 + 30) * 8% = (60 - 30) * 8%

7.20 2.40 9.60

Foreign Exchange risk = (2 -1) *30 * 8%2.40 2.40

Total Market Risk 7.20 4.80 12.00

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Total Market Risk 12 THB million

Market Risk Assets = 12 x 12.5

= 150 THB million

Capital

Risk Assets= 8 %

Risk Assets =

8%

Capital

Risk Assets = X 12.5Capital

Example of Market Risk calculation with Standardised Approach

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Market Risk calculation with Internal Model Approach

Normal Distribution of return

VaR

2.33 times ofStandard deviation

99%

1%

Portfolio Return Distribution

Frequency

Portfolio Return

0Loss Profit

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Market Risk calculation with Internal Model Approach

Qualitative Standards Quantitative Standards

� Calculate VaR on daily basis

� 99% 10-day VaR

� At least 250 historical data are needed

� Allocate Market risk capital at the end

of the day (3+plus factor) of VaR

� Allocate more capital for Specific Risk

of debt and equity instruments (if any)

� Qualified On-site Examination

from the BoT

� Risk Controlling Unit is in place

� Board of Directors and

Senior Executives take responsible

for Risk Management process

� Perform Back Test

� Perform Stress Test

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Pillar II

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� To ensure Banks have in place the process to capture :-

• Credit Concentration Risk

• Interest Rate Risk on Banking Book

• Liquidity Risk

• Strategic Risk

• Reputation Risk

• Risk arising from unusual/ stress events

Basel II : Objective of Pillar 2

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Principle # 1

� ICAAP

� Capital Plan

Principle # 1

� ICAAP

� Capital Plan

For Banks For BoT

Pillar II

Principle # 2

� ICAAP Evaluation

� Capital Evaluation

Principle # 2



Principle # 3

� Maintain capital in excess of minimum requirement of Pillar 1

Principle # 3


Principle # 4

� Intervention if banks are unable to maintainadequate Capital

Principle # 4



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Principle # 1

� ICAAP

� Capital Plan

Principle # 1

� ICAAP

� Capital Plan

For Banks For BoT

Pillar II

Principle # 2



Principle # 2



Principle # 3


Principle # 3


Principle # 4


Principle # 4



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Comprehensive risk assessment

: Estimate risks in addition of minimum requirements in Pillar 1

under Normal & Stress condition

Sound capital assessment

: Have in place the “Capital Plan” for Normal and Stress condition

Monitoring and reporting

: Timely report risk position and the capital required to management

ICAAP 1ICAAP 1

ICAAP 2ICAAP 2

ICAAP 3 ICAAP 3

ICAAP 4 ICAAP 4

ICAAP 5ICAAP 5

Board and senior management oversight

: Approve “Risk tolerance” , “ICAAP Policy” , “Capital Plan”

Review of ICAAP

: Annually review ICAAP by independent person / unit


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• Executive Summary

• Bank’s profile

• ICAAP and Board and senior management oversight

• Comprehensive assessment of material risks

• Stress testing for material risks

• Sound capital adequacy assessment

• Monitoring and reporting

• Review of ICAAP

Content of ICAAP reportContent of ICAAP report

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� Credit concentration risk

� Interest rate risk in banking book

� Liquidity risk

� Strategic risk

� Reputation risk

� Credit concentration risk

� Interest rate risk in banking book

� Liquidity risk

� Strategic risk

� Reputation risk

Pillar II risks Pillar II risks

� Credit risk

� Market risk

� Operational risk

� Credit risk

� Market risk

� Operational risk

Pillar I risksPillar I risks

Comprehensive assessment of material risksComprehensive assessment of material risksContent of ICAAP reportContent of ICAAP report


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� develop extreme but plausible scenarios, assumptions, and models

for stress testing

� analyze the impact of the stress testing on the bank’s Capital & BIS ratio

� develop extreme but plausible scenarios, assumptions, and models

for stress testing

� analyze the impact of the stress testing on the bank’s Capital & BIS ratio

Stress testing for material risksStress testing for material risksContent of ICAAP reportContent of ICAAP report


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Pillar III

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BankBank

Scope ofApplication

MarketDiscipline

Capital

Risk exposureand assessment

MarketMarket

Disclosure of relevant information concerning :

� Content of Basel II


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Scope of Application

Capital

Risk exposure andassessment

� Scope of consolidation� Method of consolidation,capital deductions� Unconsolidated entities within the group

� Core/supplementary capital components� Capital requirements for each risk� Total and Tier 1 capital ratio

� Credit Risk� Securitisation� Market Risk� Operational Risk� Equities� Interest rate risk in the banking book

� Content of Basel II


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Content





� Pillar 1

� Pillar 2




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• August 2005 :

BOT issued a draft guideline on Basel II capital requirement to be

implemented in the end of year 2008.

• November 2005 :

Risk Management Department arranged seminar in Basel II Accord and

impact on TBANK’s capital.

• June 2006 :

TBANK submitted Basel II preliminary application and self assessment

form on June 30, 2006.

• December 2006 :

The Quantitative Impact Study (QIS) was done in order to estimate the

effect on the bank’s capital adequacy.

Basel II : Chronicle of Pillar 1

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• September 2007 :

TBANK submitted Basel II final application and self assessment form on

September 30, 2007.

• December 2007 – Dec 2008 :

Basel II has been soft implemented in parallel by Basel I.

• January 2009 onward :

All FIs in Thailand commenced using Basel II.


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Dec’08 � Prepare to implement ICAAP

� Official implementation of ICAAP� Prepare ICAAP supporting documentsDec’10

� Submit ICAAP Report & supporting documents to BoT

Jan’11


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Content





� Pillar 1

� Pillar 2




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Basel II : Implementation Plan for Pillar 1

• Set up action plan for Basel II : pillar 1

• Prepare database to support Basel II, starting with data gap analysis

� Customer/Counter party

� Collateral

� Lending Exposure

� Data for operating risk

• Modify legacy to collect missing data

• Develop procedure, IT and risk management system

• Test the system and conduct UAT

• Start implementing Basel II system

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Basel II : Implementation Plan for Pillar 2

• Set up action plan for Basel II : pillar 2

• Evaluate current process in comparison with Basel II guideline

and prepare gap analysis report

• Establish policies related to Pillar2

� ICAAP policy

� Strategic Risk Policy

� Reputational Risk Policy

• Draft up the ICAAP report and discuss with relevant persons /

departments

• Propose policies and ICAAP report to the Board of Director for approval

• Submit ICAAP report to the BoT

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Content





� Pillar 1

� Pillar 2




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• Data discrepancy

• Communication of new regulation to

� executives

� related parties and users

• In-house developed system

• Hiring consultant service

Basel II : Issues to concern

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Content





� Pillar 1

� Pillar 2




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Committee and working group

• Basel II Committee

• Basel II working group

• Relevant Departments

� Risk management team

� IT

� Compliance

� SRD

� Data Management Center

� Accounting

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Committee and working group

• Basel II Committee

consist of executives from relevant team as follow :-

� CEO

� COO

� CRO

� Head of Treasury Department

� Head of Banking business

� Head of Retail business

� Head of IT

� Head of SRD

� Head of Accounting & Finance

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Content





� Pillar 1

� Pillar 2




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Overview of Basel III

• Background of Basel update

• Basel III Guidelines

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• World Economic and Financial Crisis caused by:-

� Erosion of the level and quality of capital

� Excessive on- and off-balance sheet leverage

� Insufficient liquidity buffer

� Procyclical deleveraging process

� Interconnectedness of systemic institution

Background of Basel update


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Background of Basel update


• Therefore, BCBS revised the supervisory guidelines on the

followings:-

� Capital Adequacy

� Liquidity Risk Management

� Systemically Important Financial Institution (SIFI)

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followings:-



� Systemically Important Financial Institution (SIFI)1) Revision of Capital Definition & Structure

� Tier 1 - Common Equity

� Tier 1 - Additional

� Tier 2

2) Capital Buffer

3) Leverage Ratio

4) Risk Coverage

Basel III Guideline


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Tier 1 - Common Equity

Tier 1 - Addition

Tier 2


Capital Adequacy

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Tier 1 - Addition

Tier 2

Component of Tier 1 - CE : • Paid in capital• Retained earnings

Significant features of Tier 1 - CE :• No condition of stock buy back• No cumulative of dividend• Bank cannot fund the purchase of CE

Deduction items from Tier 1 - CE :� Net losses� Deferred Tax Assets� Gain/Loss from revaluation of

liabilities due to credit rating change� Good will / Other intangibles

� Profit from securitization transaction� Treasury Stock� Reciprocal cross holding of capital� Investments in financial entity outside

the financial group

• Stock surplus (deficit)• Other comprehensive income


Capital Adequacy

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Basel III Guidelines : Capital Adequacy

Component of Tier 1 - Addition :• Instruments that meet the criteria

Significant features of Tier 1 - Addition :

• Subordinated to depositors, creditors, and

subordinated debts

• No maturity

• No incentive to redeem (such as step-ups)

• No cumulative of dividends

• Callable after a minimum of 5 years

• Principal loss absorption (write-down/conversion)

upon trigger point : CET1 < 5.125%

• Supplementary loss absorption at the point of

non-viability (write-down/conversion) upon

trigger events

• No credit sensitive dividend feature


Tier 1 - Addition

Tier 2

Capital Adequacy

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Component of Tier 2 :• Instruments that meet the criteria

Significant features of Tier 2 :

• Subordinated to depositors and creditors

• Maturity after a minimum of 5 years

• No incentive to redeem (such as step-ups)

• Callable after a minimum of 5 years

• Supplementary loss absorption at the point of

non-viability (write-down/conversion) upon

trigger events

• No credit sensitive dividend feature


Tier 1 - Addition

Tier 2

Capital Adequacy

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Remark : Capital instruments that no longer qualify as Tier 1 or Tier 2 will be phased out over 10 year horizon

Capital Adequacy

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• Objective :

• To set a ceiling in the build-up of leverage

• To mitigate the risk of deleveraging process which can

damage the financial system and economy

• To introduce a simple supplementary measure to the risk

based requirements


Leverage Ratio

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Leverage Ratio

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followings:-



� Systemically Important Financial Institution (SIFI)• Liquidity Coverage Ratio

• Net Stable Funding Ratio

• Monitoring Tools

Basel III Guideline


-103-

• Objective :

• To ensure that a bank maintains an adequate level of

high quality assets that can be converted into cash

to meet the liquidity needs for a 30-day time horizon

under liquidity stress scenario


Liquidity Coverage Ratio : LCR

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Liquidity Coverage Ratio : LCR

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• Objective :

• To promote Banks’ use of more stable source of funding in

conducting banking activities


Net Stable Funding Ratio : NFSR

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Net Stable Funding Ratio : NFSR

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followings:-



� Systemically Important Financial Institution (SIFI)

• Definition of SIFI

• Supervisory Guidelines for SIFI

Basel III Guideline


-108-

• To define the SIFI, the committee used the following criterion :-

� Size that represents the major market player

� Interconnectedness with other financial institutions

� Lack of substitutability as the financial service provider


Definition of SIFI

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• Additional Loss Absorbency such as:-

� Capital surcharge

� Liquidity surcharge

� Bank levies

• Development of more efficient recovery and resolution plan

• More stringent supervision on SIFI

• Strengthening the structure of OTC Derivatives market to

reduce the contagion risk

• Establishment of Peer Review Council (PRC) to evaluate the

supervisory guideline for SIFI in each country


Supervisory on SIFI

Vietnam bank_June 2013 (2)(1).pdf

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