WBG Survey on proposed revisions to Basel II Finding

Transcription

1 WBG Survey on proposed revisions to Basel II Finding & Issues Damodaran Krishnamurti October 2015

2 Basel II SA Proposed revisions Objectives To make it more risk sensitive To reduce reliance on external ratings To increase comparability with IRB approach To increase comparability with SA in other jurisdictions by reducing national discretion Wider consultation Involved a few non-bcbs jurisdictions in the task force (Chile, UAE, Jersey, Philippines, Poland, Thailand) Wider consultation issued in December 2014 Consultation period 3 months WBG Survey finding submitted to Basel Committee (available on BIS website at ) WB-IMF-FED Seminar Oct

3 World Bank Survey Supported by the Basel Consultative Group Issued to over 100 jurisdictions Received completed responses from 53 jurisdictions WB-IMF-FED Seminar Oct

4 Survey respondents operating capital adequacy frameworks WB-IMF-FED Seminar Oct

5 Exposure on MDBs Current framework Highly rated MDBs zero RW; Other MDBs as per external rating (see below) Proposed framework Highly rated MDBs zero RW; Qualifying MDBs per external rating (same as above); Other MDBs as per RW for corporates WB-IMF-FED Seminar Oct

6 MDBs Is the proposed treatment for multilateral development banks (MDBs) appropriate? Are the eligibility conditions for a qualifying MDB adequate? Would the eligibility conditions exclude any MDB which is active in your jurisdiction? Yes 4 (8.2%) WB-IMF-FED Seminar Oct

7 Exposure on banks Current framework Proposed framework v v Exposures by way of investment in all capital and equity instruments issued by other banks are proposed to be risk weighted as below unless these exposures are deducted from regulatory capital or risk-weighted at 250% under Basel III: 250% risk weight for subordinated debt and capital instruments other than equities; 300% risk weight for equity holdings that are traded on recognised stock exchanges, and 400% risk weight for all other equity holdings. Source for bank ratios: When calculating capital requirements, banks would have to use the data disclosed in their obligor s most recent Pillar 3 reports. A bank exposure would be assigned the highest risk weight of 300% if the relevant information is not published by the obligor bank within the frequency required by the Pillar 3 disclosure requirements. Breach of prudential standards: The highest risk weight (300%) would also apply in cases where a bank is aware that its obligor bank has breached any binding minimum prudential standard required by their national supervisor. WB-IMF-FED Seminar Oct

8 Exposure on banks (2) Implications of the proposed revisions Implications for non-basel III banks Ability of non-basel III banks to compute CET 1 Ratio: Easy or very easy 24; difficult or very difficult - 18 WB-IMF-FED Seminar Oct

9 Exposure on banks (3) CET1 Vs Tier 1 and Leverage ratio Alternative to CET 1 capital Is Net NPA an effective measure of credit risk in banks WB-IMF-FED Seminar Oct

10 Exposure on banks (4) Can exposures to banks subject to higher minimum capital requirements justify a lower risk weight? Is Pillar 3 disclosure by banks an acceptable source for a counterparty creditor bank to verify the risk drivers? WB-IMF-FED Seminar Oct

11 Exposure on banks (5) Breach of any prudential requirement 300% RW Use of consolidated bank s ratios when solo are not available WB-IMF-FED Seminar Oct

12 Exposure on corporates Current framework Proposed framework 300% RW if revenue and leverage data are not provided; If counterparty is a newly incorporated corporate 110% RW in the first year after its establishment. Equity exposures: 300% RW if listed on recognised stock exchanges; 400%, if not WB-IMF-FED Seminar Oct

13 Risk drivers Exposure on corporates 53% (27): Revenue either needs to be replaced by a more sensitive risk driver or its computation needs to be clarified 31% (16): Leverage either needs to be replaced by a more sensitive risk driver or its computation needs to be clarified 85% (45): risk sensitivity can be improved by including additional risk drivers like industry sector and external ratings Availability of financial ratios 28% (14): Corporates do not provide data on revenue & leverage 49% (25): These data are provided at annual or longer intervals WB-IMF-FED Seminar Oct

14 Corporates: Specialised Lending Current framework Currently no distinct treatment; available under IRB approach Proposed framework WB-IMF-FED Seminar Oct

15 Corporates: Specialised Lending Will introducing specialised lending categories enhance the risk of sensitivity of the standardised approach? What percentage of total assets will constitute specialised lending? WB-IMF-FED Seminar Oct

16 Corporates: Project financing Likely influence on project financing models in EMDEs - where banks may currently fund projects at the development stage through equity finance Materially or significantly higher capital requirements in 56% of RJs (24 out of 43) because of the revised treatment WB-IMF-FED Seminar Oct

17 Corporates: Non-retail SMEs Do leverage and revenue appropriately reflect the credit risk of non-retail SMEs in your jurisdiction? The proposed risk weight bucketing for exposures to nonretail SMEs will increase from 75% to at least 100%. Is the proposal for this risk weight bucketing appropriate? WB-IMF-FED Seminar Oct

18 Retail Exposures Is there a need to increase the risk sensitivity of the regulatory retail portfolio? 60% - No; 40% - Yes Is it appropriate to apply a flat risk weight add-on to retail exposures where the currency of the loan is different from that of the borrower's income? WB-IMF-FED Seminar Oct

19 Exposures secured by residential real estate (RRE) Exposures that meet eligibility criteria is 35% Others: Current framework 75% if the exposure qualifies as retail exposure Else, like exposure on corporate max 150% Proposed framework Exposures on those that meet eligibility criteria will be risk weighted as per their LTV and DSC ratios. Others: similar to current approach will be treated as unsecured retail or corporate exposure WB-IMF-FED Seminar Oct

20 Exposures secured by RRE Do the chosen risk drivers (LTV and DSC ratios) have sufficient predictive power of loan default and/or loss incurred for exposures secured by RRE? Should the DSC ratio and the value of the property be kept as constant as measured at origination in the calculation of the LTV ratio? Where the counterparty is not an individual (a small business), is the LTV an adequate risk driver or should it be supplemented by the DSC ratio or any other risk driver? WB-IMF-FED Seminar Oct

21 Exposures secured by RRE (2) Ability to compute LTV and DSC ratios 22 can compute DSC ratio 29 can compute LTV ratio 19 have requested additional specific guidance to ensure consistent calculation of the ratios across banks and jurisdictions Is it appropriate to apply a flat risk weight add-on to exposures secured by RRE where the currency of the loan is different from that of the borrower's income? WB-IMF-FED Seminar Oct

22 Off-balance sheet exposures WB-IMF-FED Seminar Oct

23 Off-balance sheet exposures (2) Do instruments allocated to each of the CCF categories share a similar probability of being drawn? And are probabilities implied by the CCF's accurate? What is the likely impact on risk weighted assets in your jurisdiction because of the higher CCF of 10 percent for commitments that are unconditionally cancellable and 75 percent for commitments other than those that are unconditionally cancellable? WB-IMF-FED Seminar Oct

24 Credit Risk Mitigation (CRM) Current framework Simple and comprehensive approaches for financial collateral; Substitution approach for guarantors who have a lower risk weight than the counterparty Proposed framework Eligible Guarantors: Credit protection given by the following entities can be recognised when they have a lower risk weight than the counterparty: a. Sovereign entities, public sector enterprises (PSEs), MDBs, banks, and prudentially regulated financial institutions; b. Parent companies, subsidiaries, and affiliate companies of the counterparty; c. other entities that meet all of the following conditions provided that the credit protection is not provided to a securitisation: - The entity is externally audited or its common shares are publicly traded on a recognised security exchange;\ - The entity has an established economic relationship with the counterparty to the guarantee under legally enforceable contract(s) to sell or purchase goods and/or services; - The entity provides credit protection to an extent that is commensurate with its economic relationship with the counterparty to the guarantee. Simple and comprehensive approaches remain, but proposal to introduce investment grade classification instead of external rating. A security of which the issuer has an adequate capacity to meet its financial commitments under the security for the projected life of the asset or exposure; meaning that: (i) the risk of default by the obligor is low and (ii) the full and timely repayment of principal and interest is expected. WB-IMF-FED Seminar Oct

25 Credit Risk Mitigation (2) Could the alternative definition for senior debt securities (using the concept of 'investment grade') yield similar results as the current criteria based on external ratings of the financial collateral? Please indicate the type of guarantor who may cease to be an eligible guarantor under the proposed revisions. (11 concurred that some currently eligible guarantors can become ineligible) WB-IMF-FED Seminar Oct

26 Specific provisions as percentage of the outstanding amount of the loan <15% => 15% <20%. => 20% <50%. => 50% Past Due Loans Current framework Past due loans secured by qualifying residential mortgages 100% 100% (but can be reduced to 50% at national discretion) Applicable risk weights Past due loans secured by collateral other than those recognized as credit risk mitigants 150% 100% Proposed framework All other past due loans 150% 100% 100% (but can be reduced to 50% at national discretion) The Committee will continue to consider the best way of incorporating the relevant issues in the new framework and what would be the appropriate calibration of risk weights. Alternatives could be a flat risk weight for all pastdue exposures, or an add-on to the applicable risk weight (which may vary as a function of the amount of provisions). WB-IMF-FED Seminar Oct

27 Past Due Loans (2) Is it appropriate to re-define this asset class to include all past due assets (not just past due loans)? Is it appropriate to assign a flat risk weight for all past-due assets? WB-IMF-FED Seminar Oct

28 Past Due Loans (3) Is it appropriate to include an add-on to the applicable risk weight - which may vary as a proportion of the amount of provisions? Would holding of higher level of provisions for past due asset warrant a lower risk weight than for a performing asset? WB-IMF-FED Seminar Oct

29 Current and Proposed Framework: Summary Asset Class CURRENT PROPOSED Min Max Min Max Sovereign PSEs MDBs Banks Corporates Retail RRE CRE CRE-B OBS Items Commitments - unconditionally cancellable - others <= 1yr - others > 1yr NIFs & RUFs CCF CCF WB-IMF-FED Seminar Oct

30 Whether the proposed changes will make the revised framework simpler than the current framework? WB-IMF-FED Seminar Oct

31 Likely overall impact Materially or significantly higher capital requirements in 74% of RJs (32 out of 43). Sources of additional capital requirement are: Higher credit conversion factors for off-balance sheet items: about 73% of RJs (32 out of 44) Exposure to banks: about 65% of RJs (29 out of 45) Project finance exposures: about 56% of RJs (24 out of 43) Exposures to non-retail SMEs: about 56% of RJs (25 out of 45) Exposures secured by residential real estate: about 47% of RJs (21 out of 45) WB-IMF-FED Seminar Oct

32 Overall feedback Makes the framework less simple (39 RJs) without adequately compensating with a more consistent or comparable outcome Leads to : - Higher capital requirements (32 RJs); - Higher cost of borrowing (34 RJs); - Higher cost of computing and disclosing risk drivers (RDs) (15 RJs) Likely unintended consequences: - Pressure to implement Basel III (37 RJs); - Adverse impact on project financing (38 RJs); - Adverse impact on lending to SMEs (12 RJs) WB-IMF-FED Seminar Oct

33 Main areas for reconsideration Risk drivers Alternate RD for non-basel III banks (CET1 Ratio) Alternate RD for corporates (Revenue) Alternate RD for exposures secured by RRE (DSC ratio) Additional guidance for computation of risk drivers to promote consistency and comparability Treatment of Conversion factors for off-balance sheet items Non-retail SME exposures Equity exposure to corporates Specialized lending Scope for greater role for national discretion and Pillar II WB-IMF-FED Seminar Oct

34 Thank You World Bank Group 1818 H Street Washington, DC 20433