Basel III, IFSR 9, & Housing Finance in Africa. 34th AUHF, Azalai Hotel, 23 rd 25 th October, 2018

Transcription

1 Basel III, IFSR 9, & Housing Finance in Africa 34th AUHF, Azalai Hotel, 23 rd 25 th October, 2018

2 Background Changes from Basel I, II, and III Outline Likely impact of Basel regulations for housing finance Additional challenges posed by IFRS 9 What can banks do differently?

3 Regulation and housing finance Lending volumes Lending rates Lending maturity Regulation

4 Underdeveloped housing market in Africa: e.g., mortgage debt to GDP ratio = 83% in Netherland vs less than 1% in many African countries. Regulation among the key factors that affect housing finance development Background Basel III and IFRS 9: two major regulatory changes developed as a response to the lessons of the 2008 financial crisis. There are potential advantages, but also potential adverse effects on lending. Our presentation will focus on the later and how best lenders can adapt

5 Basel III

6 An internationally agreed set of measures developed by the Basel Committee on Bank Supervision (BCBS) In a nutshell Introduces new and more stringent capital and liquidity requirements for commercial banks, compared to Basel I & II Objective is to make banking systems safer and more resilient to shocks African countries have reacted differently to the changes: Partial implementation (Nigeria), Full implementation (South Africa), Adoption of stricter rules than the Basel III rules (BCEAO).

7 Changes from Basel I, II, and III Basel I 1988 Min Capital adequacy ratio: 8% of risk-weighted assets (RWA) Risk-weighting method: assign assets to one of five risk-weights (0, 10, 20, 50, and 100)% Eligible capital = Tier 1 capital (Min 50% of total capital) + Tier 2 capital Basel II 2004 New risk-weighting framework: standardised approach, supported by external rating; or internal-rating based method (IRB), subject to explicit approval of supervisor. This change makes risk-weights more risk sensitive. Basel III 2010 New definition of eligible capital: shift towards higher quality capital New types of capital requirements (capital buffers) resulting in higher overall capital ratio New Leverage ratio New Liquidity ratios (liquidity coverage ratio and net stable funding ratio, min 100%)

8 Basel III requirements and adoption in Africa Table 1: Adoption of the Basel III regulatory framework in the WAEMU, CEMAC, and South Africa (a) BCBS deadlines/ Transition periods (b) Basel III standards WAEMU (c) CEMAC South Africa Minimum common equity Tier 1 capital Jan Jan % 5% 4.5% 4.5% Minimum Tier 1 capital Jan Jan % 6% 6% 6% Minimum Total capital adequacy ratio 8% 9% 8% 8% Capital conservation buffer Jan 2016 Jan % 2.5% 2.5% 0 2.5% Capital Min. total capital + conservation buffer 10.5% 11.5% 10.5% 8% % Capital countercyclical buffer Jan 2016 Jan % - 2.5% 0% - 2.5% 0% - 3% 0 2.5% Minimum leverage ratio Jan % 3% (d) 4% GSIB Additional min. capital requirement Jan 2016 Jan % - 3.5% N/A (e) N/A (e) N/A (e) DSIB- Additional min. capital requirement Jan 2016 Jan 2019 (f) (f) 1% - 2.5%(h) (f) Liquidity Minimum liquidity coverage ratio (LCR) Jan % 100% (g) 100% Net stable funding ratio (NSFR) Jan % 100% (g) 100% Notes: a) We use the green color in the Table to indicate the standards that have been implemented within the BCBS agreed deadlines. b) All dates are as of 1 January. The ends of the transition periods in the table are the dates when the standards are due to become fully effective.

9 How Basel III may affect housing finance Banks strategies to meet the new requirements Raise additional capital and liquidity; Accumulation of retained earnings; Shrink the size of assets; Shift toward less risky or more liquid assets Impacts Higher loan rates; Lower overall bank lending. Shorter maturity of loans; Lower lending to riskier borrowers What can determine the size of the impacts? Pre-reform levels of capital, liquidity; Banks profitability. Monetary policy response; Length of transition period; Market environment

10 But assessing the overall impact of the Basel regulations on lending should also consider the following: Potential positive effects on bank lending Substitution effects towards non-bank lending

11 IFRS 9

12 New accounting rules for financial instruments (debt instruments, derivatives, equity instruments). IFRS 9 in a Nutshell Published in 2014 by the International Accounting Standards Board (IASB), to replace IAS 39 Three focus areas: classification and measurement of financial instruments, impairment, and hedging. Required for accounting periods beginning on or after January 2018

13 Forward looking provisioning based on expected credit losses (vs incurred credit losses based on past and present information under IAS 39) IFRS9 and impact on housing finance Early recognition of credit deterioration (vs delayed recognition under IAS 39) Increase in loan-loss provisions on performing exposures (vs too little, too late under IAS 39) Increase in risk costs which could make some clients that are currently part of business no longer profitable.

14 Basel III and IFRS 9 basically mean a tightening of regulations to reduce the risk of financial crisis. Key insights But this also means that bank lending activities, and housing finance in particular, may be adversely affected.

15 1. Are Basel III regulations relevant for the Africa context, especially regarding the needs for financing affordable housing? Questions for discussion 2. How should African countries respond? No implementation, or full or partial implementation? 3. How best to ensure adequate financing of (affordable) housing while ensuring the stability of the financial sector? 4. What could be the role of residential property investment vehicles and other innovative non-bank financing?