PMSinfo Basel III (CRD IV)

Transcription

1 PMSinfo Basel III (CRD IV) Background The financial and economic crisis starting in 2007 has painfully revealed the deficits of the bank regulation to date. The Bank of International Settlements (BIS) in Basel has reacted by introducing a reform package referred to as Basel III with the objective to improve the quality and quantity of the banks equity capital and its determination which should be consistent and transparent for all market participants. To be able to fulfil these requirements, the prerequisites for a recognition of the capital components have become stricter, the deduction directives regarding the capital base determination have been tightened and harmonised, the disclosure regulations for banks have been enhanced and the core capital quota has been increased. Basel III comes into effect step-by-step as of 1 January 2013, its realisation in the European Union being based on changes of the Capital Requirements Directive (CRD). Main Scopes of the Basel III Reforms (CRD IV) The legal frameork of Basel III stipulates new requirements on the capital of banks. These requirements do not only apply to big [banks] but also to the private financial institutions around the corner - and it s going to be very painful. (Handelsblatt, ) and this is where the standard software solution PMS (Portfolio and Risk Management System) of the much-net AG comes into play.

2 PAGE 2 LCR and NSFR in PMS The Liquidity Coverage Ratio (LCR) (monthly liquidity ratio) is to ensure a sufficient supply of highquality, liquid cash to secure short-term liquidity under stress conditions. PMS displays detailed information such as the legal framework, the factor etc. for each liquidity class. Illustration 1 PMS enables a free definition of subclasses for selected liquidity classes. Illustration 2 The long-term liquidity ratio Net Stable Funding Ratio (NSFR) (year-ratio) is meant to encourage institutions to choose stable sources for a financing of their activities based on matching maturities and to avoid one-sided dependencies on short-term refinancing schemes. The NSFR compares available sources of finance with the required long-term financing needs that evolve from the balance sheet assets. The NSFR aims at an institution s refinancing requirement over a period of one year.

3 PAGE 3 The special benefit of the PMS Basel III solution is that it does not only offer calculations of requirements and financial key figures, it also offers simulation possibilities. In addition to the general booking simulation that uses simulated positions to calculate requirements and financial key figures and the PMS scenario manager which enables editing of various scenarios on the one hand and the calculation of requirements and financial key figures under scenario conditions on the other hand (interest rates, currencies, indices, spreads, inflation, volatilities, ratings, etc.), PMS offers simulation features specifically for the liquidity ratios such as Additional Benefits in PMS a manual tightening of the haircuts including the possibility to store different haircut sets flexible settings of the analysis period Period length (default: 30 days) Start and end date (default: month s end date 30 days until month s end date) Further benefits: Possibility to adjust the liquidity classes like for example user-defined descriptions, factor etc. (see illustration 1) Definition of user-defined subclasses (see illustration 2) Display of the results on the graphical user interface (GUI) based on the schemes published along with Basel III and accompanied by in-depth drill-down options to heighten the transparency Standard reporting via Crystal Reports; on request custom-made reporting Creation of the required reporting files in accordance with the official classifications of CRD IV Historicisation of the reporting results on the PMS database Simulation Options ST = Short Term LT = Long Term 1 Based on a selection of 40 significant European banks 2 Includes cash, corporate and government bonds 3 Mainly includes short-term funding of financial institutions 4 Includes tier-2 capital Illustration 3

4 v PAGE 4 Counterparty Risk in PMS The Basel Committee increased the capital requirements for the risks that were not sufficiently covered by Basel II, particularly the counterparty risk. The calculation refers to two points (see illustration 4): a) Central Counterparty = CCP for standardised derivatives b) CVA charge for OTC derivatives Illustration 4 a) Changes of the Central Counterparty In the definition of capital requirements for the counterparty risk, it is no longer permitted to assign a risk weight of zero to derivatives that are settled via a central counterparty. In the future, CCPs have to fulfil specific qualitative requirements on risk management for a privileged capital backing. On an international level, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) will devise appropriate standards. All in all, a significantly lower risk capital backing in relation to the CVA improves the attractiveness of Central Counterparties. b) CVA Charge Basel III offers two approaches for a capital backing measurement for the CVA risk of OTC derivatives (=CVA charge): Advanced CVA: Measurement in the context of the Internal Model Method (IMM) Standard CVA: Bond Equivalence Method provided by PMS. Both Credit Value Adjustment methods (CVA) have the target to measure possible evaluation losses which are due to the deterioration of counterparty ratings. Features and benefits of the Credit Value Adjustments Calculation in PMS are: Calculation of Credit Value Adjustments according to the Bond Equivalence Method Consideration of Netting and Hedging Convenient maintenance and selection of ratings are possible

5 PAGE 5 The screen CVA Eigenkapitalanforderungen offers a clear presentation of results. Beside the total result in the field Eigenkapitalanforderung the relevant data for all positions involved in the calculation will be displayed: Counterparty Rating and corresponding weighting Exposure with and without discounting Time to Maturity much-net AG Kennedyallee Bonn / Germany Phone (02 28) Fax (02 28) office@much-net.com If you have any questions please contact: Eduard Tolmatschjow - 58 Dr. Klaus Wenger - 26 P LEASE VISIT OUR WEBSITE AT: WWW. MUCH- NET. COM Even if appropriate export regulations have not been legislated for all CRD 4 requirements, the scheduled time for the implementation is short. The integration of the new requirements necessitates a fairly extensive interference with the existing processes and data structures. much-net AG will gladly assist you in the implementation process based on their well-established software solution PMS accompanied by tailored project and consulting services.