Proportionality Principle: Its Application & Challenges. Damodaran Krishnamurti Oct 2018

Transcription

1 Proportionality Principle: Its Application & Challenges Damodaran Krishnamurti Oct 2018

2 Caveat The contents of the presentation and the views expressed do not necessarily represent the views of the WBG or the IMF or the FED WB-IMF-FED - Oct For Discussion 2

3 Outline Why proportionality What is proportionality How it is applied How it can be applied Challenges in applying proportionality What can help WB-IMF-FED - Oct For Discussion 3

4 Why proportionality? Evolution of complex standards, despite attempt to strike a delicate balance Simplicity, Risk sensitivity and Comparability Widespread adoption of Basel (global) standards in EMDEs Peer (jurisdiction) pressure; Peer (correspondent banks) pressure Parent bank requirement; Home or Host supervisor requirement Investors, rating agencies, analysts and advisers Absence of key pre-requisites: External ratings, HQLA, developed and active markets... Unintended consequences: Diversion of supervisory resources Cost of operations & compliance costs Inclusive growth WB-IMF-FED - Oct For Discussion 4

5 Outline Why proportionality What is proportionality How it is applied How it can be applied Challenges in applying proportionality What can help WB-IMF-FED - Oct For Discussion 5

6 How do we understand Proportionality? ADAPT FOR COMPLEX/ RISKY/ SYSTEMIC BANKS ADAPT FOR SIMPLER BANKS BASEL STANDARD APPLY TO COMPLEX / RISKY/ SYSTEMIC BANKS NOT APPLY TO SIMPLER BANKS WB-IMF-FED - Oct For Discussion 6

7 Outline Why proportionality What is proportionality How it is applied How it can be applied Challenges in applying proportionality What can help WB-IMF-FED - Oct For Discussion 7

8 Broad approaches for applying proportionality Segmentation Standard specific Standard specific : Component level Standard component : Content level Mix and match WB-IMF-FED - Oct For Discussion 8

9 How jurisdictions determine the segment(s) Balance sheet metrics Size; Size in relation to GDP; Materiality Islamic banks Foreign activity Business model Risk profile Supervisory judgment WB-IMF-FED - Oct For Discussion 9

10 Size thresholds in practice Source: Financial Stability Institute WB-IMF-FED - Oct For Discussion 10

11 Areas where proportionality has been applied Source: Financial Stability Institute WB-IMF-FED - Oct For Discussion 11

12 Outline Why proportionality What is proportionality How it is applied How it can be applied Challenges in applying proportionality What can help WB-IMF-FED - Oct For Discussion 12

13 Options for applying proportionality a % b % 100-x % 100-y % ADAPT FOR COMPLEX/ RISKY/ SYSTEMIC BANKS ADAPT FOR SIMPLER BANKS BASEL STANDARD APPLY TO TO MID-SIZE/ COMPLEX RISK / RISKY/ SYSTEMIC BANKS BANKS 100 % 100 % NOT APPLY TO SIMPLER BANKS x % y % 100-x % 100-y % % of Total Assets % of No. of banks WB-IMF-FED - Oct For Discussion 13

14 How jurisdictions can apply proportionality Regulatory requirement Exempted Modified Higher Lower CAPITAL ADEQUACY Definition RWA calculation Buffer Capital adequacy ratio ICAAP Pillar 3 LEVERAGE MARKET RISK OPERATIONAL RISK IRRBB LCR NSFR INTRA-DAY LIQUIDITY Disclosures Supervisory reporting WB-IMF-FED - Oct For Discussion 14

15 How jurisdictions can apply proportionality (2) Regulatory requirement Complex/ Risky/ Systemic Tier 1 banks Others Tier 2 banks Basel III Basel III Basel II Basel I Exempted CAPITAL ADEQUACY Definition RWA calculation Buffer Capital adequacy ratio ICAAP Pillar 3 LEVERAGE MARKET RISK OPERATIONAL RISK IRRBB LCR NSFR INTRA-DAY LIQUIDITY Disclosures Supervisory reporting WB-IMF-FED - Oct For Discussion 15

16 Can we apply Proportionality as below? Zero % Zero % 45 % 95 % ADAPT FOR COMPLEX/ RISKY/ SYSTEMIC BANKS APPLY SIMPLER OPTIONS TO OTHER BANKS BASEL STANDARD APPLY LATEST TO COMPLEX/ RISKY/ SYSTEMIC BANKS 100 % 100 % NOT APPLY TO SIMPLER BANKS 55 % 5 % 45 % 95 % % of Total Assets % of No. of banks WB-IMF-FED - Oct For Discussion 16

17 Outline Why proportionality What is proportionality How it is applied How it can be applied Challenges in applying proportionality What can help WB-IMF-FED - Oct For Discussion 17

18 Challenges in applying proportionality Determination of segments Calibration Striking the balance simplicity, risk sensitivity, comparability Ongoing review and re-calibration of the proportionality regime Capacity challenges in supervisory agencies Implications for banks in EMDEs adopting proportionality Implications for investor assessments (rating agencies, analysts, advisors) WB-IMF-FED - Oct For Discussion 18

19 Challenges in applying proportionality (2) Implications for systemic risks Can small institutions collectively be/ become systemic? Unintended opportunities for regulatory arbitrage Can have macroprudential implications for example, leading to potential creation of shadow banks, even within the banking system Implications for competition Implications for supervisory effectiveness Implications for standards assessments WB-IMF-FED - Oct For Discussion 19

20 How to assess compliance with BCPs? Zero % Zero % 50 % 40 % ADAPT FOR COMPLEX/ RISKY/ SYSTEMIC BANKS ADAPT FOR SIMPLER BANKS BASEL STANDARD APPLY TO COMPLEX / RISKY/ SYSTEMIC BANKS NOT APPLY TO SIMPLER BANKS 25 % 5 % 25 % 55 % % of Total Assets % of No. of banks WB-IMF-FED - Oct For Discussion 20

21 How to assess compliance with BCPs? (2) Regulatory requirement Exempted Modified Higher Lower CAPITAL ADEQUACY Definition RWA calculation Buffer Capital adequacy ratio ICAAP Pillar 3 LEVERAGE MARKET RISK OPERATIONAL RISK IRRBB LCR NSFR INTRA-DAY LIQUIDITY Disclosures Supervisory reporting WB-IMF-FED - Oct For Discussion 21

22 Outline Why proportionality What is proportionality How it is applied How it can be applied Challenges in applying proportionality What can help WB-IMF-FED - Oct For Discussion 22

23 What can help? Range of practices Country assessments of effectiveness of proportionate adoption of global standards Capacity building in EMDEs Global guidance or guiding principles Development of several simplified approaches WB-IMF-FED - Oct For Discussion 23

24 Looking Ahead a principles based approach Adopt latest Basel standards in entirety for the Tier-1 banks; For example, D-SIBs Adopt the simpler options available under the Basel Standards for Tier-2 banks; For example, all banks that are not Tier-1 or Tier-3 banks Adopt the principles underlying the simpler options for Basel standards for Tier-3 banks; For example, Each bank that is less than x % of market share and Collectively less than y % of market share WB-IMF-FED - Oct For Discussion 24

25 DISCUSSION

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