Basel Accords and Its Effects for Turkish Banking Sector Basel III & Turkey

Transcription

1 Basel I & Current Situation Basel Accords and Its Effects for Turkish Banking Sector Bazit Kızılkaya Defne Sandıkçıoğlu Kemal Öztürk Yavuz Selim Güney

2 Basel I & Current Situation Why to regulate banks? To prevent Banks excessive risk taking which imposes negative externalities on depositors,other banks,firms and the whole economy To eliminate asymmetric information problems(as and MH) which households cannot deal with

3 Basel I & Current Situation Who are the Regulatory Bodies?

4 Basel I & Current Situation The Basel Accords The recommendations on banking regulations issued by the Basel Committee on Banking Supervision (BCBS) are called The Basel Accords refer to the banking supervision accords: Basel I (1988) Basel II (2004) Basel III (2010)

5 Basel I & Current Situation BASEL I Situation before Basel I: Pre 80s; strict banking regulations and limited capital mobility Post 80s; banking deregulations and capital account liberalizations The main objectives: To strengthen the soundness and stability of international banking system. To set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks. Focus on: Credit Risk IDEA: Higher the capital,more to lose

6 Basel I & Current Situation Capital Adequacy Ratio (CAR) Minimum capital requirement in Basel I is 8% CAR= Capital Base / Risk Weighted Assets Constituents of capital base are Tier 1 and Tier 2 Capital. -

7 Basel I & Current Situation

8 Basel I & Current Situation Criticisms of Basel I: 1.Limited differentiation of credit risk (just 4 broad risk weights and weak risk tolerance) 2.Regardless of the maturity of a credit exposure 3.Simplified calculation 4.Lack of recognition of portfolio diversification effects 5.Addresses only credit risk 6.OECD-country criteria creates inequality (large capital flows to developing OECD countries)

9 Basel I & Current Situation Basel I 1993 Amendments By this ammendment, banks are required to calculate and apply capital charges by taking into account capital risks and market risks as well. Market risk : -Risk of losses in on and off-balance sheet positions that are caused by market price changes. -Types: Interest rate risk, Equity position risk, Foreign exchange risk, Commodity risk (1996 amendment) Aim of this amendment is to fix Basel I s insufficiency on incorporating market risk when measuring capital requirements for banks.

10 Basel I & Basel I 1996 Amendments Amendment to the Capital Accord to Incorporate Market Risks BIS allowed banks to use internal models (e.g., VaR) to calculate their capital requirements VaR (Value at Risk): amount to loose in two weeks under the most unfavorable (with 3% prob) conditions (e.g., interest rates increase, FX rates increase). VaR depends on the extent of banks maturity/currency mismatch Higher the VaR Higher the capital to hold Current Situation Banks are incentivized to reduce their maturity/currency mismatch

11 Basel I & Current Situation Implementation of BASEL I in Before 1980 military coup, January 24 Stability Decisions were carried into effect by Özal. Mainly, they deregulated the financial system and situation was like in other countries in too. After Basel I,it was aimed to reach Capital Adequacy Ratios 5% in 1989,6% in 1990,7% in 1991 and 8% in 1992 in Those targets were accomplished due to that Basel I criterias were simple to adapt.

12 Basel I & Current Situation TRANSITION TO BASEL II Based on suggestions among member countries. Contributions and additions over Basel I. Published in Purpose of Basel II : Financial system reliability & Free competition environment and risks

13 Basel I & Current Situation Basel ll Standards FIRST PILLAR -Section of credit risk, operational risk, mitigation of risk, and guarantee SECOND PILLAR -Supervisory Review Process THIRD PILLAR -Market Discipline

14 Basel I & Current Situation Capital Adequacy Ratio Total Capital (same with Basel I) Credit risk buffer + Market risk buffer + Operational risk buffer (calculation changed) (changes less to Basel I) (new added)

15 Basel I & Current Situation Calculation of Credit Risk Standard Approach ratings from external credit agencies Internal Based Approach make own models to calculate ratings

16 Basel I & Current Situation Implementation of Basel ll in Basel ll was published by BIS in BRSA declared the roadmap of trantision to Basel ll in Basel ll standards were started to practise in Banks have calculated credit risk up to standard approach in Basel ll by In 2012 all banks in have become using Basel ll completely.

17 Basel I & Current Situation Impacts of Basel ll to Increase in cost of granted loans & decrease in loan amount Shortening of the maturity of the loans Increased implementation cost

18 Basel I & Current Situation Capital Adequacy Ratio

19 Basel I & Current Situation Why do we need Basel III? Basel II regulations and capital requirements were not enough. Liquid assets can t withstand liquidity shocks. As a response to financial crisis, to ensure that the impact of future crises not becomes as severe as the previous one, Basel 3 regulation has published in The goal of Basel III is to force banks to act more prudently by improving their ability to absorb shocks arising from financial and economic stress by requiring them to maintain a much larger capital base, increasing transparency and improving liquidity.

20 Basel I & Current Situation Targets of Basel III Strengthening the capital buffers Increasing the quality of the capital Applying a leverage ratio to support Basel II Reducing the cyclicality of the minimum capital requirement and allocating provision Making capital and liquidity regulation proposal Improving risk management Increasing the resilience of banks to stress environments

21 Basel I & Current Situation What s new? Capital Regulations: The Basel III capital regulation is intended for a higherquality capital structure. Accordingly, capital is classified based on the capacity to absorb losses. Two new regulations: Capital Conservation Buffer 2.5% by 2019 Countercyclical Buffer 0%-2.5% depending on the conditions and preferences of member countries. Counterparty Risk additional capital based on stress scenarios and histrorical data. Leverage Ratio 3% Liquidity Requirements: Liquidity Coverage Ratio (LCR, Short Term) min. 100% Net Stable Funding Ratio (NSFR, Long Term) min. 100% New regulations for SIFIs

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23 Basel I & Current Situation Basel III and Effects on Turkish Banking System Basel 3 has started to be legally implemented in on 1/1/2014 by the official publication. Like all other member countries, transition period of will end in Turkish banking sector does not experience any problems in implementing Basel 3 regulations thanks to its high capital adequacy level, effective internal control systems, robust equity structure, high level of liquidity, low leverage level and deposit-based funding structure.

24 Basel I & Current Situation Capital Adequacy Requirement and Source: BDDK Turkish Banking Sector Indicators, December 2017

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26 Basel I & Current Situation

27 Basel I & Leverage Ratio Current Situation

28 Basel I & Current Situation Liquidity Ratio

29 Basel I & Current Situation Current Situation LCR-NSFR is currently in trial period, the banks and BRSA are in contact for further developments and implementation. LCR->%100(2019) NSFR- >%100(2018) Currently there are no banks are authorized to use IRB approach, but now there are some applications and the systems developing with higher data management and internal decision mechanisms.(one big bank is under validation process to use Advanced-IRB) Leverage ratio will be imposed after july 2018, parallel run since BRSA implies the regulations up to date to current international regulations and usage is efficient with internal and external control mechanisms of the banks. SIFIs determinance and their buffers are under transition period since 2016.

30 Basel I & Current Situation Current Situation & Trends

31 Basel I & Current Situation & Trends Current Situation

32 Basel I & Current Situation Challenges & Opportunities The restructuring programs for old SEE credits and some other huge companies Credit Guarantee Fund(KGF) Huge Credit Expansion -250B TL Increasing Loans to Deposit Ratio Relatively poor management of the data Credit Classification Differences State banks relatively less transparency Potential credibility loss if Halkbank case happens Potential credit rating downgrades Strong Capital Structure of Turkish Banking Sector Strong up-to-date regulations of BRSA Relatively competitive financial sector with strong domestic market Opportunities of both west and east with the compliance of both. The highest profits of all time can be transferred to capital injection in any kind of crisis moment Still relatively low banking sector to GDP ratio relative to OECD countries Turkish Banks are main external borrowers, FX positions are hedged with off-balance sheet items. Liquidity is sound.

33 Basel I & Current Situation Current Situation The Credit Guarantee Fund was the key determinant in the banking sector last year, and there s no need to discuss its quality or quantity as the common belief is that it was helpful. However, it is neither compatible with the rules of a free market economy, nor sustainable.

34 Basel I & Current Situation Basel IV expected to be less model dependent deregulation The importance of internal models will be diminished. Until nowadays, banks developed so many ways of modelling risks and defaults. The banks calculate vastly different capital levels for seemingly similar levels of risk. But neverthless; we believe strong Turkish regulation and system will adapt all the changes quickly except maybe the data science ones since the financial institutions data systems are still complex than their counterparts.

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36 Basel I & Current Situation References Capgemini Consulting, Basel IV, Changing Regulatory Landscape of Banks,2016 Güney, Yavuz Selim. Sandıkçıoğlu, Defne. of Banking Regulations in Emerging Markets Basel IV, Big Bang or the end game of Basel III? PWC Report, December 2017 Turkish Banking Sector Main Indicators, December BRSA. Turkish Banking Sector Profitability, How to Adjust to the New Life Stage. Oliver Wyman Reports.2015 Basel Committee on Banking Supervision. (1988). Basel I- Comprehensive Version, Bank for International Settlements. 1988, Basel Committee on Banking Supervision. (2004). Basel II- Comprehensive Version, Bank for International Settlements Basel Committee on Banking Supervision. (2010). Basel III- Comprehensive Version, Bank for International Settlements. 2010, Basel III implementation assessments of Russia and. BCBS Road to Basel-III Strategies and Priorities of the BDDK.BDDK. İhsan Uğur Delikanlı Basel II s Possible Affects on Turkish Banking Sector, Economics & Economy, Vol. 1, No. 3 (June, 2014), Salih Kaya

37 Basel I & Current Situation Thank you for listening. *All of the comments are subjective and they are all conclusions from overall analysis by team members. **All rights reserved.