BASEL II OVERVIEW FEBRUARY 2017

Transcription

1 BASEL II OVERVIEW FEBRUARY 2017

2 BASEL II INTRODUCTION

3 BASEL BACKGROUND 3 BASEL I Issed 1988 BASEL II Issed 2006 BASEL III Issed 2010 Post Basel III (BASEL IV ) After 2012 In the early 1980s, the onset of the Latin American debt crisis heightened the Committee s concerns that the capital ratios of the main international banks were deteriorating at a time of growing international risks. Designed to achieve greater convergence in the measrement of capital adeqacy. Reslts in broad consenss on a weighted approach to the measrement of risk, both on and off banks' balance sheets. Designed to improve the way reglatory capital reqirements reflect nderlying risks and to better address the recent financial innovation. The changes aimed at rewarding and encoraging contined improvements in risk measrement and control. Also to develop and expand the standardized rles set ot in the 1988 Accord. Banking sector had entered the financial crisis with too mch leverage and inadeqate liqidity bffers. These defects were accompanied by poor governance and risk management, as well as inappropriate incentive strctres. The dangeros combination of these factors was demonstrated by the mispricing of credit and liqidity risk, and excess credit growth. Some contries are already starting to execte capital reqirements that go beyond crrent Basel III. Particlarly, the US and some Erope contries are demanding banks to meet minimm capital ratios even after the effect of severe stress. UK and Switzerland have set a minimm level of leverage ratio at above 3%; other contries, are contending that Pillar 2 add-on capital are met throgh highest qality capital.

4 BASEL KEY CONTENTS 4 BASEL I Issed 1988 BASEL II Issed 2006 BASEL III Issed 2010 Post Basel III (BASEL IV ) After 2012 Focs on a single risk measre (Credit Risk) Insfficiently sensitive to risk (broad categories) - One size fits all Did not allow for se of Credit Risk Mitigation techniqes sch as Collateral, Garantees etc. Introdced Minimal Capital Reqirement pillar of at least 8% of its risk-weighted assets for sm of Tier 1 and Tier 2 capital Did not assess market risks - these came in the 1996 Market Risk Amendment Operational risks were ignored as a specific risk category Establish fixed risk weights corresponding to each spervisory category and makes se of external credit assessments Greater se of assessments of risk provided by banks internal systems as inpts to capital calclations Introdced capital charge for Operational Risk Introdced 2 new pillars Spervisory Review Process (Pillar 2) Market Discipline (Pillar 3) Focssing on strengthening existing capital reqirements and accompanying liqidity concerns Introdcing Liqidity Coverage Ratio (LCR) and Net Stable Fnding Ratio (NSFR) Capital reqirements for CCR based on stressed inpts Introdcing bank liqidity and bank leverage Introdcing Capital Conservation Bffer and contercyclical bffer Introdcing methodology to identify global systemically important financial instittions (SIFIs) Restricting the advantages to banks of sing internal models to calclate their capital reqirements Reqiring banks to meet a higher minimm leverage ratio Greater disclosre by banks

5 THE 3 PILLARS OF THE BASEL II ACCORD 5 Pillar 1 Minimm Capital Reqirements Minimm Capital Reqirement q Credit Risk Standardized approach Fondation internal ratings based (F-IRB) approach Advanced IRB (A-IRB) approach q Market Risk Standardized approach (SA) Internal methods approach (IMA) q Operational Risk Basic indicator approach (BIA) Standardized approach (SA) Standardized Measrement Approach (SMA) Pillar 2 Spervisory Review Process Capital Adeqacy Assessment Board and Senior Management Oversight Sond Capital Assessment and Planning Comprehensive Assessment of Risks Monitoring and Reporting Internal Control Review Spervisory Review Process Annal comprehensive ICAAP Review Stress Testing Review Material Risks Review Pillar 3 Market Discipline General Considerations Giding Principles Interaction with Acconting Disclosres Disclosre Reqirements General Scope of Application Capital Strctre Capital Adeqacy Credit Risk Market Risk Operational Risk Liqidity Risk Interest Rate Risk Other Material Risks

6 BASEL II PILLAR 1 OVERVIEW

7 CREDIT RWA CALCULATION 7 Total Capital Bank s capital ratio = ³ 8.00% Credit RWA + Market RWA + Operational RWA Standardised Approach Classification of credits External rating of credit qality Allocation of fixed weights to each category Calclation of credit risk as the sm of the prodct of each exposre and respective weight Internal Rating Based (IRB) Approaches Classification of credits and Internal rating of credit qality Allocation to risk classes Calclation of risk parameters per conterparty / exposre Probability of defalt (PD) - What is the likelihood that a borrower defalts? Loss given defalt (LGD) - How mch of the exposre will be lost in event of defalt? - Exposre at defalt (EAD) - What is yor exposre to the borrower in case of defalt? Qantification of credit risk as a fnction of PD, LGD, EAD, CCF, credit risk mitigation and effective matrity. Only applied for certain exposre (new gideline issed on Mar 2016) (i.e. Not applicable for sovereign, banks, large corps, etc.) AAA A+ BBB+ to AA- to A- to BBB -... Sovereigns 0% 20% 50%... Banks Option I 20% 50% 100%... Option II 20% 50% 50%... Corporates 20% 50% 100%... IRB Fondation Approach Individal derivation of PD of each risk class LGD, EAD and time to matrity given by spervisory athorities IRB Advanced Approach Individal derivation of PD, LGD, and EAD for each risk class Consideration of time to matrity of each credit exposre

8 MARKET RWA CALCULATION 8 Total Capital Bank s capital ratio = ³ 8.00% Credit risk + Market risk + Operational risk Standardized Approach Under this method market risk capital reqirements are fixed based on predefined tables depending pon whether the exposres are: Long or short positions Physical or derivative positions Interest rate, Eqity position, FX, Commodity or Option risks Sbject to instrment specific or general market risks Instrment matrity Internal Models Approach This method allows banks to se risk measres derived from their own internal risk management models, sbject to seven sets of conditions, namely: certain general criteria concerning the adeqacy of the risk management system qalitative standards for internal oversight of the se of models, notably by management gidelines for specifying an appropriate set of market risk factors (i.e., the market rates and prices that affect the vale of banks' positions) qantitative standards setting ot the se of common minimm statistical parameters for measring risk gidelines for stress testing validation procedres for external oversight of the se of models rles for banks which se a mixtre of models and the standardized approach

9 OPERATIONAL RWA CALCULATION 9 Total Capital Bank s capital ratio = ³ 8.00% Credit risk + Market risk + Operational risk Basic Indicator Approach Operational risk seen as linear fnction of one niqe risk measre (Gl) per bank: with K BIA GI a K BIA = GI * a = capital charge = exposre indicator, provisionally average gross income over past 3 years = fixed percentage, set by Committee, relating the indstry-wide level of reqired capital to the indstry-wide level of the indicator - actally 15% Standardized Approach Operational risk seen as linear fnction of niqe risk measres GEl 1-8 ) per bsiness nit: K STA = S(GI 1-8 * b 1-8 ) with b= fixed percentage, set by Committee, for each of the 8 bsiness lines Alternative Standardized Approach allows for special treatment of retail and commercial banking: K IRB = ß RetailBk. * m * LA Retail Bk. with ß RetailBk. = beta of bsiness line LA RetailBk = loans and advances m = mltiplier (0.035) Standardised Measrement Approach* The SMA combines the Bsiness Indicator (BI), a simple financial statement proxy of operational risk exposre, with bank-specific operational loss data (shold se 10 years of good-qality loss data or minimm of five years of data). *According to d355, Advanced Measrement Approach to be replaced by SMA - the proposed SMA framework wold be applied to internationally active banks on a consolidated basis. Spervisors retain discretion to apply the SMA framework to non-internationally active instittions. ILDC: Interest, Lease and Dividend Component; SC: Services Component; FC: Financial Component; Avg: Average of the items at the years: t, t-1 and t-2

10 BASEL II PILLAR 1 CREDIT RISK STANDARDIZED APPROACH

11 CREDIT RWA CALCULATION PROCESS SVC Asset Classification Risk Weight Assignment Exposre Calclation Credit Risk Mitigation RWA Calclation Approach determination Approach Determination - Defines approach to be adopted (Standardized, Fondation IRB or Advanced IRB) for each credit portfolio Single View of Cstomer (SVC) - Creates a consolidated view of all credit exposres to a cstomer, inclding identifying material cstomer relationships for prposes of defining a cstomer grop Asset Classification - Identifies the asset class of the exposre Risk Weight Assignment/ PD calclation: Depends on different methods (SA/ IRB), Risk Weight Assignment (applicable for SA) or Internal PD calclation (applicable for both F-IRB and A-IRB) will be performed. Exposre / Exposre at Defalt (EAD) - Calclates the potential exposre at the point when cstomer defalts Credit Risk Mitigation (CRM) - Recognises the mitigating effects of collaterals, garantees, etc in redcing the exposre amont and / or LGD Standardized Approach 1 SVC IRB Approach 2 Asset Classification Fondation Advanced CRM & Spervisory Spervisory EAD LGD Internal PD Calclation CRM Internal PD Calclation CRM Internal EAD Calclation Internal LGD Calclation Internal Matrity Calclation Matrity calclation: Determines Spervisory Matrity (applicable for F-IRB) or internally calclate Matrity (applicable for A-IRB) Risk Weighted Assets (RWA) Calclation - Calclates the credit RWA of the exposre based on rles specific to the approach adopted CRM CRM Spervisory Matrity RWA Calclation

12 ASSET CLASSIFICATION 12 Banking Book Exposre Non-retail Exposres Retail Exposres Eqity Exposre Secritisation Exposre Prchased Receivables Sovereign Exposre Bank Exposre Corporate Exposre Trade Finance Residential Mortgage Specialised Lending Object Finance Commodity Finance Qalifying Revolving HVCRE IPRE Other Retail IRB Exposre Categories Sovereign Exposre Bank Exposre Corporate Exposre Secred by Residential Property High Risk Other Non-central Government PSEs Mlti-lateral development banks Secrities Firms Secred by Commercial Real Estate Retail Reglatory Past De Off-balance sheet Standardised Exposre Categories

13 KEY PARAMETERS ACROSS APPROACHES 13 Standardized Approaches IRB Approaches Simple Comprehensive Fondation Retail Advanced Cstomer Risk Spervisory Vales, dependent on external ratings Cstomer PD Pool PD Cstomer PD Credit Risk Mitigation Eligible Financial Collateral Spervisory Risk weights Eligible Financial Collateral HairCts (Collateral, Crrency, Matrity) Eligible Collateral HairCts (Crrency, Matrity) Bank s Collateral Haircts (Crrency, Matrity) Exposre LGD Pool LGD Exposre LGD Effective Matrity Effective Matrity Effective Matrity Exposre EAD EAD Exposre Calclation CCF CCF HairCts (Crrency, Matrity) HairCts (Crrency, Matrity) Capital Calclation RWA x min. 8 % Reglator Defined Internally Calclated

14 CREDIT RISK MITIGATION RESIDUAL RISK 14 E* = MAX {0; [E * (1+H Exposre ) - C * (1 - H Collateral H FX )]} Matrity Mismatch Exposre and collateral possess a different time to matrity: Usally the collateral is not pledged for the life of the exposre This matrity mismatch cases a forward credit risk Spervisory measres: - Collateral mst be pledged for at least one year - Consideration of matrity adjstment: Adjsted Protection = C * = C * (1 - H Collateral H FX ) * t T Market Risk Vale of exposre and collateral depends on different market risk factors This can case a diverging development of the respective vale Application of haircts to allow for - volatility of price of exposre - volatility of price of collateral - volatility of exchange rate, if FX-mismatch exists Legend: E * = Exposre vale after risk mitigation, E = Crrent exposre vale (before mitigation), C = Crrent vale of collateral received, w = Specific risk weight

15 CREDIT RISK MITIGATION DERIVATION OF HAIRCUTS IN THE COMPREHENSIVE APPROACH 15 E* = MAX {0; [E * (1+H Exposre ) - C * (1 - H Collateral H FX )]} Standard Spervisory Haircts Own Estimates Haircts based on VaR-models Isse rating for debt secrities Residal Matrity Sovereign Issers Other Issers t <= 1 yr 0,5 1,0 AAA to AA- 1 yr < t <= 5 yr 2,0 4,0 5 yr < t 4,0 8,0 A+ to BBB- and t <= 1 yr 1,0 2,0 nrated bank 1 yr < t <= 5 yr 3,0 6,0 secrities 5 yr < t 6,0 12,0 BB+ to BB- 15,0 - Main index eqities and gold Other eqities listed on recognized exchanges 15,0 25,0 UCITS / Mtal Fnds Cash in same crrency Highest hairct applicable 0,0 - Haircts expressed as percentage - Haircts based on 10 day holding period assmption Derivation based on internal estimates of price and FX volatility - 99th percentile one-tailed confidence interval - Consideration of illiqidity - Historical observation period of at least 1 year - Update at least every 3 months Derivation of hairct for each category of exposre; else individally - Debt secrities are rated BBB- (A-3) or higher - Categorisation according to type of isser or isse, its rating, its matrity and its modified dration Use VaR-approach to reflect price volatility of exposre and collateral of repo-style transactions - Repo-style transactions covered by a bilateral netting agreement on a conterpartyby-conterparty basis - Reqires spervisory approval of internal model according to 1996 Market Risk Amendment - Same statistical parameters as in market risk measrement, except for 5 bsiness day holding period Backtesting reqired Legend: E * = Exposre vale after risk mitigation, E = Crrent exposre vale (before mitigation), C = Crrent vale of collateral received, w = Specific risk weight

16 CREDIT RISK MITIGATION TECHNIQUES 16 Collateral Financial collateral Physical collateral - Receivables - Corporate or Residential Real Estate Credit Risk Mitigation Techniqes Garantees and Credit Derivatives Specific characteristics - Direct claims on protection provider - Explicitly referenced to specific exposres - Irrevocable and nconditional Certain range of eligible protection providers - Sovereign entities, PSE, banks and secrities firms with lower risk weight than conterparty - Other entities rated A- or better On-Balance Sheet Netting Agreements Consideration of net exposre of loans and deposits: Assets (loans) treated as exposre Liabilities (deposits) treated as collateral

17 CREDIT RISK MITIGATION TYPES OF COLLATERAL ELIGIBLE 17 Approach Impact on capital charge Collateral Selected Fin. Collateral Financial Collateral Cash Gold Debt secrities rated by ECAIs - Sovereign or PSE exposre rated BB- or better - Other exposre rated BBB- or better - Short-term rating of A-3/P-3 or better Debt secrities not rated by ECAIs - Issed by banks and listed on exchange - Qalifies as senior debt - Other isses of same seniority rated BBB- (A- 3/ P-3) or better - Conterparty not expected to be rated below BBB- Eqities inclded in a main index Eqities not inclded in a main index bt listed on a recognized exchange Physical Collateral Receivables Real Estate Collateral - Commercial Real Estate (CRE) - Residential Real Estate (RRE) Any other physical collateral Standard Approach Standard Approach IRB Fondation Approach IRB Advanced Approach Simple Approach: Sbstittion of Risk Weights Selected Fin. Collateral Comprehensive Approach: Redction of Exposre All collateral types Comprehensive Approach: Redction of Exposre All collateral types Collateralisation reflected in derivation of Loss Given Defalt (LGD)

18 BASEL II PILLAR 1 MARKET RISK STANDARDIZED MEASUREMENT APPROACH

19 WHAT ARE MARKET RISKS? 19 Market Risks Risk of losses in on- and off-balance sheet positions arising from movements in market prices The risks sbject to this reqirement are: - The risks pertaining to interest rate related instrments and eqities in the trading Book - Foreign exchange risk and commodities risk throghot the bank Trading Book A trading book consists of positions in financial instrments and commodities held either with trading intent or in order to hedge other elements of the trading book. To be eligible for trading book capital treatment, financial instrments mst either be free of any restrictive covenants on their tradability or able to be hedged completely. In addition, positions shold be freqently and accrately valed, and the portfolio shold be actively managed. Trading book positions are more vlnerable to short-term changes in their vale and therefore warrant a capital charge against market risk. Positions held with trading intent are those held intentionally for short-term resale and/or with the intent of benefiting from actal or expected short-term price movements or to lock in arbitrage profits, and may inclde for example proprietary positions, positions arising from client servicing (e.g. matched principal broking) and market making.

20 INTEREST RATE RISK Interest rate risk capital charge is the total of both specific and general risk capital charges 20 Definitions Specific Risk Adverse movement in the price of an individal secrity owing to factors related to the individal isser Exposres 1. Absolte gross market vale of long and short debt secrities positions 2. Offsetting is restricted to matched positions in the identical isse Measrement Method Specific risk capital charge according to conterparty type and credit ratings Parameters 1. Conterparty type 2. Credit ratings 3. Residal term to final matrity General Risk Risk of loss arising from changes in market interest rates Net short or long market vale of debt secrities positions by crrency General risk capital charge for the followings:- 1. Net position charge 2. Basis risk charge 3. Yield crve risk charge Measred sing one of the following methods:- 1. Matrity Method 2. Dration Method 1. Copon rate 2. Residal term to matrity

21 EQUITY RISK Eqity risk capital charge is the total of both specific and general risk capital charges 21 Specific Risk Definitions 1. Gross eqity positions (i.e. the sm of all long eqity positions and of all short eqity positions) 2. Long and short positions in the same isse may be reported on a net basis Exposres 1. Absolte gross market vale of long and short debt secrities positions 2. Offsetting is restricted to matched positions in the identical isse Measrement Method 8%, nless the portfolio is both liqid and well-diversified, in which case the charge will be 4%. Parameters 1. Conterparty type 2. Credit ratings 3. Residal term to final matrity General Risk 1. Difference between the sm of the longs and the sm of the shorts (i.e. the overall net position in an eqity market) 2. The long or short position in the market mst be calclated on a market-by-market basis, i.e. a separate calclation has to be carried ot for each national market in which the bank holds eqities. Net short or long market vale of debt secrities positions by crrency 8% 1. Copon rate 2. Residal term to matrity

22 FOREIGN EXCHANGE RISK 22 Definitions General Risk Risk of holding or taking positions in foreign crrencies, inclding gold Exposres 1. The net spot position (i.e. all asset items less all liability items, inclding accred interest, denominated in the crrency in qestion) 2. The net forward position (i.e. all amonts to be received less all amonts to be paid nder forward foreign exchange transactions, inclding crrency ftres and the principal on crrency swaps not inclded in the spot position) 3. Garantees (and similar instrments) that are certain to be called and are likely to be irrecoverable Measrement Method Parameters Short hand method:- 1. 8% of the higher of either the net long crrency positions or the net short crrency positions and 2. 8% of the net position in gold Crrency code

23 COMMODITIES RISK 23 Definitions General Risk The risk of holding or taking positions in commodities, inclding precios metals, bt exclding gold Exposres 1. Long and short positions in each commodity may be reported on a net basis for the prposes of calclating open positions 2. Positions in different commodities will as a general rle not be offsettable in this fashion Measrement Method Parameters Commodity risk capital charge captres the following risks: 1. Directional Risk (15% of net position) 2. Basis Risk, Interest Rate Risk and Forward Gap Risk (3% of gross position) Commodity risk capital charge can be measred sing one of the following methods:- 1. Simplified Approach 2. Matrity Ladder Approach Commodity type

24 BASEL II PILLAR 1 OPERATIONAL RISK BASIC INDICATOR APPROACH

25 OPERATIONAL RISK BIA MEASUREMENT 25 Operational Risk capital charge nder the BIA is calclated as follows: Average over the previos three years of a fixed percentage (denoted alpha, i.e. 15%) of positive annal gross income Figres for any year in which annal gross income is negative or zero shold be exclded from both the nmerator and denominator when calclating the average The charge may be expressed as follows: where: K BIA = the capital charge nder the Basic Indicator Approach GI = annal gross income, where positive, over the previos three years N = nmber of the previos three years for which gross income is positive α = 15%

26 DEFINITION OF GROSS INCOME 26 Gross income is defined as follows:- Net interest income pls net non-interest income Gross of any provisions (e.g. for npaid interest) Gross of operating expenses, inclding fees paid to otsorcing service providers Exclde realized profits/losses from the sale of secrities in the banking book Exclde extraordinary or irreglar items as well as income derived from insrance

27 BASEL II PILLAR 2 SREP & ICAAP OVERVIEW

28 ICAAP FRAMEWORK 28 Key Reqirements ICAAP Measrement ICAAP Management Capital Charge Credit Risk (inc. Concentr. & residal risk) Board & Senior Management Oversight Monitoring, Reporting and Review Capital Charge Market Risk Use of ICAAP Capital Charge Risk Aggregation Operational Risk Capital Charge* Interest rate Risk in the Banking Book Capital Charge* Other Risks (Strategic, Reptation) Establish rigoros corporate governance and senior management oversight Establish risk-based strategy inclding defining and setting the bank s appetite and tolerance for risk Assess and measre all material risks inherent in Grop s bsiness Review, monitor, control and report on all material risks Demonstrate that ICAAP forms an integral part of day-to-day management process and decision making cltre of the Grop Relate capital to level of risk and ensre capital adeqacy sing scenario analysis and stress testing methods

29 RISK APPETITE OVERVIEW 29 What is Risk Appetite? Risk Appetite is the amont and type of risk that an organization is able and willing to accept in prsit of its bsiness objectives. It can be set qalitatively ( high, moderate, very low ) or qantitatively (e.g. throgh at-risk measres) for broad grops of risks. It does not seek to prevent risk taking. It aims to establish an nderstanding of the risk exposre s implications and establish tolerable thresholds that gide the bsiness to optimize risks-retrns. Implicit Risk Appetite Implied statement of acceptable risk taking or behavior by an organization in the prsit of its corporate objectives Explicit Risk Appetite Statement that is explicitly defined by the organisation and sed internally to management and monitoring prpose

30 RISK ADJUSTED RETURN ON CAPITAL (RAROC) 30 Introdction to RAROC - Components Risk-Adjsted Profit & Loss Interest income Fnds charge Interest expense Fnds credit Net Interest Income Non Interest Income Direct Indirect Overhead Taxes Non Interest Expense Expected Loss (for credit risk) Earnings on Capital Risk-Adjsted Capital Credit Risk Risk-Adjsted Retrn Risk-Adjsted Capital Market Risk Operational Risk Other Risks = RAROC Capital allocated for nexpected losses RAROC best practice is to adjst net income for expected losses de to credit risk and adjst capital for nexpected losses de to risks

31 LINKING RAROC TO VALUE 31 ILLUSTRATIVE Total Bank Hrdle Rate = 15% 1 Capital allocated according to risk, with an expectation of meeting or exceeding the hrdle rate 400m 600m 1000m RAROC Econ. Profit 2 ($) Econ. Profit ($) BU 1 BU 2 BU 3 20 % 15 % 10 % 20m 0 <50m> Vale adding +5% Hrdle Rate = 15% -5% Vale destroying 1 In this simplified example the hrdle rate for each bsiness is assmed to be the same as the overall hrdle rate for the bank 2 Economic Profit = (RAROC - Hrdle Rate) x Allocated Capital Application of RAROC Creates a level playing field that spports identification of vale (e.g. economic profit), when compared against the bank-wide hrdle rate, or the minimm retrn expected by shareholders Enables better nderstanding of where capital shold be allocated and the associated retrns, contribting to decision making Provides a niform and comparable measre of the risk-adjsted rate of retrn across all lines of bsiness or prodcts, enabling relative rankings for performance evalation

32 BASEL II PILLAR 3 MARKET DISCIPLINE OVERVIEW

33 CONCEPTUAL OVERVIEW 33 Giding Principles Complements Pillars 1 and 2 Shold be consistent with how senior officers actally manage risks in the bank Achieving appropriate disclosre Pillar 3 helps give spervisors a level playing field for disclosre, bt actal implementation is left to contry spervisors Interaction with Accont Disclosres Similar to, bt different from, acconting disclosres Pillar 3 has a narrower scope of capital adeqacy reporting Location of disclosre is not specified bt management mst try to keep all disclosre in same place

34 CONCEPTUAL OVERVIEW (CONTINUED) 34 Banks mst decide whether the information is material bt there is gidance on what information is material Freqency of disclosre Mostly on semi-annal basis Risk Policies etc. on an Annal basis Large international banks mst disclose on qarterly basis Proprietary and confidential information Banks shold determine which information is proprietary before disclosre isse of discssion with spervisor E.g. Methodologies, parameter estimates etc.

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