Actuary in Banking. 1st Seminar on Finance & Investment 18th May 2018

Transcription

1 1st Seminar on Finance & Investment 18th May 2018 Actuary in Banking Mr. Raminder P S Bagri DGM, Canara Bank International Operations & CCR Wing Bangalore

2 Actuary in Banking Unchartered Territory for Actuaries specially in Indian context Enormous scope as banking entails dealing with risk just like Insurance Banking and Insurance Synergies Complement each other - banks requires insurers to insure the collaterals and credit - Similarly Insurers require banking services and to hedge their financial risk An important Parent/Subsidiary relationship exists between Insurance companies and banks. In India most of the Insurance companies are owned by banks

3 Risk management in Banking BASEL Accord Guidelines issued by Basel Committee on Banking Supervision (BCBS) Intends to strengthen Bank solvencies by a set of Capital Requirement standards Basel III - Framework based on three Pillars Pillar I - Minimum Capital Requirement Pillar II - Supervisory Review Pillar III - Market Discipline Quantitative and model based approach towards risk quantification and capital adequacy apart from documentation and disclosures Emphasis on Actuarial Techniques

4 BASEL III Pillar I - Minimum Capital Requirement CRAR = Capital / Risk Weighted Assets (RWA) Risk Weighted Assets Credit Risk Market Risk Operational Risk Phase wise implementation and to migrate to advanced approaches

5 Pillar I - Credit Risk Standardised approach Risk weight based on external ratings Internal Rating Based Approaches Foundation IRB Advanced IRB Requires Calculation of PDs, LGD and EAD Credit Risk = PD X LGD X EAD Probability of Default is based on past loss experience. PD calculation require use of actuarial and quantitative techniques

6 Pillar I - Market Risk Risk on account of movement in market prices due to Interest rates, commodity prices, exchange rates, credit spreads and derivatives Approaches to measure market risk - Standardised Measurement Approach (SMM) - Internal Model Based Approach (IMA) SMM is currently being used in Indian banks as IMA requires development of detailed models Measurement of Interest Rate Risk through Gap analysis, Modified Duration Analysis, Convexity, Simulation Methods, PV01 Equities include a component of general market risk and specific risk Under SMM capital required for both the components is defined by the regulator

7 Internal Models Approach: Pillar I - Market Risk Calculation of Value at Risk (VaR) capital requirement under both normal and stressed scenarios IMA overcomes the inherent weakness of SMM approach viz. fixed capital charge irrespective of actual volatilities, Risk measurement methods specified by regulator Move towards determination of economic capital requirement by a bank BIS recent guideline emphasise on shift from VaR to Expected Shortfall to ensure more prudent capture of tail risks Significant usage of Actuarial Techniques in the measurement of Market Risk under IMA Migration from SMM to IMA will require alignment of Internal Processes, Board approvals, Parallel Run, Back testing

8 Pillar I - Operational Risk Risk of loss from Inadequate or failed internal processes, people and system or external events Operational Loss events can not be fully eliminated or diversified away nonetheless manageable as to keep the losses within some level of risk tolerance Approaches to Capital Requirement: Basic Indicator Approach - Prescribes capital charge at 15% of gross income (3 year average) The Standardised Approach - Business line gross income X Multiplication factors (summed across 8 business lines) Advanced Measurement Approach - Based on internal models developed by the bank.

9 Operational Risk AMA is based on i) collection of loss data ii) The characteristic of low frequency/high severity events BCBS has proposed introduction of Standardised Measurement Approach (SMA) during March SMA will replace Standardised Approach and AMA. Other Imperatives of BASEL III: Liquidity Coverage Ratio Adequate stock of HQLA to cover the total net cash outflows during the next 30 days. Net Stable Funding Ratio: Requires banks to maintain a stable funding profile reducing reliance on short term wholesale funding

10 Pillar II - Supervisory Review Internal Capital Adequacy Assessment Process (ICAAP) : A comprehensive document prepared by the management and is subject to review by the supervisor ICAAP is a process to ensure that the management adequately identifies, measures, aggregates and monitors the bank s risks ensures that the institution holds adequate internal capital in relation to the institution s risk profile; and uses sound risk management systems and develops them further

11 Pillar II - ICAAP ICAAP document comprises of : a summary of the financial position of the business, including the strategic position of the bank, its balance sheet strength, and future profitability a brief description of the capital planning, forecasts of the capital needs and of the regulatory Own Funds which must be in line with the bank s business plan. Possible sources of additional funds in the cases of contingent future adverse events commentary on the most material risks and the mitigation techniques implemented, why the level of risk is acceptable or, if it is not, what mitigating actions are planned

12 Pillar III Market Discipline Pillar 3 of the Basel framework seeks to promote market discipline through regulatory disclosure requirements It mandates enhanced level of disclosures requirement by the banks BIS has issued a new consultative document in February 2018 on pillar 3 which include new or revised requirements: for credit risk (including provisions for prudential treatment of assets), operational risk, the leverage ratio and credit valuation adjustment (CVA) that would benchmark a bank's risk-weighted assets (RWA) as calculated by its internal models with RWA calculated according to the standardized approaches that provide an overview of risk management, key prudential metrics and RWA

13 BASEL IV In December 2017 BCBS published a package of proposed reforms for the global regulatory framework Nine-year implementation timetable. A five-year 'phasein' period would commence on January , with full implementation foreseen from January Fixes Standardised floor Capital requirement under IMA will always be greater than 72.5% of requirement under Standardised approach More detailed disclosures of reserves and other financial statistics Banks world over have to set aside additional capital / reserves to meet Basel IV requirements

14 International Financial Reporting Standard 9 (IFRS 9) IFRS 9 Financial Instruments Deals with three main topics Classification and measurement of Financial Instruments Impairment of financial instruments Hedge accounting Becomes effective from January 1, 2018 and replaces earlier IAS 39 For banks it is a major shift from incurred loss model to expected loss model Significant use of actuarial techniques in the measurement of impairment of financial assets, fair value and amortised cost, Effective interest method India has adopted Ind AS 109, which is in convergence to IFRS 9 Timeline extended by one more year by RBI as the legislative amendment is required to the reporting format of bank balance sheet

15 Methodology for computation of ECL

16 Computation of PDs: Expected Credit Loss (ECL) Corporate: The methodology adopted for calculation of PD is based on Transition Matrix. 12 months PD for stage 1 impairment (Less than 30 days default) Stage 2 and 3 impairment: Transition Matrices are used for computing lifetime PDs over the tenor of the loan Retail: Stage 1 - PDs based on observed default rate during the period (No. of Default during the year / No of standard accounts at the beginning of the year) Stage 2 and 3 impairment: Survival Analysis Methodology to compute lifetime PD. PD in each period is assumed to be independent

17 Expected Credit Loss (ECL) Loss Given Default: In the absence of historic data/defaults with most of the banks, regulator prescribed LGD figures are taken as a proxy for both fund based and non fund based facilities. Exposure At Default: EAD is sum of current outstanding and CCF (Credit Conversion Factor) of undrawn exposure CONSTRAINTS Effective Interest Rate (EIR) is a challenge as banks require more time to develop suitable IT systems Challenges in developing forward looking scenarios and macroeconomic scenarios in computation of ECL in the initial stage

18 Challenges Facing Banks Ever evolving guideline: Basel IV is a mid course correction when banks are still implementing Basel III guidelines People: Requires necessary skill up gradation specially when banks move towards IMA. Opportunity for Actuarial profession to fill the void Data: May need more systems and procedures to collect the necessary data. Data needs to meet the standards of Adequacy for the purpose, data Integrity, Validation of data IT Infrastructure: Additional hardware and Software Requirement

19 Opportunity for Actuaries Modelling - specially when the banks move towards IMA. Banks have limited human resources when comes to quantitative specialist Validation of risk management framework in the banks starting from data, analysis, modelling and reports providing greater assurances to the stakeholders Advisory roles in the risk management field Actuaries to look beyond Basel and IFRS 9 Project Finance (Click here) Assumptions validation Model Audits Advisory functions Investments, Forex, commodities Credit Ratings Capital Planning and Capital Raising With consideration to suitability, regulatory requirement and cost optimisation

20 Indian Banking Scenario - A Perspective Dominated by 21 PSBs, 20 Private Banks, 42 Foreign Banks, 56 RRB apart from significant number of Cooperative banks Outstanding Deposits of Indian Banks is ~USD 1.73 Trillion and advances are ~USD 1.21 Trillion Indian Banking sector is forecasted to be the fourth largest in 2030 with asset size of USD ~ 7.8 Trillion (Source : The growth in sector will translate into opportunities for professionals including risk professionals, Actuaries

21 Actuaries in Banking Indian Scenario Minimum presence of Actuaries in Banks Banks employing significant number of professions from other fields like CA, FRM, MBA, Engineers, MSc Agriculture The above professionals do not possess modelling skills to the extent required to qualify as an actuary. CA2 is a mandatory subject to qualify as an actuary Actuarial profession is not finding place in the current manpower planning in the banks across India Information Gap International Scenario Considerable Actuaries working in Banking field. Special emphasis by Actuarial Bodies abroad for the role played by Actuaries in the Banks. In South Africa 350 Actuaries and Actuarial students are currently working in banks and also ASSA has a separate fellowship exams in banking Recognising the need for Actuaries in Banking IFOA is launching ST 10 Link 1 Link 2 Link 3

22 Way Forward Create Awareness - Bridge the information gaps IAI Proactive Initiative Student Actuaries should dare to move into new fields

23 Q & A?