FPDFS Prudential Oversight Unit. Introduction

Transcription

1 Introduction

2 Agenda Background: Why was the FPM created? The FPM Integrating tool Importance of analysis FPM use within dynamic supervision Details: Features/Specs; Structure; Closer look at entry sheets and results summary sheet FPM s wide range of uses Managing Expectations - Caveats FPM s Portfolio of Work to-date 2

3 Why was the FPM created? Update tools to assess condition/viability under incertitude/tension Balance the excesses: little onsite and too much offsite (pre crisis) Need to evaluate viability of a bank as a business (flow of earnings) Need a dynamic perspective on loans (flows, feedback, 2nd round effects) Focus on solvency rather than static impact of regulatory capital Correct modeling myopia : need to look at drivers of bank s earnings Internalize knowledge of onsite examiners (CAMEL+RAS) 3

4 FPM: An Integrating Tool. Simply put FPM can be as basic or comprehensive as your inputs Macroeconomic data The financial data of a bank (or banks or whole banking system) User s assumptions for the behavior of each BS & PL line and macroeconomic scenario(s) and FPM gives a projection of the financial data 4

5 Strength Depends on Quality of Inputs The financial data of a bank (or banks or whole banking system): Supervisory Risk Assessments (bottom-up perspective from Onsite-Exams) Functional Cost Analysis Macroeconomic data: Financial Stability Analyses (topdown systemic perspective) Impact of Stress Tests User s assumptions for the behavior of each BS & PL line: Formed from all the analyses and gives a projection of the financial data In easily understandable outputs: Balance Sheet and Profit/Loss Proxy Performance Indicators Operational Cash Flow PV of Discretionary Dividends Resolution Costs (as needed) 5

6 The Inputs: Important Areas for Analysis The FPM requires in-depth analysis of both external and internal variables affecting the evolution and viability of the banking firm (or of a group, or the system as a whole): Macro- Economic Scenarios GDP Inflation Exchange rate Interest rates Market size Correlations NPL regression Market Banking Financial Size of market Volume growth Market position Business lines Market trends Reference rates Competition Risk Assets Reviews NPLs Stock Future NPLs PDs, LGDs, or Fixed income Investments Foreclosed assets Related parties Functional Activities Interest products Banking spreads Fee services Other activities OpEx & Overheads Regulatory regime Recurrence Restructuring Actions Pre-provision profits and OCF New capital Carve Outs Defeasances Liability Restructuring Rightsizing vs. cost readying 6

7 The Inputs: All in the details This could mean extra work requiring the user to: Learn accounting practices: re-aging, restructuring, interest capitalization Take stock of existing analysis, examination and audit reports (and detect gaps)... Special focus on risk asset reviews & segment/income profitability analysis Growth patterns, market shares, yields and spreads by main products Although it can be quite powerful with robust data, the FPM is only a tool for a dynamic supervision process, not a panacea!

8 FPM: a Part of a Dynamic Supervision Process Compile and input bank and macroeconomic data Assess loan quality & determine interest rates Make assumptions of the Bank s operations and macroeconomic scenarios 1. ANALYTICS: Build a starting point Identify info gaps & distortions 2. SIMULATION: Determine consistency and assess impact of assumptions Firm v. Market Data Clarify Abnormal Items Test at Benchmark Bank Remedy gaps of info Institutionalize use of model Monitor target indicators Deepen risk asset review Clarify business-segment MIS Feed back new data & assess system reliance 4. CONTINUED SUPERVISION Execute supervisory strategy 3. REPORTING: Review Scenarios and Sensitivity Analysis Assess Confidence Limits Identify Crucial Variables Reconsider Risk Profile 8

9 FPM Details: Features/Specifications System of simultaneous equations solved by iteration (Gauss-Seidel method to converge) 12 periods of various frequencies (annual, quarterly, monthly, daily) Up to 3 macroeconomic scenarios to input and choose from 2 currencies (books (Local & Foreign Currencies or two entities)) 8 credit segments with PD/LGD for A and B -graded clients and default class C/D Scaling factor for PD/LGD and interest performance of C/D (suspended or cash) 7 deposit products with differential reserve requirement and interest cost Nominal GDP as growth driver for system deposits via market share (both can be scaled) 9

10 FPM Details: Features/Specifications, cont. Separate view of operational cash flow and balance sheet fund flows in each currency Discretional fund flow allocation to loans and AFS selected by user (credit share monitored) Designated balancing item is ELA after settlement between fund flows (cost subsidy) Lines to simulate zero/accruing recap bonds and preferred non/cumulative shares User defined constraints: liquidity and proxy regulatory capital adequacy Absolute entries to implement/simulate ALM, restructuring, reorganization, migration, stress Initial estimation of technical values: book, liquidation, P&A, and NPV of DCF. 10

11 FPM Details: The Structure INPUTS Activities OUTPUTS ENTRY (BS/PL) Assumptions for BS Macro Variables Assumptions for PL Deposits, Cash & CB Money Markets Capital Markets Loans Other Assets/Liabilities Capital Funds Flow Projected BS Projected PL Summary Basel II Simulation Valuation Actions (ALM) Operations Resolution 11

12 A Closer Look into FPM Series of Excel worksheets of data entry, calculations, and grouped results Screenshot of [FPM Cover] sheet

13 FPM Details: Entry Data - [Macro] [Macro] data entry, historical and base year data: (macroeconomic drivers, reference rates, banking sector size and share of target bank, etc.) 13

14 FPM Details: Entry Data - [Macro], cont. and up to 3 sets of macro-scenario assumptions for the projection periods, for same macro variables 14

15 FPM Details: Entry Data - [Entry] Base year Balance Sheet and Profit & Loss Account data Two books local and foreign currency activities possible 15

16 FPM Details: Entry Data - [Assumptions-BS] Assumptions for behavior of each BS line for the projection periods 16

17 FPM Details: Entry Data - [Assumptions-PLA] and assumptions for behavior of each PL line for the projection periods 17

18 FPM Details: Summary of Results [Summary] sheet shows resulting figures in both currencies, as % of total assets, % growth, and % of internal structures [Projected BS] & [Projected PL] show results in separate books Local currency activities in LC.CY.; foreign currency activities in FG.CY. and in LC.CY.; & all activities in LC.CY. 18

19 FPM Uses: What is it for? Identifying & monitoring problem banks Assessing banks risk profiles Extrapolating results of supervisory examination/diagnostic of a bank s financial condition Assessing the sustainability of a bank going forward Ascertaining consistency & strength of bank mgmt business plans Evaluating resolution options and developing a resolution plan for problem and failed banks Implementing multi factor sensitivity analysis for developing policy measures against potential shocks Bank valuation as a concrete starting point for negotiating a price Analyzing cost & subsidies of government or CB support programs Cost-benefit analysis associated with state-owned financial institutions Setting performance targets for management of state-owned banks 19

20 Managing Expectations - Caveats Not a cure-all! Diagnostic Review: Get out of the dark to find out how large the hole is in the hull An integration tool Results are based on existing diagnostics & assumptions: Highly dependent on quality of exams and offsite analysis & data Can accommodate inputs from bank mgmt and auditing processes Suffers from the risk of the garbage in, garbage out syndrome Can be manipulated to fit desired politically correct story line Requires sound judgment and best available info (and filling gaps) Strengthens the supervision process (exam & analysis), but not substitute it 20

21 FPM: Caveats, continued Constraints data availability and reliability, time resources to come up with meaningful level of detail for inputs (starting data and assumptions), understanding of assets/liabilities movements (rates, reference rates (macroecon rates), spreads) Can be used in any type of financial institution, but mainly focused on deposittaking institutions Modeling is a dynamic process (not a statistical event) Depends on the capacity of the supervisory agency - may not reach full capacity at once but improve steadily as tool & methodology are institutionalized; Depends on the Model Features : FPM structure is standardized; local templates adapted to FPM via mapping; FPM can accommodate a variety of local features; FPM is a simplification of the complexities of banking; FPM shared complied as-is under license 21

22 FPM: Portfolio of Work, to-date So far, the FPM has been used in client countries in Africa, Latin America, and East Asia through our different delivery modes: Delivered as a supervisory tool Method: preliminary contact/desk work, subsequent in-country consultations and training, and follow-ups. Content: select group of supervisors work through hands-on case studies to be familiarized with the FPM. They also try out a real case alongside the delivery team, and as resources allow, another case with minimal support. These supervisors champion the ultimate integration of the tool into day-to-day work. Result and Benefits: supervisors, consolidating information from other relevant CB departments, perform diagnostics of possibly problematic banks, to put figures to the depth of the problems, to simulate what-if scenarios and test breaking point thresholds. Team may deliver recommendation for improving any gaps in supervision process. Ultimate integration of the tool is up to the Supervisory Department. (Some projects delivered with funding from Financial Sector Reform and Strengthening (FIRST) Initiative) 22

23 FPM: Portfolio of Work, to-date (cont.) In a modular FSAP, the FPM was used to prepare diagnostic reports on the country s SME banks. Focusing on baseline projection and costing out resolution alternatives for the Ministry of Finance. Run a baseline scenario and develop two alternatives, restructuring or shutting down of the bank Support the baseline projection with a sensitivity analysis to cover the impact of the deviations from the assumptions on loan quality and productivity Develop the main components of the restructuring plan to limit the cost of supporting SMEs to the tax payers, and Set quantitative performance criteria for the management to ensure the delivery of desired outcomes. OTHER uses: Customizable to your needs. *Best use attained when good knowledge on revenues and costs, business lines, and portfolio segments. 23

24 Thank you for your interest! We look forward to discussing how the FPM may assist your work. Any Questions, please contact us. Y. Carol Lee 24