Finanskonferencen Pension og Asset Management

Transcription

1 Finanskonferencen Pension og Asset Management Lars Norup, PwC Den 6. april 2017 Revision. Skat. Rådgivning.

2 Top five scary scenarios 1st 2nd 3rd 4th 5th A global cyber attack New regulation, restricting ability to generate profitable business Loss of market share to non-traditional players A large macro idiosyncratic risk, that hurts global economies High inflation due to central bank policies 2

3 Regulatory reform programme 3

4 Basel IV effects on capital requirements New rules lead to a capital shortfall for almost all banks Available and (expected) required capital H in Tn Comments Combined the capital buffers and the expected increase in RWA due to the current Basel IV proposals would approximately double the capital requirements from Tn 1.1 to an expected Tn 1.9 to 2.3 In spite of the current excess in capital, the current Basel IV requirements are expected to lead to a capital shortfall for nearly all banks in scope On average, banks with a shortfall, would need to raise between 5.0 bn and 8.5 bn additional capital which is equivalent to an increase of 30 to 50% 1) The capital shortfall absolutely and relatively increases with the size of the bank, as larger banks tend to rely more on internal models for RWA calculations Average bank shortfall 1) bn 5.0 bn 8.5 bn # banks with shortfall 1) Number weighted average across all banks which have a shortfall 2) Assuming a current SREP requirement of 10.3% (based on ECB SSM SREP document) and an additional systemic risk and countercyclical buffer of 2.0% Source: Strategy& analysis 4

5 Section 1 Executive Summary Business models in the financial industry under pressure by increased regulation Increased regulation in the financial sector Strategic response in the shape of flexible and easily adjustable business models Key impact factors: Regulation Macro economic reality Political uncertainty and unpredictability Technological developments and innovations Big picture consequences: Drastic shifts in market share both for banks and institutional investors New market participants and well established ones in new roles Great opportunities and great risks New technologically and socially driven customs/niches/wishes 5

6 An opportunity to prioritise and optimise The focus will be on capital, risk and business models Banks will look to the consequences borne out of regulatory changes embodied in Basel III, Basel IV/FRTB and IFRS 9 The shadow-banking sector will carefully evaluate the products it will be able to supply as it is aptly poised to replace traditional banks as counterparties to many of the trades with institutional & professional investors, e.g. currency forwards used in large part by institutions for currency hedging Investment Funds & Firms will evaluate threats and opportunities in financial markets as nonregulated participants A number of large game changers are on their way: they will give rise to both risks & opportunities. The more a bank can prepare, the better it will be able to navigate the sea of changes, adapt its business and benefit from the opportunities. The right changes and adjustments can lead to the bank having a better business model, capital structure, clientele and product focus. Large and fundamental changes to the banking domain will alter the financial markets and their pricing. The regulatory changes will emphasize the divide between regulated and unregulated entities even more, creating interesting market opportunities for the latter the latter being outside the scope of banking regulation. 6

7 Own funds quality and quantity for banks were the focus of Basel III. Basel IV seeks to harmonise Risk Weighted Assets The financial landscape will evolve, and speedily, as banks look to contain capital shortfalls Basel IV & Banks/Institutionals Banks repositioning will lead to opportunities for Institutional Investors and unregulated entities in financial markets Risk Weighted Assets of major European banks will rise an estimated 35+% The Basel (BCBS) committee is a proponent of a global, uniform regulatory framework for banks. To this end, regulation has been updated continuously over the years, starting in Basel IV is the latest such iteration, the spirit of which is to assign similar risk weights to similar exposures with no exemptions for SIFIs. The changes to the regulatory framework will have profound consequences on the financial sector, with effects ranging from market participants to market microstructure. Banks will address capital shortfalls due to increased credit and market risks by prioritizing and optimizing business models and products. This makes room for institutional investors to step in and scoop up portfolios that fit well within their mandates. Banks exiting some businesses could alter the future landscape of market participants and counterparties, which has implications for liquidity and pricing. It is a golden opportunity for institutional investors to divest into new products. Basel IV revisions to estimation practices for internal models will lead to significant increases in credit and market risk capital charges for banks. 7

8 Determining the opportunity Disruption in the market micro structure The impact on OTC derivatives markets will be quite substantial. For instance, corporate treasury functions will have fewer banks to choose amongst that are willing (and capable) of bearing the additional capital requirements. Concentration risks amongst counterparties capable of transacting in size will increase, while the ability to hedge portfolios quickly and efficiently will get severely limited as banks relinquish their roles as market-makers. Pricing of existing products will suffer as complexity in the standard approach increases, and internal models for market, credit and CVA risks get outlawed. Coupled with increased risk weights, wider bid-offer spreads will become the norm as banks will look to be compensated for the additional capital requirements as well as the additional regulatory risks that must be factored in. 4 5 Pricing suffers Prime brokerage and market making remains a joker Market micro structure changes Market depth and inventories shrink (trading book) 3 1 Corporate funding (SA credit risk) Increased securitizations (credit risk) De-facto Removal of the IRB approach for large corporates will lead to banks exiting many corporate engagements but corporate financing & hedging needs will not disappear. 2 This may lead to a fundamental reorientation to a market-based funding structure for many large corporates. Banks may want to hold on to some debt, and the MBS and ABS markets may see significant pickups as tranching takes centre stage while banks off-load different portfolios. MBS and ABS markets may see a large increase in significance as new market participants step in and the hunt for yield continues. Maintaining bond inventories in the trading book will incur higher capital charges banks will no longer be able to offset against the banking book leading to decreased inventories. 8

9 Economic contribution (EP) Redefine the business model Capital markets players will need to make significant structural changes to their business models, rethinking their strategic scope, portfolio mix, and business design Business model redesign should be driven by the organisation s strategy and adapted to the context of available capital and in-house capabilities: 1. Strategic vision 2. Portfolio mix 3. Business design Review of business and definition of strategic priorities: Products Clients Geographies Defined set of core and auxiliary businesses Business lines identified for core vs. non-core portfolios consideration Optimisation of portfolio against capital (risk weight) constraints: EP post optimization of capital allocation EP pre optimization (BU) B Business Unit (BU) A (BU) D (BU) E (BU) C Risk weighted asset (RWA) Allocation of capital to support optimum portfolio mix Definition of non-core portfolios Alignment of front office to support vision and portfolio mix: Organisation and governance Coverage models and incentives Booking models Optimum allocation of resources Business model aligned to strategic vision and capital allocation 9

10 Outlook as seen by the financial industry itself The top three priorities for respondents over the next five years are: Enhancing customer service; filling talent gaps and new product development. Talent (or lack of appropriate talent) is a key constraint across all themes. The top three challenges are: Increasing profitability of clients; the impact of new technologies; and attracting and retaining talented employees Top three investment priorities Enhancing customer service Filing talent gaps New product development Implementing new technology Regulatory compliance Product rationalisation Increasing profitability of clients 45 Top three challenges Impact of new technologies Attracting talent New market entrants Retaining existing clients Digital transformation

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