Risk assessment and pricing a bank failure - German approach

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insurance issues Financial Stability Institute, BIS, IADI, Basel/Switzerland

1 Risk assessment and pricing a bank failure - German approach Bernd Bretschneider 6 December 2016 Conference on bank resolution, crisis management and deposit insurance issues Financial Stability Institute, BIS, IADI, Basel/Switzerland Institut / Mandant / Kunde GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh, Köln Seite 1

2 Contents Structure slide 3 Deposit Protection Scheme slide 6 since 1996 Deposit Guarantee Scheme slide until 2015 Deposit Guarantee Scheme slide 13 since 2016 GBB-Rating slide 20 2

3 1 The Structure Germany 3

4 Structure Private banks sector mandatory system voluntary system systemrelevant parties risk management processes risk-based models validation reimbursement SCV data file cross boarder data exchange platform 4

5 2 Deposit Protection Scheme Voluntary system GBB-Rating 2016 NextGenerationCFO 2016 Bernd Bretschneider 29. November 2016 Düsseldorf 5

6 Voluntary system 1996 until A B C 1 C 2 C 3 A B C 1 C 2 C 3 A 1 A 2 A 3 B 1 B 2 B 3 C 1 C 2 C 3 AAA AA+ A- BBB+ CC C 22 classes 90 % ratios: Balance sheet 10 % Ratios: P & L 10 % 16 qual. criteria - appendix 30 % ratios: Balance sheet 50 % Ratios: P & L 20 % 16 qual. criteria - integrated 23 qualitative criteria Scale qualitative criteria Scale 0-10 GBB-Rating 2016 NextGenerationCFO 2016 Bernd Bretschneider 29. November 2016 Düsseldorf 6

7 Voluntary system 1996 until Financial profile Business profile Additional rating factors Basis: Analysis of the annual financial statements Main criteria Financial data input template Adjustments Rating data Strategy Market Risk management Risk profile Capitalization potential Specifics Long-term earnings position by cluster Sustained capital position Criteria Indicators OR/MPR 1 Cluster Indicators CCR 2) Cluster Indicators Criteria Criteria Criteria Criteria Criteria + + Analysis of current development Analysis of projected development + + Analysis of current development Analysis of projected development Additional analysis features Supplementary indicators Analysis tools Benchmarks Database research... + Analysis of other considerations + Loss absorbing capacity Transformation curves, weights, factors, evaluation of weighted point scores Evaluation of weighted point scores Financial profile intermediate result Business profile intermediate result Combined result Rating result 1) Cluster OR/MPR comprises banks with operational or market price risks as main risk profile contributors 2) Cluster CCR comprises banks with credit and counterparty credit risks as main risk profile contributors Additional rating factors (if applicable) Comprehensive rating result GBB-Rating 7

8 Voluntary system Methodology: Combined statistic based system expert knowledge based system, annual back-testing, validation if necessary, probability of default approach Flexibility: Assessment of different business models Capability: Broad mandate of Auditing Association of German Banks Effort: Complex system - banks are complex Scope: Between -2 % (discount) and +350 % (surcharge), 14 premium classes 8

9 Risk-based model Application Pyramid Expected loss approach Fair burden sharing Preparedness Early Intervention 9

10 3 Deposit Guarantee Scheme - until Mandatory system GBB-Rating 2016 NextGenerationCFO 2016 Bernd Bretschneider 29. November 2016 Düsseldorf 10

11 Mandatory system 2012 until

12 Mandatory system 2012 until Methodology: Statistic-based system, annual back-testing and validation if necessary Flexibility: Assessment of different business models due to integrated rating Capability: paybox Effort: Medium complexity, based on audited data from annual report Scope: Between 75 % and 200 %, 9 premium classes 12

13 4 Deposit Guarantee Scheme - since Mandatory system GBB-Rating 2016 NextGenerationCFO 2016 Bernd Bretschneider 29. November 2016 Düsseldorf 13

14 New model Baseline EBA formula 14

New system Comply with EBA Guidelines German Transposition Capital 1.1 Leverage Ratio 9 % 1.2 CET1 Ratio 9 % Liquidity / Funding 2.1 Liquidity Coverage Ratio - LCR 18 % 2.

15 New system Comply with EBA Guidelines German Transposition Capital 1.1 Leverage Ratio 9 % 1.2 CET1 Ratio 9 % Liquidity / Funding 2.1 Liquidity Coverage Ratio - LCR 18 % 2.2 Net Stable Funding Ratio - NSFR * 0 % * contribution campaign % Asset Quality 3.1 NPL Ratio 13 % Business Model and Management 4.1 Risk Density 6,5 % 4.2 Return on Assets 6,5 % 4.3 Rating 25 % Option for Building Societies*: * 4.3 Rating 18,5 % * 4.4 Specfic Ratio 6,5 % Potential Losses for the EdB 5.1 unencumbered assets / covered deposits 13 % 15

16 New system Risk classes 16

17 Mandatory system Methodology: Expert knowledge based system, annual back-testing, validation potential limited due to fixed framework Capability: paybox Effort: Simple system, based on data from COREP, FINREP and SCV file Scope: Between 50 % and +200 %, 10 premium classes 17

18 T H A N K Y O U 18

19 5 GBB-Rating Profile 19

Bernd Bretschneider CV Bernd Bretschneider is managing director and working with GBB-Rating since 1996.

20 Bernd Bretschneider CV Bernd Bretschneider is managing director and working with GBB-Rating since GBB-Rating is the Rating Agency of the Deposit Guarantee Scheme of the private banks segment in Germany. Bernd studied business administration at the Universities of Nuremberg (Germany), Cologne (Germany) and Bradford (UK). Before he entered GBB-Rating he completed a two year term apprenticeship with a Bank in Frankfurt/M. (Germany) and afterwards worked in the SME business with a Bank in Berlin (Germany) for four years. Beside his job as managing director, he is co-head of EFDI Research Working Group on `Risk-based Contribution` and wrote a paper on risk-based premiums for World Bank together with his EFDI working group co-head. GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh, Cologne/Germany Seite 20

21 GBB-Rating Company established 1996 office Cologne managing directors Bernd Bretschneider, Dr. Dirk Thiel competent authority European Securities and Markets Authority, ESMA independent non-executive board members (INEDs) Prof. Dr. P. Ruhwedel, Prof. Dr. C. J. Börner, W. Weissenberger, CPA staff ca.30analysts internet GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh, Cologne/Germany Seite 21

22 GBB-Rating Services Bank assessment Technical support Quantitative methods Support of DGSes GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh, Cologne/Germany Seite 22

GBB-Rating Contact GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh Kattenbug 1 D-50667 Cologne/Germany Fon +49 221 912897 0 E-Mail info@gbb-rating.

23 GBB-Rating Contact GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh Kattenbug 1 D Cologne/Germany Fon info@gbb-rating.eu Bernd Bretschneider managing director Fon b.bretschneider@gbb-rating.eu GBB-Rating Gesellschaft für Bonitätsbeurteilung mbh, Cologne/Germany Seite 23

3. For the purpose of this Rule, the definitions contained in regulation 2 of the Regulations shall apply; and:

3. For the purpose of this Rule, the definitions contained in regulation 2 of the Regulations shall apply; and: BANKING RULES BANKING RULE ON THE RISK-BASED METHOD AND THE COMPENSATION CONTRIBUTION METHOD UNDER THE DEPOSITOR COMPENSATION SCHEME REGULATIONS (S.L. 371.09) Ref: INTRODUCTION 1. In terms of regulation