Regulatory Capital the proposed revision of the Standardised Approach for credit risk and the automated FinTechsolution

Transcription

1 Regulatory Capital the proposed revision of the Standardised Approach for credit risk and the automated FinTechsolution Diana Paredes Murat Abur Pascal di Prima , London

2 Agenda Introduction Current practice General revision within the framework of Basel IV FinTech solution 1 / L_LIVE_EMEA2: v1

3 Introduction The standardised approach is the simplest approach to credit risk. The other two approaches are based on banks internal rating systems. The proposed revised standardised approach aligns regulatory capital requirements more closely with the key elements of banking risk by introducing a wider differentiation of risk weights and a wider recognition of credit risk mitigation techniques, while avoiding excessive complexity. Accordingly, the proposed standardised approach should produce capital ratios more in line with the actual economic risks that banks are facing, compared to the present accord. The regulator wants to improve the incentives for banks to enhance the risk measurement and management capabilities and should also reduce the incentives for regulatory capital arbitrage. 2 / L_LIVE_EMEA2: v1

4 Introduction In December 2014, Basel Committee on Banking Supervision (BCBS) has submitted a consultation paper on the review of standardised approach for credit risk (Revisions to the Standardised Approach for credit risk). The proposals contained significant changes: For the differentiation of risk weights in future specific indicators such as core capital ratio, debt ratio or revenues are used instead of using external ratings. In addition to reducing dependency and significance of external ratings increasing the risk sensitivity of capital adequacy requirements is intended. Additional objectives of the BCBS include strengthening the coherence of standardised approach and internal ratings-based approach as well as the improvement of the comparability of the capital requirements between credit institutions. 3 / L_LIVE_EMEA2: v1

5 Current practice The standardised approach for credit risk sometimes refers to discrete risk weights (0, 10, 20, 50, 100, 150%) which depend on ECAI ratings. Model: Receivables from non-banks and insurance companies: Basis equity ratio: 8% AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated Of 8 percent 20% 50% 100% 150% 100% Absolute percent 1,6% 4% 8% 12% 8% 4 / L_LIVE_EMEA2: v1

6 General revision within the framework of Basel IV The new proposal represents a substantial revision of the risk measurement processes for determining the capital requirements: According to the proposal of the BCBS the revision of the standardised approach should lead to capital requirements calibrated in accordance with the inherent risk and the standard procedures representing a suitable alternative or complement to the internal ratings-based models. These innovations, timidly addressed as Basel IV due to the calibration of the risk-weighted capital requirements in Pillar I, will be connected with considerable effort for all, i.e. also for institutions that use the internal ratingsbased approach. 5 / L_LIVE_EMEA2: v1

7 General revision within the framework of Basel IV Overreliance on external ratings Major flaw of the standardised approach sometimes was the overreliance on external ratings. In particular, the negative effects associated with external ratings on the stability of the financial sector, e.g. arising by an abrupt increase of the risk weights (cliff effects), should be avoided in the future. 6 / L_LIVE_EMEA2: v1

8 General revision within the framework of Basel IV Risk drivers The BCBS will encounter the issue that a large proportion of corporate receivables has no external rating by subjecting risk weights for bank and corporate receivables to certain risk drivers. For bank receivables those risk drivers are the core capital ratio and the so-called net non-performing assets ratio (ratio of non-performing receivables to the overall exposure), with which an assessment of the quality of their assets shall be performed. 7 / L_LIVE_EMEA2: v1

9 General revision within the framework of Basel IV Banks: CET1% 12% 12% > CET1% 9.5% 9.5% > CET1% 7% 7% > CET1% 5.5% 5.5% > CET1% 4.5% CET1% < 4.5% Net NPA% 1% 30% 40% 60% 80% 100% 1% < Net NPA% 3% 45% 60% 80% 100% 120% 300% Net NPA% > 3% 60% 80% 100% 120% 140% 8 / L_LIVE_EMEA2: v1

10 General revision within the framework of Basel IV Corporates: Revenue (Mio EUR) Revenue 5 5 < Revenue < Revenue 1000 Revenue > 1000 Leverage: 1x-3x 100% 90% 80% 60% Leverage: 3x-5x 110% 100% 90% 70% Leverage: >5x 130% 120% 110% 90% Negative equity 300% 9 / L_LIVE_EMEA2: v1

11 General revision within the framework of Basel IV Bank receivables* In accordance with the quotas determined the risk weights arise between 30% and 300%. Compared to today s common risk weight of 20% for credit institutions in Germany or rather in the EU, this proposal will result in substantially higher capital requirements for bank receivables. Corporate receivables* For corporate receivables the decisive risk drivers will be revenue and debt ratio (leverage). Thereof dependent, a risk weight of 60% to 300% will be estimated, compared to the currently being the most widely used risk weight of 100%. *BCBS, Consultative Document, Revisions to the Standardised Approach for credit risk, 22. December 2014, p. 8, p / L_LIVE_EMEA2: v1

12 General revision within the framework of Basel IV Current Risk Weights under CRR Institutions 20% - 150% Suggested Risk Weights by BCBS Banks 30% - 300% Corporates 20% - 150% Equity Exposures 100% - 250% Secured by mortages on imm. property Retail 75% Residential 35% Commercial 50% Off-balance sheet 0% - 100% Exposures in Default 100% - 150% Other Items 0% - 150% Corporates Senior Debt 60% - 300% Corporates Specialised Lending 120% - 300% Sub. Dept, Equity and Other 250% - 400% Regulatory Retail 75% Secured by real estate Other Retail 100% Residential 25% - 100% Commercial 50% - 300% Off-balance sheet 10% - 100% Past due loans Under analysis Other Assets 100% *BCBS, Consultative Document, Revisions to the Standardised Approach for credit risk, 22. December 2014, p. 8, p / L_LIVE_EMEA2: v1

13 Critical view on the proposed standardised approach Overall increase of capital requirements? Reduced incentive to use IRBA? Banning of external ratings? Are the proposed risk drivers the most prudent approach? Increased volatility of RWAs? 12 / L_LIVE_EMEA2: v1

14 Pascal di Prima, Partner +49 (0) Pascal advises banks and financial institutions on banking regulatory, accounting and tax law. One of his main practice areas is CRD IV/CRR in relation to core capital products, structured finance, the large exposures regime and remuneration programmes. Pascal also specialises in accounting law and balance sheet consolidation under German GAAP and IFRS/IAS. Furthermore, he advises on the regulatory and corporate law aspects and the setting-up and restructuring of Contractual Trust Arrangements (CTAs), especially in M&A transactions. Pascal studied law at Goethe University in Frankfurt, followed by a Master of Laws (LL.M.) at the University of New South Wales, Sydney (Australia). During his traineeship, he worked in the tax department of another international law firm as well as for the German Federal Financial Supervisory Authority (BaFin). 13 / L_LIVE_EMEA2: v1

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