Strengthening the European banking system Overview of the CRDIV. World Bank CFRR IFRS Seminar for banking supervisors 18 April 2012, Zagreb

Transcription

1 Strengthening the European banking system Overview of the CRDIV World Bank CFRR IFRS Seminar for banking supervisors 18 April 2012, Zagreb 1

2 Main Drivers Financial Stability and Sustainable Growth Unprecedented State Aid to European banks: Euro 3.6 trillion Basel 3 agreement: December 2010 G20 agreement to implement Basel 3 Single Rule Book European Council Decision: June 2009 Review of the existing CRD legislation 2

3 Basel III agreement: key elements BASEL III CAPITAL LIQUIDITY LEVERAGE Each bank: - More and better capital - Better risk weights - Conservation buffer - Countercyclical buffer Short-term stress Liquidity Coverage Ratio 2015 Longer term stress Net Stable Funding Ratio 2018 Leverage Ratio back stop (with a view to migration to a binding measure in 2018) 3

4 CRDIV core part of Commission response to crisis CRD IV (incl. corporate governance and sanctions) CRD II & CRD III EU framework for crisis management and resolution Stress test Overhaul of the EU supervisory architecture MIFID and MAD review, short selling Derivatives (EMIR) Credit Rating Agency Regulation, External Audit AIFM, DGS, mortgage credit, FICOD, protection schemes, remuneration 4

5 Assessing the impact Short-term costs limited (pre-2019) Capital 1 percentage point GDP % (EC, Basel) Long-term benefits substantial (post-2019) Banking crises less likely and if they occur, impact reduced Financial system more stable and in line with economy Benefits exceed cost Annual EU GDP growth 0.3-2% (Basel) Transition to new rules (pre-2019) Larger banks need to raise more capital Smaller banks already exceed new rules 5

6 Legislative proposal on CRDIV - what? REGULATION DIRECTIVE CAPITAL LIQUIDITY LEVERAGE RATIO COUNTER- PARTY CREDIT RISK SINGLE RULE BOOK Improve quality, increase quantity Resilience to funding risks Backstop Higher capital charge derivatives Maximum harmonisation where interlinkages with national administrative laws are particularly important + CAPITAL BUFFERS + CORPORATE GOVERNANCE + SANCTIONS + ENHANCED SUPERVISION 6

7 CRD IV: harmonised rules Removing options and discretions Legislative form: Regulation Maximum harmonisation of Pillar 1 & Pillar 3 measures EUROPEAN COUNCIL OF JUNE 2009: The European Council also recommends [ ] establishing a European single rule book applicable to all financial institutions in the Single Market. 7

8 Capital: Improved quantity Today Total Tier 1 Certain Tier 1 items 8% 4% 2% Tomorrow Total Tier 1 CET1 8% 6% 4.5% 8

9 Capital: Improved quality Total Tier 1 CET1 8% 6% 4.5% Total capital remains at 8% Greater focus on Common Equity Tier 1 (CET1): 75% predominance ratio Capital quality / quantity significantly higher Highest quality capital of mutuals / cooperative banks / savings institutions recognised Harmonised deductions and prudential filters Gradual transitional arrangements 9

10 Extra Capital buffers Capital conservation buffer A fixed target buffer of common equity of 2.5% to absorb losses in stressed periods If buffer breached, constraints on bank s discretionary distributions Countercyclical capital buffer Banks required to build-up extra buffers in economic upturns of (common equity), which can be draw down in a downturn Macro-prudential tool. ESRB role in assuring transparency and coherence of buffer decisions 10

11 VARIABLE Capital: Increased quantity - new capital minima 13,0% 10.5% 10,0% 8,0% 6,0% 4.50% 4,0% Global systemic banks. In future, likely to be required to hold extra capital 1-2.5% met with common equity.* Countercyclical buffer met with Common Equity. Fluctuates with national credit growth: Builds when credit excessive. Released in credit crunch. Conservation buffer of 2.50% met with Common Equity. Can go down but triggers earnings distribution constraints. Tier 2 capital. Min. 2.0% on top of Tier 1 capital. Loss Absorbing as a Gone concern. Non equity Tier 1. Going concern loss absorbing. Min 1.5% on top of Common Equity. Macro Level Additional requirements Micro Level New Capital Benchmark 2,0% Common shares + retained earnings New deductions. Min. 4.50% 0,0% * GHOS agreement; to be confirmed by FSB/G-20 (November) 11

12 Liquidity Coverage Ratio (LCR) Liquidity standards Stock of highly liquid assets > 30 days net outflow in stress scenario From 2013: general requirement on banks to have appropriate liquidity coverage Commission committed to introduce a harmonised LCR by 2015 (delegated act) Reporting requirement to verify adequate liquidity coverage (extremely high liquid assets and impact on SMEs and trade finance) Net Stable Funding Ratio (NSFR) Available stable funding > required stable funding Commission to use Basel III observation period (until 2018) to prepare a proposal for the attention of Council and Parliament. 12

13 Leverage ratio A Tier 1 capital divided by an exposure base of non risk weighted assets Safeguard against model risk and measurement error Reduce leverage in order to bring debt more in line with underlying assets Implementation step by step, gather data before introducing effective regulatory tool Implementation in Pillar 2 as of 2013, public disclosure as of 2015, Review in 2016, final decision on the introduction as a binding requirement (Pillar 1) as of

14 Corporate governance Suitability of board members: skills (understanding risks) & time commitment (no double mandates) Diversity in Board composition: diversity of age, professional background, gender balance Board s role with regard to risk strategy: Boards responsible for risk strategy and risk management systems Risk management function: enhance status, independence and involvement of risk management Supervisors: review governance arrangements, corporate culture and values Remuneration (European Parliament) 14

15 Sanctions and enhanced supervision Supervision and enforcement key for credibility of new rules Need to ensure consistent application in all MS Findings by CEBS/EBA: not all supervisors have necessary tools Minimum standards for supervisors sanctioning powers Example: All supervisors should be able to impose deterrent fines where banks don t report to them as required Enhanced supervision - Enhanced supervisory powers (Art 136 CRD) - Supervisory stress testing 15

16 Capital: EU specificities non joint stock companies, grandfathering CET1 instruments, cut-off date (state aid) Option consolidation of insurance (if FICO) Prudent approach on new Basel III instruments (LCR, NSFR and Leverage ratio) SME review clause flexibility within the Internal market (max harmonisation, proposal, fiscal exposure, macro prudential) Home - Host issues corporate governance 16

17 Role of EBA in CRD IV Developing draft regulatory and implementing technical standards Commission has to adopts technical standards Issue guidelines Prepare reports (Liquidity, Leverage, SME) Workload 76 RTS 32 ITS and 20 GL most to be delivered by 31/12/

18 Accounting and CRD IV Applicable accounting framework (definition) Exposure value (SA: accounting value with specific credit risk adjustments, (general credit risk adjustments?), valuation adjustments, loan loss provisioning matrix prudential filters) Recognition of fair value gains and losses? Prudential reporting COREP and FINREP 18

19 Phasing in Negotiations CRDIV - timeline 2010, early 2011 Public consultations + impact assessment (Basel and EU) Summer CRDIV COM adopts legislative proposal (Directive & Regulation), accompanied by an impact assessment January 2013 Directive and Regulation enter into force Not to scale January 2019 Full implementation of Basel III 19

20 Legislative process Adoption before January 2013 Council ECOFIN 2 May (general approach) European Parliament (2.195 amendments (!) ECON vote 25 April, plenary vote June) 20

21 Thank you. 21