LATEST TRENDS IN BASEL ACCORD

Transcription

1 LATEST TRENDS IN BASEL ACCORD How Regulatory Reforms will affect Bank s Business Model Dr. Amine Awad Group Advisor BLOM Bank S.A.L. Beirut, May 18,

2 Outline I- Evolving Basel III Accord * New Capital Adequacy (Quality & Quantity of Equity) * Capital Buffers (Conservation, Countercyclical, Leverage Ratio) * Special Treatment for S.I.B. (G-SIB v/s D-SIB) * New Liquidity Rules (L.C.R., N.S.F.R.) II- Basel III a Forward Looking Approach in Banks Risk Management (Focus on Pillar II) * ICAAP, an Internal Tool for Capital Planning * Provisions Based on E.C.L. (convergence between Basel & I.F.R.S.9) 2

3 * Focus on Stress Tests as a Protection Tool against Risks * New Pillar III Disclosure Requirements * Less Reliance on Internal Models a) Revisions to the S.A. for Credit Risk b) More Restrictions on I.R.B. for Credit Risk c) New S.M.A. (former Standardized Approach) for Operational Risk in preparation for canceling the reliance on A.M.A.) III- Impact of Basel Accord on Banks Business Models 3

4 Introduction Sir John Vickers, the architect of the UK s post-crisis banking reform, declared that BoE is setting low equity capital requirement for the British banking system which lead to some doubts around the resilience of this system. The best way to inspire confidence in banks is to ensure that they have clear capacity, primarily in the form of Equity, to absorb large losses when a crisis hits. Regulators must weigh the benefits of more resilient banks against the higher costs of equity funding, which are likely to entail higher borrowing costs in the real economy. 4

5 I- Evolving Basel III Accord 5

6 New Capital Adequacy (Quantity & Quality of Equity) Just after the big hit of the Global Financial Crisis, in late 2009, as part of its work to strengthen global capital requirements, the BCBS conducted a top-down assessment of the overall level of capital that should be held in banks. The experts were asked to undertake empirical analysis to perform a calibration of the common equity and Tier 1 risk-based ratios and the Tier 1 leverage ratio, as well as the regulatory buffers above the common equity and Tier 1 risk-based ratios. 6

7 New Capital Adequacy (Conceptual Framework) The following high-level concepts were adopted: The regulatory minimum requirement is the amount of capital needed for a bank to be regarded as a viable going concern by creditors and counterparties, while a buffer can be seen as an additional amount of Equity, sufficient for the bank to withstand a significant downturn period and remain above minimum regulatory levels. 7

8 Strengthening global capital framework Transitional arrangements for Capital & Liquidity Forward Looking Stress Tests & E.C.L. Basel III New Macroprudential Regulations Introducing Global Liquidity standards Larger Scope of Application 8

9 New Capital Adequacy (Quantity & Quality) 1. Raising the Quality, Consistency & Transparency of the Capital base: 3 Capital Adequacy Ratios (C.A.R.) Instead of one More emphasize on Common Equity No more Tier III In addition, Basel III introduces more stringent Qualitative rules: - New Risk Management Practices - New rules on Corporate Governance, Boards Structure and Business Ethics - New Rules on Compensation/Remuneration in the financial sector, with more Disclosures - New Rules on Consumer Protection (and financial literacy) - New Rules on Supervisory Improvements: Supervisory Colleges New Basel Core Principles 9

10 New Capital Adequacy (Capital Minima) Total Regulatory Capital 8% Tier 1 Capital 6% Tier 2 capital 8% Common Equity Tier 1 CAR I: 4.5% Additional Tier 1 CAR II: 6% Tier 2 Capital CAR III: 8% 10

11 Capital Buffers & Leverage Ratio Two types of Buffers were added: A. Conservation Buffer An additional 2.5% of Common Equity against the Risk Weighted Assets should be maintained permanently by banks, bringing the Total Common Equity Standard to 7%. This additional amount of capital aims at receiving the first hit of any future losses. When a bank falls into the buffer range, the supervisor may put constraints on the bank s discretionary distribution of dividends, in order to build-up again the fall of the Common Equity level (%). 11

12 B. Countercyclical Buffer Another buffer, between 0% and 2.5% of Common Equity can be imposed by the Supervisors when they judge that credit growth is resulting in a build-up of system wide risk. It aims at ensuring that banking sector capital requirements take into account the macro-economic environment in which banks operate. Its main goal is to protect banks from period of Excess Aggregate Credit Growth. In downtown, this regime should help to reduce the risk that the supply of credit will be constrained by the regulatory capital requirement which could undermine the performance of the Real Economy and result in additional credit losses in the banking sector. N.B.: It is a Macro Prudential, Forward Looking Instrument 12

13 C. Leverage Ratio LEVERAGE RATIO The Leverage Ratio main objective is to prevent damage to the financial system and the economy by containing build-ups of leverage in banks that could ultimately result in destabilizing deleveraging spirals. The Basel III leverage ratio (LR) is designed to restrict the build-up of leverage in the banking sector and to backstop the existing riskweighted capital requirements (RWRs) with a simple, non-riskweighted measure. There is considerable room to raise the LR requirement above its original 3% level, within a range of 4% to 5%. Doing so, should help to constrain banks risk-taking earlier during financial booms. 13

14 LEVERAGE RATIO DESIGN The leverage ratio is the ratio of Tier 1 capital (numerator) over the sum of the following items (denominator): On-balance sheet exposures (i.e. loans) Derivatives exposures at replacement cost (net of cash variation margin, with a set of eligibility criteria) plus an add-on for potential future exposure Exposures from securities financing transactions, with limited recognition of netting of cash receivables and cash payables with the same counterparty under strict criteria Off-balance sheet items (i.e. L/C s, L/G s standby L/C s etc ). 14

15 LEVERAGE RATIO LOGIC Given its broad scope and the fact that it does not try to account for the riskiness of assets, the LR ensures greater robustness of capital requirements against uncertainties and risks that are difficult to model within the risk weighted framework. That said, the LR does not provide information about banks underlying risk profiles. This insensitivity to risk may incentivize banks to take on riskier positions. Therefore, Risk-Weighted Capital Requirements and LR, are complements and not substitutes 15

16 SPECIAL TREATMENT for S.I.B.S s There is renewed scrutiny on the impact that the failure of large financial institutions could have on the financial system as a whole. The interconnected nature of today s systemically important banks (SIB s) has contributed to a system where the potential failure of a single large institution can have wider effects that reverberate throughout the global economy. Over and above the higher Capital Requirements, the BCBS sets standards requiring additional going-concern loss absorbency for SIB s. 16

17 Indicators and their weights S.I.B. s Indicators Category Indicator Indicator weight Size Total exposures 1/5= 20% Interconnectedness Substitutability/financial institution infrastructure Complexity Cross-jurisdictional activity Intra-financial system assets Intra-financial system liabilities Securities outstanding Payment activity Assets under custody Underwritten transactions in debt and equity markets Notional amount of OTC derivatives Trading and AFS securities Level 3 assets Cross-jurisdictional claims Cross-jurisdictional liabilities 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/15=6.6 % 1/10=10 % 1/10=10 % 17

18 S.I.B. s Additional Requirements Based on the score computed by the supervisor, the S.I.B. will be required to have the following additional Capital Requirement. Category Additional Capital Requirement % CET1 +2.5% CET1 +2.0% CET1 +1.5% CET1 +1.0% CET1 18

19 Common Equity Tier1 (CET1) Additional Tier 1 Tier 2 % Minimum Requirement % (2015) Gradually since Dec (until 2015) Total Equity TE T1 CET 1 2% 1.5% 2% 0.5% Add. BDL 1.5% 1% Add. BDL Tier 1 CET % 4.5% Basel III BDL 19

20 Common Equity Tier1 (CET1) Additional Tier 1 Tier 2 Minimum Requirement + Capital Conservation Buffer (2.5%) % % (2019) (2015) Total Equity TE T1 CET1 2% 1.5% 2% 0.5% Add. BDL 1.5% 1% Add. BDL Tier 1 CET % + 2.5% 4.5% + 2.5% Basel III BDL 20

21 Basel III: Capital Requirements % TE (Gradually till 2019) SIB S Buffer (0-3.5%) CCB (0-2.5%) Conservation Buffer (2.5%) Systemically Important Financial institutions Buffer Countercyclical Capital Buffer (Gradually till 2019) SIB S Buffer (0-3.5%) CCB (0-2.5%) Conservation Buffer (2.5%) T1 % T1 CET1 4.5 Tier 2 Tier 1 CET1 5.5 CETI Basel III BDL 21

22 NEW LIQUIDITY RULES ( L.C.R. & N.S.F.R. ) When times are good it is hard to force banks to respect liquidity risk. Liquidity has a cost and banks have short memories and significant competitive pressures. Borrowing capacity is not a substitute for balance sheet liquidity in times of crisis but is the lowest cost source in good times. 22

23 Common Themes of Troubled Banks in 2008 Reliance on short term funding Low levels of liquid assets High Leverage Interconnectedness with other banks Reliance on off balance sheet funding Overestimated the liquidity value of less liquid assets 23

24 Rationale for Liquidity Requirements Banks perform an important role in converting demand deposits into long term loans Maturity Transformation. This means they are inherently illiquid. In conjunction with high leverage, this makes them vulnerable to creditors confidence. Banks are integral to the economy, so there are large public costs associated with bank problems, both in terms of taxpayer support and reduced economic growth (credit contraction). Liquidity regulation seeks to address insufficient incentives for banks to self insured against liquidity stresses. 24

25 Why Authorities start regulating Liquidity & Transfer Pricing Cash markets are fragile and can disappear quickly Too much maturity transformation is unhealthy for the financial system Interconnected financial sectors can collapse like a house of cards There is good banking business (loans, deposits, service to real economy) There is bad banking business (proprietary trading, derivatives, casino) 25

26 Basel Liquidity Framework Principles for Sound Liquidity Risk Management and Supervision Qualitative document arranged around seventeen principles for managing and supervising liquidity risk (BCBS document Sept & BCCL Circular 275 Jan. 2013) Liquidity Coverage Ratio (LCR) 30 day stress test that establishes a minimum amount of liquid assets to be held by banks Net Stable Funding Ratio (NSFR) Structural metric that measures amount of longer term, stable source of funding relative to asset mix and off balance sheet exposures. Intraday Framework for Liquidity Risk Measurement, Standards & Monitoring 26

27 Key Takeaways from the 17 Principles Hold liquid assets Establish FTP (That helps following maturity mismatching & liquidity cost) Reduce Leverage Collateral and Intraday Management (including break clause etc ) Public Disclosure 27

28 LCR - Calculation Stock of high quality liquid assets (HQLA) 100% Net cash outflows over a 30 day time period Note: the LCR will be phased in between 2015 and January January January January January 2019 Minimum LCR 60% 70% 80% 90% 100% 28

29 Net Stable Funding Ratio (NSFR) The Structural Metric Not yet Finalized Also referred to as the Nobody Seems to Focus on Ratio (NSFR) 29

30 NSFR - Definition Available amount of stable funding (ie, sources) > 100% Required amount of stable funding (ie, uses) Assets with maturity > 1 year should be funded by sources that are expected to be available for a period > 1 year 30

31 MONITORING TOOLS FOR INTRADAY LIQUIDITY MANAGEMENT Managing Intraday Liquidity Risk is a corner-stone of a bank s overall Liquidity Risk Management Framework. The Intraday Liquidity Positions help the bank to meet payment and settlement obligations on a Timely and Inexpensive way under Normal and Stressed conditions, (contributing to the smooth functioning of the Global Payment System). 31

32 II - BASEL III, A FORWARD LOOKING APPROACH IN BANKS RISK MANAGEMENT 32

33 What is an ICAAP? The ICAAP is a system of Sound, Effective and Complete Strategies and Processes that allow the bank to assess and maintain, on an ongoing basis, the Amounts, Types and Repartition of Internal Capital that he considers adequate to cover the nature and level of risks to which he is or might be exposed. P.S.: The Internal Capital "complements the Regulatory Capital set by the regulators. 33

34 ICAAP / SREP Background o The Internal Capital Adequacy Assessment Process (ICAAP). Banks must ensure they identify and assess all risks they are or maybe exposed to (i.e., not only Pillar I risks), maintain sufficient capital to face these risks and develop and better use risk management techniques in monitoring and managing these risks. o The Supervisory Review and Evaluation Process (SREP). Supervisors are responsible for evaluating how banks are assessing their capital adequacy needs relative to their risks. Supervisors should take the necessary actions, if they are not satisfied with the results of this process. o Pillar II should foster a Dialogue. Between Banks and Supervisors so that when deficiencies are identified, prompt and decisive actions can be taken to reduce risk and/or restore capital 34

35 ICAAP Principles The three principles of a good ICAAP are: o o Completeness any existing or potential risk should be identified and taken into account when assessing the Adequacy of the Internal Capital Specificity every bank. the ICAAP exercise is specific for o Proportionality the ICAAP should be proportional to the bank s complexity and size 35

36 ICAAP Overview Pillar I Risks Other Risks Processes Fairness Supervisory Action Credit Risk Settlement Risk Liquidity risk(*) Business Risk Model Risk Risk Management Stress Testing ICAAP Peer Group Comparison ICAAP Improvement Capital Increase Market Risk Operational Risk Concentration risk Interest Rate Risk Compliance Risk Reputation Risk Capital Planning Governance Dialogue SREP Proportionality Principle Risk Exposure reduction Individual Capital Guidance * The Liquidity has been addressed through 2 new ratios (LCR and NSFR) under Basel III. Provisioning 36

37 Examples of Risks not Covered by Pillar I o Contagion & Related Party Risk o Concentration Risk (Geography, Industry, types of Product, degree of Granularity of the Regulatory Retail Portfolio ) o Residual Risk o Strategic Risk (Environment, Regulatory ) o Business Risk o Reputational Risk o Stress Situation o Compliance Risk 37

38 Quantitative or Qualitative Pillar 2 inherent risk exposures are assessed quantitatively to the extent possible but, where risks are not quantifiable, supervisory judgment is necessary. Supervisory judgment is also necessary with respect to qualitative assessments of the Bank s ability to contain actual risk exposures within prudent and planned levels, through effective Risk Governance, Oversight, Management and Control Practices. Since these exposures are generally not capable of quantification, a degree of judgment about Capital Adequacy is required, by the Bank and the Supervisors. 38

39 EXPECTED CREDIT LOSSES The B.C.B.S. issued in Dec a paper setting out supervisiory guidance on sound credit risk practices associated with the implementation and ongoing application of Expected Credit Loss (ECL) accounting framework. P.S.: The term Allowances includes allowances on loans, and allowances or provisions on loan commitments and financial guarantee contracts. 39

40 E.C.L. Model The ECL Accounting Model should interact with a bank s overall credit risk practices and regulatory framework, but does not endeavour to set out regulatory capital requirements on expected loss provisioning under the Basel Capital Framework. 40

41 E.C.L. Historically, the incurred-loss model served as the basis for accounting recognition and mesurement of credit losses and was implemented with significant differences from a jurisdiction to another, and among banks, due to the development of national and/or entity-specific practices. In revising its 2006 guidance on the verge of a global transition to ECL Accounting Framework, the BCBS emphasis the importance of High Quality, Robust and Consistent implementation of ECL Acounting Framework in all juridictions. 41

42 I.A.S.B. Adopts E.C.L. The move to ECL accounting framework by the IASB was an important step forward in resolving the weakness identified during the financial crisis, that credit loss recognition was too little and too late. The development of ECL framework is consistent with the April 2009 call by the G20 leaders for IASB to «Strenghten accounting recognition of loan loss provisions by incorporating a wider range of credit information». 42

43 SCOPE OF E.C.L. The focus of ECL is on lending exposures; i.e.: Loans, Loan Commitments and Financial Guarantees to which an ECL framework applies. The BCBS expects that a bank will estimate ECL for all its lending exposures. While the implementation of ECL framework may require an investment in ressources and system development/upgrades, IASB have given banks a sufficient time to transition to the updated accounting requirements (Jan 1st 2018). 43

44 E.C.L. METHODOLOGY Consideration of forward-looking information, including macroeconomic factors, is a distinctive feature of ECL framework and is critical to the timely recognition of ECL. Banks will have to use sound judgement, consistent with generally accepted methods for economic analysis and forecasting. As Credit Risk Management is a core competence of banks, the BCBS expects that a bank s consideration of forward-looking information, will be supported by a sufficient set of data. 44

45 SUPERVISORY GUIDANCE TO BANKS APPLYING IFRS In accordance with the IASB impairment standard for financial instruments, «if, at the reporting date, the credit risk of a financial instruments has not increased significantly since initial recognition, the bank shall mesure the loss allowance for this instrument at an amount equal to 12 months ECL». The BCBS expects that the bank will always mesure ECL for all exposures, and that a zero allowance will be very rare because ECL estimates are a probability-weighted amount that should always reflect the possibility that a credit loss will occur. 45

46 12 MONTHS E.C.L. In formulating the estimate of the amount equal to 12 months ECL, it is important to consider reasonable and supportable information that affects credit risk, especially forward-looking information, including macroeconomics factors. Every bank should exercise its experienced credit judgement to consider both qualitative and quantitative information that may affect the bank s assessment of credit risk. 46

47 ASSESSMENT OF SIGNIFICANT INCREASE IN CREDIT RISK IFRS9 states: «the objective of the impairment requirements is to recognise a Lifetime Expected Loss for all Assets for which there have been significant increase in credit risk since initial recognition (whether on an individual or on collective basis), taking into consideration all information». 47

48 ASSESSMENT OF SIGNIFICANT INCREASE IN CREDIT RISK The BCBS understands that the rationale for this approach is that the creditworthiness of the counterparty, and thus the ECL anticipated upon inital recognition, is taken into account in the pricing of credit at that time. It follows, then, that a post-origination increase in credit risk may not be fully compensated by the interest rate, and consequently the bank should carefully consider whether there has been significant increase in credit risk; if so the lending exposure would be subject to LEL measurement 48

49 LIFETIME EXPECTED LOSS The BCBS endorses the IASB view that Lifetime Expected Credit Losses must be recognised before a financial instrument become «Past Due» and that credit risk increases when the borrower lags in reimbursing (Rescheduling, Restructuring ). Therefore the bank should take into account the fact that the determinants of credit losses begin to deteriorate very often long time before any evidence of delinquency appears in the lending exposure. 49

50 IFRS 9 THREE STAGES *IFRS 9 THREE STAGES 50

51 IFRS9 THREE STAGES *IFRS 9 THREE STAGES 51

52 Definition of Stress Test S.T. s are used to study the impact of one (or many) shocks on the Assets, Liabilities, Equity and Financial Results of a given bank. There are many categories of S.T.: - Simple Tests (of sensitivity) - Complex Scenarios (based on historical data) 52

53 Stress Test Purpose What ST can and should do? Supplements other Risk Management tools Provides forward - looking assessment of risks Facilitates development of Mitigation / Contingency Plans (Micro and Macro Prudential Policy) 53

54 Purpose of Stress Test In theory: S.T. serves to Identify the vulnerabilities in a Bank, which cannot be identified while running the normal businesses. In practice: S.T. serves to Evaluate already identified vulnerabilities and their impact on the future situation of the Bank. There are many types of S.T. Specific: - S.T. based on one type of Risk in one Bank - S.T. based on one type of Risk in all Banks Systemic: - S.T. based on many types of Risks in all Banks - Conducted by the Regulators - Same test for all Banks 54

55 New Approach to Stress Test (In Banks) Major Changes: Crisis Scenarios on «Liquidity & Market Risks», based on recent events. Focus on «Liquidity Risk» more than on «Interest Rate Risk» (i.e. not only cost of liquidity) Other improvements: * Constant revisions of assumptions * More recourse on «Reverse S.T.» * Identification of «Correlated Risks» * Taking into account the «second Round Effects» and the «Crisis Duration» 55

56 New Approach to Stress Test (By Regulators) - Based on the capacity of banks to: * Resist to the Recession * Resist to a Financial Crisis * Continue their Intermediation Role - New Assumptions: * On the changes of the Macro Economic Indicators: G.D.P., Unemployment, R.E. prices, Inflation, etc * On the Duration of the Recession * On the capacity of banks to generate future profits that can absorb present losses and add new capital * On the Compensation Policy * On the Distribution of Dividends Policy * On the Quality (and not only volume) of Equity 56

57 Stress Test and Basel III The international financial crisis led to major amendments in the Basel framework: - Pillar 1: * The Recession scenario during 2 consecutive quarters with a growth rate of 0%, is modified. * Special Treatment (more severe) for SIFI s. - Pillar 2: * Market shocks are considered plausible * More focus on Concentration Risk (example: Real Estate) * New approach to «Global Credit Risk»: Credit + Counterparty + Collaterals * More focus on the diversification of Liquidity Funding Sources (L.C.R. / N.S.F.R.) - Pillar 3: * More coherence between Accounting and Prudential Standards 57

58 REVISIONS TO THE S.A. FOR CREDIT RISK The BCBS seeks to improve the S.A. for Credit Risk in a number of ways; these include: * Reducing (without excluding) reliance on External Credit Ratings (Rating Agencies) * Increasing Risk Sensitivity * Reducing National discretion * Strengthening the link between S.A. and the I.R.B. Approach * Enhancing Comparability of Capital Requirements across banks 58

59 KEY ASPECTS OF THE REVISIONS The major amendments are related to the following: * Banks Exposures, would no longer be risk-weighted by reference to the external rating of the bank or its country of incorporation, but they would be based on a look-up table where risk weights range from 30% to 300% on the basis of 2 risk drivers: - Capital Adequacy Ratio of the bank - Asset Quality ratio of the bank 59

60 KEY ASPECTS OF THE REVISIONS Corporate Exposures, would no longer be riskweighted by reference to the external credit rating of the Corporate, but they would be based on a look-up table where risk weights range from 60% to 300% on the basis of 2 risk drivers REVENUE & LEVERAGE. Further risk sensitivity would be increased by introducing a specific treatment for Specialized Lending. 60

61 KEY ASPECTS OF THE REVISIONS * Retail Category, would be enhanced by tightening the criteria to qualify for the 75% preferential risk weight, and by introducing a fallback subcategory for exposures that do not meet the criteria. * Exposures Secured By Residential R.E.,would no longer receive 35% risk weight. Instead, risk weights would be determined according to a look-up table where risk weights range from 25% to 100% on the basis of 2 drives: 1- Loan to Value 2- Debt Service Coverage Ratios. 61

62 KEY ASPECTS OF THE REVISIONS * Exposures Securecd By Commercial R.E., are subject to further consideration with 2 options: 1. Either treating them as unsecured exposure to the counterparty (with a possibility of national discretion under certain conditions) 2. Or determining the risk weight according to a look-up table where R.W. range from 75% to 120% on the basis of the Loan-to-value ratio. 62

63 CREDIT RISK MITIGATION The proposed amendments would reduce the number of approaches, recalibrating Supervisory Haircuts, and updating Corporate Guarantor Eligibility Criteria. 63

64 EXPOSURES TO SOVEREIGN Credit Assessme nt AAA To AA- A+ To A- BBB+ To BBB- BB+ To B- Below B- UNRATE D RISK WEIGHT 0% 20% 50% 100% 150% 100% 64

65 EXPOSURES TO BANKS CET1 Ratio >12% 12%> CET1> 9.5% 9.5%> CET1> 7% 7%> CET1> 5.5% 5.5%> CET1> 4.5% CET1 < 4.5% Net NPA Ratio< 1% 1%< Net NPA Ratio< 3% 3%< Net NPA Ratio 30% 40% 60% 80% 100% 300% 45% 60% 80% 100% 120% 300% 60% 80% 100% 120% 140% 300% 65

66 CORPORATE EXPOSURES Leverage 1X 3X Leverage 3X 5X Leverage >5X Negative Equity REVENUE < EUR 5 Mios Eur 5 Mios< REVENUE< EUR 50 Mios EUR 50 Mios< REVENUE< EUR 1 Bios REVENUE > EUR 1 Bio 100% 90% 80% 60% 110% 100% 90% 70% 130% 120% 110% 90% 300% 300% 300% 300% 66

67 RESIDENTIAL R.E. COLLATERAL LTV < 40% 40%< LTV <60% 60%< LTV <80% 80%< LTV <90% 90%< LTV <100% LTV >100% Loans to individuals With Debt Service Coverage < 35% 25% 30% 40% 50% 60% 80% Other Loans 30% 40% 50% 70% 80% 100% 67

68 COMMERCIAL R. E. LTV < 60% 60%< LTV <75% LTV >75% Exposures secured by commercial R.E. 75% 100% 120% 68

69 NEW STANDARDISED MEASUREMENT APPROACH SMA FOR OP. RISK In March 2016, the BCBS issued a paper entitled «Standardised Measurement Approach for Operational Risk in Banks». This consultative document aims at replacing the AMA (that was part of the Basel II) and which allows for the estimation of regulatory capital to cover op. risk, based on internal modelling practices. 69

70 AMA WEAKNESSES The AMA s principles-based framework was established with a large degree of flexibility. The inherent complexity of AMA and the lack of comparability arising from different internal modelling practices have exacerbated variability in Risk-Weighted Asset calculations; This have eroded confidence in Risk-Weighted Capital Ratios. The BCBS therefore determined that the withdrawal of the AMA for Op. Risk from the Basel framework is warranted. 70

71 NEW S.M.A. APPROACH FOR OP. RISK The Standardised Measurement Approach (SMA) combines the Business Indicator (B.I.), a simple financial statement proxy of op. risk exposure, with bank-specific operational loss data. The B.I. is made up of almost the same P&L items that are found in the composition of the Gross Income (of the Standardised Approach); The main differences relates to how the items are combined. 71

72 NEW PILLAR III DISCLOSURE REQUIREMENTS A few weeks ago, the BCBS issued a consultative document aiming at consolidating and enhancing the Pillar III (Disclosure) requirements, to become more transparent and easily accessible to all banks stakeholders. This new document in combination with the IFRS 7 requirements will improve transparency in the banking industry leading to less Moral Hazards and Misuse of Taxpayers Money in crisis time. 72

73 III- IMPACT OF BASEL ACCORD ON BANKS BUSINESS MODELS 73

74 - Capital is becoming rare and expensive, * Banks must review their dividend policy (with lower Pay-Out Ratio) - Liquidity is becoming rare, * Banks must manage their Intraday/S.T./L.T. Liquidity in a conservative way - More pressures on Profitability, by having more liquid assets and implementing E.C.L. approach * Banks must manage better their cost of funds by using comprehensive F.T.P. models - New Types of Risks (mainly Op. Risks), due to Compliance and Cyber Crimes, * Banks must invest in improving their Expertise (H.R.) and Technology, to avoid Fines and Bad Reputation. 74

75 There are several negative side effects of the compliance (AML CFT) efforts, including fighting Tax Evasion, on Financial Inclusion and on Trade and Growth, in particular in the Emerging Markets. FATF continues to emphasize the proper implementation of these new measures, without pushing Banks for De- Risking by withdrawing from specific sectors or countries. Banks should continue to be vigilant and to carry out Due Diligence and Transaction Monitoring on specific entities. Information sharing and continuous communication with correspondent banks in Developed Countries are a Must. 75