Financial Institutions Supervision Department Comments on the draft Financial Institutions (Capital Adequacy) Regulations, 2018 September 2018

Similar documents
Comments Received on the Basel II and III Consultation Papers. Areas of National Discretion

Consultation Paper on the Areas of National Discretion

BOM/BSD 18/March 2008 BANK OF MAURITIUS. Guideline on. Standardised Approach to Credit Risk

BOM/BSD 18/March 2008 BANK OF MAURITIUS. Guideline on. Standardised Approach to Credit Risk

Supplementary Information Appendix BR-4 Guidelines for Completion of PIR Bahraini Conventional Banks

Fédération Bancaire Française Responses to CP 18

BCBS Discussion Paper: Regulatory treatment of accounting provisions

Basel II Pillar III disclosures

Basel III Pillar III disclosures

Basel II Pillar III disclosures

Interim financial statements (unaudited)

Proposals for the Implementation of Basel II/ III for Institutions licensed under the Financial Institutions Act, 2008 PHASE 1

Instructions. for the. Completion of the Capital Adequacy Return. for Institutions licensed under the. Financial Institutions Act, 2008

African Bank Holdings Limited and African Bank Limited

Financial Institutions (Capital Adequacy) Regulations 2018

BASEL III PILLAR 3 DISCLOSURES (unaudited) March 31, 2018

Cambridge & Counties Bank (C&CB) January 2016

Regulatory Disclosures March 31, 2018

Basel III Pillar III disclosure

Basel II and Financial Stability: Singapore s Experience

Disclosure in terms of Regulation 43 relating to banks, issued under section 90 of the Banks Act, No. 94 of 1990, as amended.

ZAG BANK BASEL PILLAR 3 AND OTHER REGULATORY DISCLOSURES. December 31, 2017

Consultative Document - Guidance on accounting for expected credit losses

Comments on the Basel Committee on Banking Supervision s Consultative Document Review of the Pillar 3 Disclosure Requirements

ZAG BANK BASEL PILLAR 3 DISCLOSURES. December 31, 2015

BASEL III PILLAR 3 DISCLOSURES. June 30, 2015

Basel Committee on Banking Supervision. Quantitative Impact Study 3 Technical Guidance

Bank of America, N.A Bangkok Branch

Basel II Pillar 3 Disclosures 31 December 2011

السالم عليكم ورحمة هللا وبركاته

BASEL III PILLAR 3 DISCLOSURES. December 31, 2016

Community Trust Company Basel III Pillar 3 Disclosures December 31, 2017

[Our comments on the questions of the Consultative Document]

MODULE 1. Guidance to completing the Standardised Approach to Credit Risk module of BSL/2

BASEL II Quantitative Disclosures

BASEL III PILLAR 3 DISCLOSURES. September 30, 2017

Community Trust Company Basel III Pillar 3 Disclosures March 31, 2017

BASEL II PILLAR III DISCLOSURE

African Bank Holdings Limited and African Bank Limited. Annual Public Pillar III Disclosures

Public hearing EBA draft guidelines on Credit institutions credit risk management practices and accounting for expected credit losses

BASEL III PILLAR 3 DISCLOSURES. December 31, 2013

China Construction Bank Corporation, Johannesburg Branch

BERMUDA MONETARY AUTHORITY BASEL III FOR BERMUDA BANKS NOVEMBER 2017 RULE UPDATE

IFRS 9 Financial Instruments and Disclosures

BASEL III Quantitative Disclosures

BASEL III PILLAR 3 Quantitative Disclosures. ( AS AT 30 June 2015 )

Joint Response to EBA consultation Paper (CP 51) Draft ITS on Supervisory Reporting Requirements for large Exposures

BASEL III PILLAR 3 Quantitative Disclosures (AS AT 31 DECEMBER 2014)

BASEL III PILLAR 3 DISCLOSURES. December 31, 2015

Regulatory Disclosures. September 30, 2016

January 19, Basel III Capital Standards Requests for Clarification

Basel III Pillar III disclosures

BASEL III PILLAR 3 DISCLOSURES (unaudited) December 31, 2017

Basel III Risk and Pillar III disclosures 30 June 2018

Community Trust Company Basel III Pillar 3 Disclosures June 30, 2018

Basel III Pillar 3 disclosures 2014

BASEL III PILLAR 3 DISCLOSURES. December 31, 2012

BASEL COMMITTEE ON BANKING SUPERVISION. To Participants in Quantitative Impact Study 2.5

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER

GLOBAL BANKING CORPORATION BSC (C) RISK AND CAPITAL MANAGEMENT DISCLOSURES (BASEL II - PILLAR III)

African Bank Holdings Limited and African Bank Limited

BERMUDA MONETARY AUTHORITY GUIDELINES ON STRESS TESTING FOR THE BERMUDA BANKING SECTOR

INDIAN BANKS ASSOCIATION. Comments on BCBS Consultative document on Revisions to the Standardised Approach for Credit Risk

Disclosure under Basel II Pillar III

Quantitative Impact Study 3 Areas of National Discretion. For use by [NAME OF NATIONALITY] banks in completing the QIS 3 Questionnaire

TABLE 2: CAPITAL STRUCTURE

Regulatory Guidance Conversion to International Financial Reporting Standards (IFRS)

Template for comments

Disclosure Report. Investec Limited Basel Pillar III semi-annual disclosure report

January 13, Japanese Bankers Association

Note 1: Basis of Presentation

TABLE 2: CAPITAL STRUCTURE

BOT Notification No (29 September 2017)-check

Basel III Standardized Approach Disclosures. For the quarter ended June 30, 2018

BASEL II Quantitative Disclosures

Bank of America, N.A Bangkok Branch Basel II Pillar III Disclosures

Consultation Paper. Draft Guidelines EBA/CP/2018/03 17/04/2018

Feedback statement. Responses to the public consultation on a draft Guideline and Recommendation of the European Central Bank

Guideline Impact Analysis Statement

Consultation on EBA-CP Supervisory reporting requirements for liquidity coverage and stable funding.

Introduction. We hope you find these comments useful and remain at your disposal for any questions or additional information you might have.

BASEL III Quantitative Disclosures

Implementing IFRS 9 Impairment Key Challenges and Observable Trends in Europe

Basel II Pillar 3 disclosures

APRA BASEL III PILLAR 3 DISCLOSURES

RESULTS OF THE QUANTITATIVE IMPACT STUDY OF NEW STANDARDS ON CAPITAL, RISK-WEIGHTED ASSETS AND LEVERAGE RATIO

BASEL II Quantitative Disclosures

FINAL REPORT ON GUIDELINES ON UNIFORM DISCLOSURE OF IFRS 9 TRANSITIONAL ARRANGEMENTS EBA/GL/2018/01 12/01/2018. Final report

Standard Chartered Bank (Thai) PCL Pillar 3 Disclosures 30 June 2018

EMIRATES NBD BANK PJSC BASEL II PILLAR III DISCLOSURES FOR THE YEAR ENDED 31 DECEMBER 2017

Nottingham Building Society. Pillar 3 Disclosures

In various tables, use of - indicates not meaningful or not applicable.

RISK REPORT 2015 CVR NO

APRA BASEL III PILLAR 3 DISCLOSURES

European Association of Co-operative Banks Groupement Européen des Banques Coopératives Europäische Vereinigung der Genossenschaftsbanken

Basel II What does it mean for Canadian banks and investors?

Comments on the Basel Committee on Banking Supervision s Consultative Document Revisions to the Standardised Approach for credit risk

Transition to IFRS 9

ABBREVIATIONS... 4 GLOSSARY... 5 EXECUTIVE SUMMARY... 7 GUIDELINES FOR PROVISIONING... 8 RATIONALE AND OBJECTIVES... 8 STATUTORY AUTHORITY...

EBA REPORT ON RESULTS FROM THE SECOND EBA IMPACT ASSESSMENT OF IFRS July 2017

Transcription:

Risk Weighting of On- Balance Sheet Exposures Section 3.2, paragraphs 25, 31, 33, 36 and 37 indicate that a risk weight of 150% be applied to exposure with a Credit rating below B- while 'Unrated' exposure carries a more favorable risk weight of 100%. The application of a 150% risk weight will penalize the bank to an amount in excess of the exposure, while a 100% risk weight for unrated exposure further contradicts the proper application of credit risk to an exposure. We therefore recommend that this policy be reviewed. The risk weights are preset by the Basel Committee for Banking Supervision (BCBS) under the Basel II Standardized Approach for Credit Risk. National supervisors may introduce measures which are more conservative to those introduced by the BCBS. However, the BCBS establishes minimum standards. Minimum Equity Ratio Common Section 6.3 provides the calculation for the Minimum Common Equity Tier 1 Ratio but does not define "Common Equity". In the absence of a definition for "Common Equity" our independent research indicates that this represents "Share Capital + Retained Earnings". To ensure consistency in interpretation across institutions, we recommend that the definition of "Common Equity" be included within the policy document. Common Equity is defined at regulation 10 (2) of the draft Financial Institutions (Capital Adequacy) Regulations, 2018. 1 P age

Claims on Corporates Section 3.2, paragraph 44 states that a risk weight of 100% can be applied to exposure to corporate customers without regard to external ratings, but this must be done consistently, whether ratings are available or not. This measure does not allow for the relief of a reduced risk weight for customers that have a credit rating. We recommend that an interim period be given to allow corporate customers to attain a Credit Rating. In the meantime, banks should be allowed to use the respective weights for those customers that are rated and the 100% weighting for those that are unrated. When a customer attains a rating, the risk weight can then be updated accordingly. There are two options available. The default option is the application of risk weights based on credit ratings as per the risk weight table on page 18. In accordance with this table, unrated corporate are to be risk weighted at 100%. The blanket application of the 100% risk weight for all corporate claims, subject to the approval of the Central Bank, is optional. Where this is adopted however, institutions must apply the 100% risk weight uniformly whether or not ratings are available. Claims secured by residential property Section 3.2 paragraph 50(c) indicates that one of the criteria to secure a 35% risk weight for claims secured by residential property is the maintenance of a loan to value (LTV) ratio of 80% on an individual basis. This requirement seems onerous as it does not give allowance for the fact that the LTV ratio will change over the life of loan as the loan balance will decline while the property value will tend to increase. As a result, in the first five years of the life of a loan, the LTV will exceed 80%, but then gradually decline as the loan ages. In keeping with the directions under the Basel II framework the Central Bank incorporated the LTV recommendation as part of its strict prudential criteria for the application of the preferential risk weight. The requirement seeks to ensure that the preferential risk weight applies to exposures for which the licensee holds a substantial margin of additional security over the amount of the loan based on strict valuation rules. This is an incentive for financial institutions to improve their risk management processes if seeking to obtain capital benefits from application of a lower capital charge. 2 P age

Schedule 2 paragraph 12 (3)-Where a residential mortgage loan secured by the residential property satisfies paragraph 12(1)(a) and 12(1)(b) but the financial organization holds no loan to value information for its individual exposures, a 50 per cent risk weight shall be applied to the entire portfolio of exposures. Please clarify whether the 50 per cent risk weight applies to the entire portfolio when any one or more residential mortgage does not have loan to value information (but satisfies 12(1) (a) and 12(1) (b). To qualify for the 35% risk weight the company must have LTV s for each individual residential mortgage exposure. Where the company does not have LTVs for all residential mortgage exposure, the institution will be required to apply the 50% to the entire portfolio (provided that these exposures are not past due more than 90 days and the property is either occupied by the borrower or rented). The 50% is applied notwithstanding that some of the exposures in the portfolio may have satisfied the criteria for the 35% risk weight. Past due residential real estate is to be risk weighted at 100%, whether or not the LTV is less than 80%. Schedule 2 paragraph. 12 (6)-For the purposes of this paragraph, a financial organization in determining the loan to value ratio shall - (a) have in place a sound valuation methodology to apprise and monitor the valuation of the property; (b) monitor the value of the property on a request basis and at a minimum annually for residential real estate; This is not commercially practical or feasible on an individual property basis. It is expected that licensees monitor the LTVs associated with residential property. This, however, does not generally require external valuations except where the asset is impaired. Licensees are expected, at a minimum, to implement an appropriate internal system of review which may, for example, include reviews of property prices by property type and geographic location. 3 P age

Collateral-The Simple Approach We note that the requirement for valuation of residential real estate requires clarification and lacks sufficient granularity. The policy document indicates valuations be done every 3 years whilst the draft regulations indicates valuations be done annually. Section 3.4, paragraph 78, states that the eligible collateral should be revalued every six months. This seems onerous and impractical, especially in the local environment. Our recommendation is a period of every three years which seems more practical. The Central Bank will amend the draft regulations consistent with the policy document to require valuations of residential property at a minimum every three (3) years. Financial collateral is subject to the vagaries of market conditions and regular revaluation is therefore important. Further, the revaluation of collateral every six (6) months is a requirement under the Basel II framework. It should be noted that only financial collateral, as directed on page 30-31 of the PPD, is eligible for the purposes of capital relief. Short Term Claims on Banks Schedule 2 paragraph 8 (2)-Claims with a maturity of three months or less: A claim will be treated as a short-term claim where it has an original maturity of three (3) months or less Does maturity here refer to original maturity or time left to maturity (TTM)? How should an asset with an original maturity of more than three months but a TTM less than or equal to three months be assessed; Long-Term or Short Term? Which credit assessment is applicable? An asset may be classified as short term only where its original maturity is less than three months. Any other asset, including assets with a TTM of less than three (3) months should be classified as Long Term and risk weighted in accordance with the directions under Claims with a maturity of more than three months. Exposures which are expected to be rolled over, or are restructured in any way, resulting in an effective maturity of longer than three (3) months, are not to be risk weighted as a short term claim. 4 P age

Schedule 2 paragraph 8 (4)-Short term claims on banks which are rolled over or are restructured in any way, resulting in an effective maturity of longer than 3 months, shall not be risk weighted as a short term claim. Please clarify the basis on which a claim with an original term to maturity of less than 3 months will be determined to not be a short term claim if rolled over for a subsequent period 3 months and under. The draft regulations will be amended to state: Short term claims on banks which are 1) expected to be rolled over or 2) restructured in any way, resulting in an effective maturity of longer than 3 months shall not to be risk weighted as a short term claim. Claims on PSEs Please clarify whether the definition of public sector entity includes state-owned or majority-controlled banks e.g. First Citizens The definition of Public Sector Entity includes state owned/majority owned other financial institutions. Claims on Multilateral Development Banks multilateral development bank means means a supranational institution chartered by two or more countries for the purpose of providing financial support and professional advice for economic and social development activities in developing countries; The Regulations will be amended. Remove the duplication of the word means 5 P age

Claims in the Regulatory Retail Portfolio The criteria for a claim to be considered retail should be a function of its characteristics and not its size per se. In that regard, the criteria is well captured in 2 (a) and 2 (b) (i) (iii). An aggregate exposure limit of 0.2% of the overall regulatory retail portfolio as cited in 2(c) appears restrictive, especially if related counterparts are considered. For example, a person can have a high value car loan, high value residential mortgage, a high value credit card, etc. If their spouse or other family member also has a high value car loan and a high value credit card, the aggregate exposure can easily accumulate. In any event, 2(c) appears to be inconsistent with 2(d). It should be either one or the other, not both. The criteria for inclusion in the Regulatory Retail portfolio are part of a Standardized Methodology which the Central Bank has adopted. The preferential risk weight of 75% is applied in view of the lower risk profile of the borrower that satisfies all of the criteria set out. Criterion (d) is the absolute threshold for exposures to be included in this portfolio notwithstanding that for the purposes of establishing granularity the 0.2% threshold is considered. Operational Risk Schedule 3 paragraph 4 (6)- Financial organizations shall have techniques for creating incentives to relevant employees to improve the management of operational risk. This regulation will be deleted. Such incentives are particularly challenging to create and appear onerous to put into legislation. 6 P age

Schedule 3 paragraph 4 (11)-The operational risk management processes and assessment system of the financial organization shall be subject to annual validation and independent review by, at a minimum, the internal audit function of the financial organization and the review shall include both the activities of the business units and of the operational risk management function. The Regulations will be amended to include triennial review of the operational risk management function. It is unlikely that an annual review by the internal audit function of the operational risk management function would be worthwhile. A triennial review may be more practical and value-added. Market Risk Schedule 4 paragraph 1- ought call option means a long position; The Regulations will be amended. Misspelling. Replace with bought call option Schedule 4 paragraph 10-The specific risk charge shall be calculated by multiplying the absolute values of the debt position by their respective risk weight as follows (i.e. new specific interest rate risk charge table) The change to the calculation to capital charges for specific interest rate risk is intended to ensure consistency in the treatment of exposures under the credit and market risk frameworks. The new risk weights add unnecessary complexity to the market risk capital calculation process in a domestic capital market that is relatively unsophisticated. 7 P age

Schedule 4 paragraph 14- The capital requirements for general risk shall be the sum of (a) the net short or long position of the relevant securities; (b) a small proportion of the matched positions in each time-band in paragraph 15; (c) a larger proportion of the matched positions across different time-bands in paragraph 15; and (d) a net charge for positions in options. The words small and larger will be removed as these are not fixed calculations. There is no specific quantum that can be used to define them. small proportion and larger proportion needs to be defined. Schedule 4 paragraph 15- The following time bands and assumed charges in yield shall be utilized in the calculation of the capital charge: Zone 1 : 1 month or less 1% 1 to 3 months 1% 3 to 6 months 1% 6 to 12 months 1% The sensitivity levels are part of a Standardized Methodology which the Central Bank has adopted. The percentages are therefore preset by the Basel Committee for Banking Supervision. The sensitivity level of 100 basis points (i.e. 1%) appears onerous for such short maturities. 8 P age

IFRS 9 The adoption of IFRS 9 (Financial Instruments) by financial institutions will significantly impact financial reporting and capital levels across the local and international financial sector. We recommend that the policy proposal document be updated to include specific guidance on the application of this standard on the Basel II/III reporting process. The Central Bank will release guidelines on the treatment of IFRS 9 provisions for regulatory capital purposes. How does/will the existing risk weighting framework (currently tied to specific provision as a % of past due loans, be it secured or unsecured) align to IFRS9 given the latter is moving away from general and specific provisioning structure (IAS39) to a staging approach centered around SICR and changes in Expected Credit Losses (12- Month and Lifetime ECLs)? Additionally, clarification on the treatment of IFRS 9 is required, as an initial measure we recommend CBTT remove the 1.25% limit on general provisions. The limit on general provisions of 1.25% of credit risk weighted assets is a requirement under Basel I, Basel II and Basel III. Pillar 3 Financial organizations shall disclose such information pertaining to their capital, risk exposures, risk assessment processes, credit risk mitigation and capital adequacy in such time, form, manner and frequency as the Central Bank may specify in a guideline. The Pillar 3 requirement refers to public disclosure by financial institutions. Notably, this requirement will not be immediately effective when the draft regulations are assented to. The Act should specify whether the disclosure is to the public, Central Bank or both. However, prior to this regulation becoming effective, the Central Bank will consult with the industry on its expectations for disclosure. 9 P age

General We recommend further consultation between the CBTT and the TWG as we note that there have been further changes/guidance to the policy proposal which should be included in a QIS/parallel reporting prior to going live. The parallel reporting period will be extended for a further three (3) to six (6) months given that the reporting template was amended and the revised Regulations are not yet in place. Whilst the overall impact of the changes may not significantly impact FIs ability to meet the capital requirements, FIs will need to assess the costs of compiling the additional data. 10 P age