Ernst & Young approachFILE/Basel-III... · Ernst & Young approach Ernst & Young liquidity risk...
1
NSFR: net stable funding ratio The net stable funding ratio (NSFR) is designed to provide incentives for banks to seek more stable forms of funding. 100% of illiquid assets need to be backed with stable • funding, but this is 65% for qualifying residential mortgages. Basel III 2012 2013 2014 2015 2016 2017 2018 2019 Countercyclical buffer 0%–0.625% 0%–1.25% 0%–1.875% 0%–2.5% Capital conservation buffer 0.625% 1.25% 1.875% 2.5% Total capital 8% 8% 8% 8% 8% 8% 8% 8% 6% 6% 6% 6% 6% 4.5% 5.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4% 4% Tier 1 capital 3.5% CET 1 capital 2% Countercyclical buffer Capital conservation buffer – stops profit being distributed 4.5% Indicative Minimal capital (CET1) 0%-2.5% 2.5% 7% 9.5% Additional requirement for systemically important firms to be decided Boom Boom Recession Minimum capital requirements The minimum level for total capital will remain at 8% • of risk-weighted assets (RWA) but the proportion accounted for by Tier 1 is being increased. By 2015, the minimum level for common equity Tier 1 (CET1) will increase to 4.5% of RWA and Tier 1 to 6% of RWA. In addition, there is a new tighter definition of Tier 1 • and a focus on CET1. Non-allowable capital Tier 3 capital (available to cover market risk) is being • eliminated. Innovative hybrid capital instruments with an incentive to redeem will be phased out. The phaseout period is 2013–21. A new stricter approach to the inclusion of minority • interests within consolidated capital is being introduced. Regulatory capital adjustments Deductions for CET1 calculation Examples include goodwill, deferred tax assets (DTAs) • (other than from temporary differences), intangibles, certain holdings in other unconsolidated financial institutions, shortfall of the stock of provisions to expected losses, defined benefit pension fund assets and investments in own shares. A limit of 15% of CET1 capital has been set on the • combined capital contribution from DTAs from temporary differences, significant investments in the common shares of unconsolidated financial institutions and mortgage servicing rights. New capital buffers A • capital conservation buffer, of 2.5% of CET1, will be added to the minimum CET1 level of 4.5%, bringing total CET1 to 7%. It will be built up in “good times” and can be drawn upon in “bad times.” Capital distribution constraints will be imposed on • any bank not fully meeting the capital conservation buffer. The country-specific • countercyclical buffer will be applied to overheating markets. This buffer will vary between 0% and 2.5% of CET1. Market and counterparty credit risk requirements Market risk New stressed VaR, incremental risk capital charge, comprehensive risk capital charge for certain correlation trading portfolios, and additional securitization requirements Counterparty credit risk Effective expected positive exposure (EEPE) with • stressed parameters New credit valuation adjustment (CVA) charge • New explicit Pillar 1 capital charge for wrong way risk • (WWR) Higher asset value correlation multiplier for large • financial institutions New standards for the capitalization of exposures to • central counterparties (CCPs) Higher quantitative and qualitative requirements for • collateralized transactions Higher operational requirements (backtesting, stress • testing and model validation) LCR: liquidity coverage ratio The liquidity coverage ratio (LCR) will prescribe the quantity of high-quality liquid assets a bank must have at any given time. It aims to ensure that each institution maintains • an adequate level of unencumbered, high-quality assets that can be converted into cash to meet its liquidity needs for 30 days under a specified acute liquidity stress. The net cash outflow is the cumulative expected cash • outflow minus cumulative expected cash inflow over a 30-designated-day period (using specified stresses). Basel III liquidity timeline 2 x further QIS LCR final amendments NSFR final amendments Bank reporting to regulators starts LCR minimum standard NSFR minimum standard LCR observation period Introduce NSFR minimum standard NSFR observation period Introduce LCR minimum standard Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019 There is a common set of liquidity monitoring metrics that capture specific information related to a bank’s cash flows, balance sheet structure, available unencumbered collateral and certain market indicators. Contractual maturity mismatch Concentration of funding Identifies the potential gaps between the • contractual inflows and outflows of liquidity for defined time periods E.g., overnight, 7 days, 14 days, 1, 2, 3, 6 and 9 • months; 1, 2, 3, 5 and 5+ years Useful in indicating how much liquidity a bank • would potentially need to raise if all cash outflows occurred at the earliest possible date No behavioral adjustments • Analyzes concentrations of wholesale funding • provided by significant counterparties, instruments and currencies Useful in assessing funding liquidity risk, if one or • more of the sources are withdrawn, and potential exposure to currency exchange risk No prescribed concentration limits; however, • reporting expectations by time horizon Available unencumbered assets Market-related monitoring tools Measures the amount of unencumbered assets • a bank has which could potentially be used as collateral for secured funding Useful in comparing ability to raise additional funds • No prescribed liquidity haircuts; however, • monetization value is expected to be reported net of expected haircuts Provides early-warning indicators in monitoring • potential liquidity concerns Useful in assessing overall health of the market, • industry or specific institution No specific metrics are specified or required; • however, guidance prescribes that accurate interpretation of liquidity impact of metrics is important The LCR by specific currency will track potential currency mismatch issues that could arise in a time of stress. Specific requirements for reporting will be set by regulators and at the EU level by the European Banking Authority. Risk appetite design Stress testing Liquidity risk Trading books Risk appetite Governance Systemic importance Regulatory focus/ intensive supervision Intensified in many countries Under intensive supervision requirements, regulators’ approaches will be reviewed by peer regulatory colleges Adjustment because of countercyclical buffers More focus on stress testing Systemically important financial institutions (SIFIs): intensive supervision; higher capital, bail-in and CoCos; and recovery and resolution planning National discretion and unlevel playing fields Regulatory stress tests and anchor scenarios Structured approach to Pillar II There is clear regulatory pressure following the crisis to enhance risk • appetite and controls to deliver it. But boards and senior management are similarly focused on the need to improve risk appetite, risk transparency and controls to improve long-run profitability. The boards of the firms that had the largest losses were not aware of the • size of the risks being taken. A survey by Ernst & Young for the Institute of International Finance highlights that improvements in risk appetite continue to be high on the list of changes that many banks see as essential. Capital and liquidity allocation Group liquidity Risk appetite ERM stress testing Topdown risk appetite statements Quantified hard limits and metrics Enterprise-wide stress testing Macroeconomic outlook 1, 3 and 5 years • Global, regional and country • Historic loss data Divisions • Geography • Risk types • Stakeholder expectations Investors • Customers • Iterative process Capital Liquidity Governance Strategy Strategic forecasting Setting strategy poses particular challenges in the new regulatory environment — given the substantial increases in required capital and liquidity buffers: Identifying areas of business which are • no longer profitable Optimizing strategy across three • dimensions: capital, liquidity and leverage Improving finance models to assess the • benefits of different strategies Not all banks will be subject to the same pressures — the new business model will not be the same for all. Legal entity optimization To ensure the optimum legal entity structure • to avoid trapped liquidity and capital as well as manage impact of IFRS changes To minimize regulatory pressure • To make recovery and resolution • planning easier Capital ratio Allowable capital Tier 1 + Tier 2 — shortfall and other deductions RWAs Business processes and practices Models Capital calculation Data quality Systems and operating models need to be fit for purpose to deal with all these areas Capital calculations Counterparty risk Liquidity calculations Leverage calculations Internal reporting Comply/minimize Regulatory reporting Bank levy calculations ICAAP Stress testing Remuneration policies Optimum business strategy Optimal balance sheet management Optimal risk governance Optimum legal entity structure Optimize Core portfolios • Core geographies • Core products • Growth • Assets • Liabilities • Capital • Leverage • Controls • MI • Risk transparency • Risk-based remuneration • Capital/liquidity • Tax • Supervisory intensity • Strategic forecasting Capital optimization Liquidity Risk appetite Stress testing Counterparty credit risk Legal entity optimization Recovery and resolution planning Capital optimization Given pressures on capital, banks must make sure usage is optimum. Changing strategy where needed • Legal entity rationalization • Ensuring the capital requirement calculations are efficient: • Recognizing collateral • Other data issues are dealt with • Calculations are risk sensitive • Ernst & Young has extensive experience in helping banks in this area and has been instrumental in finding multibillion-dollar capital savings for individual firms. Ernst & Young approach Ernst & Young liquidity risk management approach Ernst & Young tools and accelerators Liquidity risk systems and data program Support end-to-end liquidity risk systems and data enhancement programs: PMO office • Target operating model • Business requirements definition • Vendor assessment and selection • Data management road map • Implementation planning • Implementation support • Business benefit measurement • Post-implementation review • Development of common data warehouses • Gap analysis Liquidity • diagnostic Best practice • benchmarking Governance Operating • model Policies design • Enhanced ALCO • Stress testing Business and regulatory stress test design • Stress test production • Quantitative stress factor development • Stress assumption validation • ILAA production and review • Regulatory reporting and assurance Reporting build support • Tactical reporting tools • Reporting UAT support • Reporting assurance — process and control • reviews, GL reconciliation FTP and liquidity buffer costs FTP benchmarking • Methodology development • Liquidity buffer pricing methodologies • CFP and recovery and resolution planning CFP action • framework Early-warning • indicators Optimization Minimizing the size • of the liquid assets buffer Managing the • structure of funding Managing collateral • and contingent items Liquidity risk management Tool Description Liquidity diagnostic tool Liquidity target operating model Liquidity conceptual framework Detailed business requirements Vendor selection Contractual cash flow reporting tools Liquidity conceptual technology architecture Framework for liquidity reporting assurance reviews ► LCR calculation engine BCBS 188 “Basel III: International framework for liquidity risk measurement, standards and monitoring “ ► Reporting ► Scenario analysis ► Basel definitions The user can get further information by navigating via the linked arrows Calculation results of the underlying scenario analysis will be displayed in the Reporting The calculated LCR will be verified and analysed in the Reporting LCR calculator, QIS reporting tools Aggregation • Profit and growth • RWAs • Framework • Quantative and • qualitative Strategy linkage • Allocate Design Consultation • Contingency • Enterprise-wide stress testing Training and culture Integrated stress test design Macroeconomic stress testing Reverse stress testing Integrated balance sheet stress testing Individual portfolio stress tests Stress test training Stress testing products Governance/risk Designing the overarching framework • Integrated strategic forecasting models • Design of macroeconomic stress tests • Stress testing approaches for business portfolios • Rigorous reverse stress testing approaches • Develop robust statements of risk appetite through Ernst & Young-led board • discussion workshops Model the forward-looking business impacts of your strategy • Provide methodologies to allocate risk appetite down to business units as part of • the firmwide business planning process Implementation of programs to embed risk appetite into business targets, limits, • controls, reporting and remuneration schemes Enhancing governance and controls • Addressing data and process challenges • Aligning IMM models with stressed market risk approaches • Developing risk management processes and strategies for CVA • Supporting data quality initiatives • Governance and controls Data quality Stress EEPE modeling CVA modeling CCRM Ernst & Young has extensive experience and tools to support the development of effective approaches. Capital Buffers Leverage Risk appetite Stress testing Counterparty risk LCR Liquidity NSFR Pillar II Risk governance Risk awareness Risk systems/data Liquidity management Regulatory reporting Legal entity optimization Capital optimization Strategic forecasting Timeline and requirements Leverage ratio A leverage ratio will be introduced as a supplementary measure to the Basel II risk-based framework. The ratio will require a minimum percentage of Tier 1 to gross on- and off-balance-sheet • assets. Data will also be collected during the observation period using total capital and CET1. Basel II treatment of counterparty credit risk for OTC derivatives and cross-product netting • arrangements will apply in the calculation of the exposure measure. The minimum Tier 1 leverage ratio is set at 3% for the observation phase. • Stock of high-quality liquid assets ≥100% Total net cash outflows over the next 30 calendar days Available amount of stable funding >100% Required amount of stable funding Client issue Governance Limits and controls • Targets • Incentives • Concentrations • Embed Escalations and responsibilities • MI • Technology and data • Risk transparency • 2011 2012 2013 2014 2015 2016 2017 2018 2019 Capital Minimum capital requirements 3.5% CET1, 4.5% Tier 1, 8% total capital 4% CET1, 5.5% Tier 1, 8% total capital 4.5% CET1, 6% Tier 1, 8% total capital Regulatory capital adjustments 2014–18 % of total new deductions applied in the year increases 20% each year from 2014 to 100% in 2018. New capital buffers Countercyclical buffer Capital conservation buffer RWA Market and counterparty credit risk requirements 2011 — Market risk requirements go live 2013 — Counterparty credit risk requirements go live Leverage Leverage ratio 2011 — Supervisory monitoring 2013 — Parallel run 2015 — Disclosure starts 2018 — Pillar 1 requirements Liquidity Liquidity 2011 — Observation period LCR 2015 — LCR goes live 2011 — Observation period NSFR 2018 — NSFR goes live Timeline Regulators • © 2011 EYGM Limited. All Rights Reserved. 1132438.indd (UK) 06/11. Creative Services Group. EYG: EK0054 Forward regulatory agenda Risk appetite Intensive supervision and enhanced Pillar II Stress testing Risk awareness Counterparty credit risk Global strengthening of regulatory regimes. Global increase in focus on stress testing and governance. Global contact Patricia Jackson UK Tel: +44 (0)20 7951 7564 Email: [email protected] 0%-0.625% 0.625% 0%-1.25% 1.25% 0%–1.875% 1.875% 0%–2.5% 2.5%
Transcript of Ernst & Young approachFILE/Basel-III... · Ernst & Young approach Ernst & Young liquidity risk...
NSFR: net stable funding ratio
The net stable funding ratio (NSFR) is designed to provide incentives for banks to seek more stable forms of funding.
100% of illiquid assets need to be backed with stable •funding, but this is 65% for qualifying residential mortgages.
Basel III2012 2013 2014 2015 2016 2017 2018 2019
Countercyclical buffer 0%–0.625% 0%–1.25% 0%–1.875% 0%–2.5%
Capital conservation buffer 0.625% 1.25% 1.875% 2.5%
Total capital
8%8% 8%
8% 8% 8% 8% 8%
6% 6% 6% 6% 6%
4.5%5.5%
4.5% 4.5% 4.5% 4.5% 4.5%4%4%
Tier 1 capital
3.5%CET 1 capital
2%
Countercyclical buffer
Capital conservation buffer – stops profit being distributed
4.5%
Indi
cativ
e
Minimal capital (CET1)
0%-2.5%
2.5%7%
9.5%
Additional requirement for systemically important firms to be decided
Boom BoomRecession
Minimum capital requirementsThe minimum level for total capital will remain at 8% •of risk-weighted assets (RWA) but the proportion accounted for by Tier 1 is being increased. By 2015, the minimum level for common equity Tier 1 (CET1) will increase to 4.5% of RWA and Tier 1 to 6% of RWA.
In addition, there is a new tighter definition of Tier 1 •and a focus on CET1.
Non-allowable capitalTier 3 capital (available to cover market risk) is being •eliminated. Innovative hybrid capital instruments with an incentive to redeem will be phased out. The phaseout period is 2013–21.
A new stricter approach to the inclusion of minority •interests within consolidated capital is being introduced.
Regulatory capital adjustmentsDeductions for CET1 calculation
Examples include goodwill, deferred tax assets (DTAs) •(other than from temporary differences), intangibles, certain holdings in other unconsolidated financial institutions, shortfall of the stock of provisions to expected losses, defined benefit pension fund assets and investments in own shares.
A limit of 15% of CET1 capital has been set on the •combined capital contribution from DTAs from temporary differences, significant investments in the common shares of unconsolidated financial institutions and mortgage servicing rights.
New capital buffersA • capital conservation buffer, of 2.5% of CET1, will be added to the minimum CET1 level of 4.5%, bringing total CET1 to 7%. It will be built up in “good times” and can be drawn upon in “bad times.”
Capital distribution constraints will be imposed on •any bank not fully meeting the capital conservation buffer.
The country-specific • countercyclical buffer will be applied to overheating markets. This buffer will vary between 0% and 2.5% of CET1.
Market and counterparty credit risk requirementsMarket riskNew stressed VaR, incremental risk capital charge, comprehensive risk capital charge for certain correlation trading portfolios, and additional securitization requirements
Counterparty credit riskEffective expected positive exposure (EEPE) with •stressed parameters
New credit valuation adjustment (CVA) charge•New explicit Pillar 1 capital charge for wrong way risk •(WWR)
Higher asset value correlation multiplier for large •financial institutions
New standards for the capitalization of exposures to •central counterparties (CCPs)
Higher quantitative and qualitative requirements for •collateralized transactions
Higher operational requirements (backtesting, stress •testing and model validation)
LCR: liquidity coverage ratio
The liquidity coverage ratio (LCR) will prescribe the quantity of high-quality liquid assets a bank must have at any given time.
It aims to ensure that each institution maintains •an adequate level of unencumbered, high-quality assets that can be converted into cash to meet its liquidity needs for 30 days under a specified acute liquidity stress.
The net cash outflow is the cumulative expected cash •outflow minus cumulative expected cash inflow over a 30-designated-day period (using specified stresses).
Base
l III
liqui
dity
tim
elin
e
2 x further QIS LCR final amendments
NSFR final amendments
Bank reporting to regulators starts
LCR minimum standard
NSFR minimum standard
LCR observation period
Introduce NSFR minimum standardNSFR observation period
Introduce LCR minimum standard
Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019
There is a common set of liquidity monitoring metrics that capture specific information related to a bank’s cash flows, balance sheet structure, available unencumbered collateral and certain market indicators.
Contractual maturity mismatch Concentration of funding
Identifies the potential gaps between the •contractual inflows and outflows of liquidity for defined time periods
E.g., overnight, 7 days, 14 days, 1, 2, 3, 6 and 9 •months; 1, 2, 3, 5 and 5+ years
Useful in indicating how much liquidity a bank •would potentially need to raise if all cash outflows occurred at the earliest possible date
No behavioral adjustments•
Analyzes concentrations of wholesale funding •provided by significant counterparties, instruments and currencies
Useful in assessing funding liquidity risk, if one or •more of the sources are withdrawn, and potential exposure to currency exchange risk
No prescribed concentration limits; however, •reporting expectations by time horizon
Available unencumbered assets Market-related monitoring tools
Measures the amount of unencumbered assets •a bank has which could potentially be used as collateral for secured funding
Useful in comparing ability to raise additional funds•
No prescribed liquidity haircuts; however, •monetization value is expected to be reported net of expected haircuts
Provides early-warning indicators in monitoring •potential liquidity concerns
Useful in assessing overall health of the market, •industry or specific institution
No specific metrics are specified or required; •however, guidance prescribes that accurate interpretation of liquidity impact of metrics is important
The LCR by specific currency will track potential currency mismatch issues that could arise in a time of stress.
Specific requirements for reporting will be set by regulators and at the EU level by the European Banking Authority.
Risk appetite design
Stress testing
Liquidity risk
Trading books
Risk appetite
Governance
Systemic importance
Regulatory focus/
intensive supervision
Intensified in many countries
Under intensive supervision requirements, regulators’ approaches will be reviewed by peer regulatory colleges
Adjustment because of countercyclical buffers
More focus on stress testing
Systemically important financial institutions (SIFIs): intensive supervision; higher capital, bail-in and CoCos; and recovery and resolution planning
National discretion and unlevel playing fields
Regulatory stress tests and anchor scenarios
Structured approach to Pillar II
There is clear regulatory pressure following the crisis to enhance risk •appetite and controls to deliver it. But boards and senior management are similarly focused on the need to improve risk appetite, risk transparency and controls to improve long-run profitability.
The boards of the firms that had the largest losses were not aware of the •size of the risks being taken. A survey by Ernst & Young for the Institute of International Finance highlights that improvements in risk appetite continue to be high on the list of changes that many banks see as essential.
Capital and liquidity
allocationGroup liquidity
Risk appetite
ERM stress testing
Topdown risk appetite statements
Quantified hard limits and metrics
Enterprise-wide stress testing
Macroeconomic outlook1, 3 and 5 years•Global, regional and country•
Historic loss dataDivisions•Geography•
Risk types•
Stakeholder expectationsInvestors•Customers•
Iterative process
Capi
tal
Liqu
idity
Gov
erna
nce
Strategy
Strategic forecastingSetting strategy poses particular challenges in the new regulatory environment — given the substantial increases in required capital and liquidity buffers:
► Identifying areas of business which are •no longer profitable
Optimizing strategy across three •dimensions: capital, liquidity and leverage
Improving finance models to assess the •benefits of different strategies
►Not all banks will be subject to the same pressures — the new business model will not be the same for all.
Legal entity optimizationTo ensure the optimum legal entity structure •to avoid trapped liquidity and capital as well as manage impact of IFRS changes
To minimize regulatory pressure•
To make recovery and resolution •planning easier
Capital ratio
Allowable capital Tier 1 + Tier 2 — shortfall and other deductions
RWAs
Business processes and practices
Models Capital calculationData qualitySystemsandoperatingmodelsneedtobefitforpurposetodealwithalltheseareas
Capital calculations Counterparty risk Liquidity calculations Leverage calculations Internal reporting
Comply/m
inimizeRegulatory reporting Bank levy calculations ICAAP Stress testing Remuneration policies
Optimum business strategy Optimal balance sheet management
Optimal risk governance Optimum legal entity structure
Optim
ize
Core portfolios•Core geographies•Core products•
Growth•Assets•Liabilities•Capital•Leverage•
Controls•MI•Risk transparency•Risk-based remuneration•
Capital/liquidity•Tax•Supervisory intensity•
Strategic forecasting
Capital optimization
Liquidity
Risk appetite
Stress testing
Counterparty credit risk
Legal entity optimization
Recovery and resolution planning
Capital optimization
Given pressures on capital, banks must make sure usage is optimum.
Changing strategy where needed•
Legal entity rationalization•
Ensuring the capital requirement calculations are efficient:•
Recognizing collateral•
Other data issues are dealt with•
Calculations are risk sensitive•
Ernst & Young has extensive experience in helping banks in this area and has been instrumental in finding multibillion-dollar capital savings for individual firms.
Ernst & Young approach
Ernst & Young liquidity risk management approach Ernst & Young tools and accelerators
Liquidity risk systems and data programSupport end-to-end liquidity risk systems and data enhancement programs:
PMO office•Target operating model•Business requirements definition•Vendor assessment and selection•Data management road map•Implementation planning•Implementation support•Business benefit measurement•Post-implementation review•Development of common data warehouses•
Gap analysisLiquidity •diagnosticBest practice •benchmarking
GovernanceOperating •modelPolicies design•Enhanced ALCO•
Stress testingBusiness and regulatory stress test design•Stress test production•Quantitative stress factor development•Stress assumption validation•ILAA production and review•
Regulatory reporting and assuranceReporting build support•Tactical reporting tools•Reporting UAT support•Reporting assurance — process and control •reviews, GL reconciliation
FTP and liquidity buffer costsFTP benchmarking•Methodology development•Liquidity buffer pricing methodologies•CFP and recovery
and resolution planning
CFP action •frameworkEarly-warning •indicators
OptimizationMinimizing the size •of the liquid assets bufferManaging the •structure of fundingManaging collateral •and contingent items
Liquidity risk managem
ent
Tool Description
Liquidity diagnostic tool
Liquidity target operating model
Liquidity conceptual framework
Detailed business requirements
Vendor selection
Contractual cash flow reporting tools
Liquidity conceptual technology architecture
Framework for liquidity reporting assurance reviews
► LCR calculation engine
BCBS 188 “Basel III: International framework for liquidity risk measurement, standards and monitoring “
► Reporting ► Scenario analysis
► Basel definitions
The user can get further information by navigating via the linked arrows
Calculation results of the underlying scenario analysis will be displayed in the Reporting
The calculated LCR will be verified and analysed in the Reporting LCR calculator, QIS reporting tools
Aggregation•Profit and growth•RWAs•
Framework•Quantative and •qualitative Strategy linkage•
Allocate
Design
Consultation•Contingency•
Ente
rpris
e-wi
de s
tres
s te
stin
g
Training and culture
Integrated stress test
design
Macroeconomic stress testing
Reverse stress testing
Integrated balance sheet stress testing
Individual portfolio stress
tests
Stress test training
Stress testing
products
Governance/risk
Designing the overarching framework•
Integrated strategic forecasting models•
Design of macroeconomic stress tests•
Stress testing approaches for business portfolios•
Rigorous reverse stress testing approaches•
Develop robust statements of risk appetite through Ernst & Young-led board •discussion workshops
Model the forward-looking business impacts of your strategy•
Provide methodologies to allocate risk appetite down to business units as part of •the firmwide business planning process
Implementation of programs to embed risk appetite into business targets, limits, •controls, reporting and remuneration schemes
Enhancing governance and controls•
Addressing data and process challenges•
Aligning IMM models with stressed market risk approaches•
Developing risk management processes and strategies for CVA•
Supporting data quality initiatives•
Governance and controls
Data quality
Stress EEPE
modeling
CVA modeling CCRM
Ernst & Young has extensive experience and tools to support the development of effective approaches.
Capital
Buffers
Leverage
Risk appetite
Stress testing
Counterparty risk
LCR
Liquidity
NSFR
Pilla
r IIRisk
gove
rnanc
e
Ris
k aw
aren
ess
Risk systems/dataLiquidity management
Regulatory reporting
Lega
l ent
ity o
ptim
izatio
n
Capita
l optim
izatio
n
Stra
tegi
c fo
reca
stin
g
Timeline and requirementsLeverage ratioA leverage ratio will be introduced as a supplementary measure to the Basel II risk-based framework.
The ratio will require a minimum percentage of Tier 1 to gross on- and off-balance-sheet •assets. Data will also be collected during the observation period using total capital and CET1.
Basel II treatment of counterparty credit risk for OTC derivatives and cross-product netting •arrangements will apply in the calculation of the exposure measure.
The minimum Tier 1 leverage ratio is set at 3% for the observation phase.•
Stock of high-quality liquid assets ≥100%
Total net cash outflows over the next 30 calendar days Available amount of stable funding
>100% Required amount of stable funding
Clie
nt is
sue
Governance
Limits and controls•Targets•Incentives•Concentrations•
EmbedEscalations and responsibilities•MI•Technology and data•Risk transparency•
2011 2012 2013 2014 2015 2016 2017 2018 2019
Capi
tal
Minimum capital requirements
3.5% CET1, 4.5% Tier 1, 8% total capital
4% CET1, 5.5% Tier 1, 8% total capital
4.5% CET1, 6% Tier 1, 8% total capital
Regulatory capital adjustments
2014–18 % of total new deductions applied in the year increases 20% each year from 2014 to 100% in 2018.New capital buffers
Countercyclical buffer
Capital conservation buffer
RWA Market and counterparty credit risk requirements
2011 — Market risk requirements go live
2013 — Counterparty credit risk requirements go live
Leve
rage
Leverage ratio
2011 — Supervisory monitoring
2013 — Parallel run
2015 — Disclosure starts
2018 — Pillar 1 requirements
Liqu
idity
Liquidity
2011 — Observation period LCR
2015 — LCR goes live
2011 — Observation period NSFR
2018 — NSFR goes live
Tim
elin
e
Regulators•
© 2011 EYGM Limited. All Rights Reserved.
1132438.indd (UK) 06/11. Creative Services Group.
EYG: EK0054
Forward regulatory agenda Risk appetiteIntensive supervision and enhanced Pillar II Stress testingRisk awareness Counterparty credit risk
Global strengthening of regulatory regimes. Global increase in focus on stress testing and governance.
Global contactPatricia Jackson
UK
Tel: +44 (0)20 7951 7564
Email: [email protected]
0%-0.625%
0.625%
0%-1.25%
1.25%
0%–1.875%
1.875%
0%–2.5%
2.5%
