Implementation of Capital Requirements in...
Transcript of Implementation of Capital Requirements in...
![Page 1: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/1.jpg)
Implementation of Capital Requirements in Emerging Markets
Caio FerreiraMonetary and Capital Markets Department, IMF
2017 Seminar for Senior Bank Supervisors from Emerging Economies
![Page 2: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/2.jpg)
Regulatory Tsunami
2
• Basel Committee since 2008:
– Over 250 papers
Not to mention the FSB…
![Page 3: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/3.jpg)
Are the international standards
appropriate for developing economies?
• Focus on sophisticate financial markets
• Universal lessons:
– Lack of capital
– Quality of capital
– Macroprudential dimension
– Liquidity requirements
– Early corrective measures
– Resolution framework
Many EMDEs need to tackle several of these issues
![Page 4: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/4.jpg)
How EMDEs Should react?
• Should Implement:
– Basel II
– New RWA approaches
– BIII Capital
– Buffers
– Leverage ratio
4
![Page 5: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/5.jpg)
How EMDEs Should react ?
5
Basel Core Principles sets the direction
• Get Basics right!
• Not just about Capital
• Not just about Pillar I
Lessons from the crisis apply to EMDEs
• New International standards benchmark
Adaptations possibly necessary
• Simplification, Calibration, timing, instruments
• More conservative, not less
• Volatility, loan recovery challenges, market illiquidity,…
![Page 6: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/6.jpg)
Basel II
6
![Page 7: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/7.jpg)
Basel II: The three pillars
Pillar 1 Pillar 3
Pillar 1 • Minimum risk based capital requirements; definition of capital
• On and off balance-sheet
Pillar 2
• An assessment of risks - both quantitative and qualitative
• Proportionate to complexity and scale, whole group, forward looking.
• Assess banks’ Governance and Risk Management frameworks
• Assess banks’ own analysis of risk profile
• Preventive supervision; structured dialogue; capital above the minimum
Pillar 3
• Disclosure to complement, enhance and reinforce Pillars 1 and 2
• Capital adequacy must be publicly disclosed
• Transparency on capital structure and risk exposures,
• Transparency on risk management and internal controls
Pillar 2
7
![Page 8: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/8.jpg)
Should Implement BII?
Important
• Securitization, fund investments
• Pillar II / Pillar III
Attention if
• Implementation at early stages
• Already imposes higher capital requirements than 8%
Possible way forward
• Simplification: market risk, securitization, derivatives
• Wait for BIII RWA rules
• Calibration (up!)
8
![Page 9: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/9.jpg)
Risk weighted assets
9
![Page 10: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/10.jpg)
Main changes
• Mortgages more sensitive
• Update calibration
• Off balanceCredit
• Stronger border
• Enhanced granularity and risk sensitivity
• Expected shortfallMarket
• Elimination of AMA
• Business indicator
• Use of operational loss dataOperational
10
![Page 11: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/11.jpg)
Should Implement new SA credit risk?
Important
• Mortgages and exposures to funds are relevant
• Off-balance sheet exposures
Attention if
• Exposures concentrated on corporates and retail
Possible way forward
• Focus on relevant portfolios
• Consider go beyond Basel revisions
• Adjust parameters
11
![Page 12: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/12.jpg)
Should Implement new SA market risk?
Important
• Trading book is relevant
• Off-balance sheet exposures
Attention if
• Small TB with simple instruments
• Banks do not have reliable pricing models
Possible way forward
• Keep BII rules (but recalibrated)
• Revise boundary
• Enforce sound valuation practices
• Attention to IRRBB
12
![Page 13: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/13.jpg)
Should Implement new Op.risk?
Important
• AMA
• Large banks
• Loss data base
Attention if
• Small banks
• Have implemented “gross income” approach recently
Possible way forward
• Incentivize operational loss databases
• Avoid additional reporting requirements
13
![Page 14: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/14.jpg)
Basel III Capital
14
![Page 15: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/15.jpg)
15
Capital: from Basel II to Basel III
Basel II Basel III
Tier 3 market risk Tier 2
Tier 2 Other Tier 1
Common Equity
Other Tier 1
Common equity
* Deducted from both Tier 1 and Tier 2 ** Deducted from Tier 1
Goodwill
Intangibles *
MSR, DTAs
Goodwill,
Intangibles, etc**
capital instruments
CET1
1 > 4
.5%
RW
A
Tier 1
> 6%
RW
A
Total C
apital > 8
% R
WATie
r 1 > 4
%R
WA
Total C
apital > 8
% R
WA
![Page 16: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/16.jpg)
Should Implement BIII Capital?
Important for
• Loss Absorbance Capacity
• Not excessively complex
Attention if
• Common Equity already majority; and
• Deductions not relevant
• But,…
Possible way forward
• Simplification: “eliminate basket"
• Calibration: higher thresholds (not reduce current level)
16
![Page 17: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/17.jpg)
Buffers
17
![Page 18: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/18.jpg)
Macro Dimension
%8100
9CAR Loss $3 %8
100
6CAR
%875
6IB %8
100
8IB
Issue
$2
-SIFI?- Set of banks?
Reducing procyclicality
![Page 19: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/19.jpg)
The buffer zone
Counter Cyclical
G-SIB/D-SIB
Capital Conservation
CET1
19
![Page 20: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/20.jpg)
Should Implement Buffers?
Important for
• Macroprudential dimension
• Escalation of actions
• Too-big-to fail
Attention if
•Severe shortcomings in basic supervision and regulation
• problem assets, supervisory reporting, risk management,…
Possible way forward
•Minimum requirements calibration
•Methodology for D-SIFIs
• Indicators for CCyB
•Rules vs discretion
20
![Page 21: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/21.jpg)
Leverage ratio
21
![Page 22: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/22.jpg)
Leverage Ratio: the backstop to risk-based capital
22
CapitalLR =
Exposures
![Page 23: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/23.jpg)
Should implement leverage ratio?
Important for
• Limit advanced approaches model risk
• Off-balance and 0% risk weight exposures
Attention if
• Standardized Approaches
• Off-balance not an issue
• Not excessive low risk weight exposures (0%)
Possible way forward
• Derivatives exposures
23
![Page 24: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/24.jpg)
But what is the priority?
24
![Page 25: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/25.jpg)
Possible Work Plan
Needs case by case evaluation!
1. Fix Basel Core Principles weaknesses– Get Basics right
– Resources, independence, supervisory powers and tools, risk management, provisions,…
– Resolution
– Caveat: assessment not always readily available
25
![Page 26: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/26.jpg)
Possible Work Plan
Needs case by case evaluation!
2. Implement Basel III considering EMDEs specificities
- Ensure quality of capital
- Differentiate minimum requirements from buffers
- Ensure D-SIBs have higher capital charge
- Enhance data collection for systemic risk
- CCyB might need high level of institutional development
26
![Page 27: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/27.jpg)
Possible Work Plan
Needs case by case evaluation!
3. Improvements on RWA calculation
- Ensure appropriate risk coverage
- Improve risk sensitivity of relevant portfolios
27
![Page 28: Implementation of Capital Requirements in …pubdocs.worldbank.org/en/857771511190547400/3-Capital-in...Implementation of Capital Requirements in Emerging Markets Caio Ferreira Monetary](https://reader031.fdocuments.us/reader031/viewer/2022011819/5e97d45b2f602f36f242858f/html5/thumbnails/28.jpg)
Thank you!
28