Seminar - Hot topics treasury - PwC · 14/06/2018 · Basel IV focuses on the RWA side of the...
Transcript of Seminar - Hot topics treasury - PwC · 14/06/2018 · Basel IV focuses on the RWA side of the...
Seminar - Hot topics treasury
Basel III & IV
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14 June 2018
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1 Welcome and introduction 3
2 Basel IV 6
3 Discussion 20
Contents
2Seminar - Hot topics treasury
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Welcome and introduction
1 Welcome and introduction
3Seminar - Hot topics treasury
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With you today
1 Welcome and introduction
4Seminar - Hot topics treasury
Niels VinkManagerCapital Markets and Accounting Advisory ServicesT: +31 (0)88 792 46 03M: +31 (0)6 13 24 17 [email protected]
Gerbrich WagenaarSenior Associate Capital Markets and Accounting Advisory ServicesT: +31 (0)88 792 54 81M: +31 (0)6 53 43 46 [email protected]
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1 Welcome and introduction
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Basel IV
2 Basel IV
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Banking Supervision in the EU Single Rule Book
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Act on Financial Supervision (“Wft”)
Frameworks(Basel III, G-SIBs, D-SIBs)
CRD IV –Directive
EBA Standards
ESMA Standards
CRR –Regulation
Solvency Regulation
Own funds Liquidity LeverageCounterparty Risk Capital Buffers
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The Basel (R)Evolution
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Pre-Basel
Credit risk
Credit + Market risks
Credit + Market + Operational
risks
Credit + Market + Operational
risks
Overview Pillar I Ratios
Large exposures
1988 Basel
Capital Accord
1996 Amendment
2004 Finalisation
of Revised Basel II
Framework
2007 Implementation
of revised framework
2010 Introduce
New Framework
No standardised rules on capital adequacy for banks. Rules depend on bank regulators of individual countries. No rules in some countries.
1988 Basel set rules for credit risk only.
1996 BCBS adds rules for market risk.
Basel II rules for credit, market and operational risks
Basel III changed the level and quality of capital, and introduced the CVA capital charge, a leverage ratio requirement and new liquidity standards.
‘Basel IV’ changes the whole capital requirements (i.e. RWA) framework for all risk types. This will present one of the biggest challenges for the financial industry in years.
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RWA impact
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Aggregated RWA impact estimate in €Tn
Source: BCBS, EBA, Strategy& analysis.1 Impact relative to starting value for risk type, impact based on Strategy& perspective on expert estimates.
Low impact1 15% 0%0% 13%0%
20% 50%30% 22%30%High impact1
Resulting
RWA
CVA & CCRMarket riskCurrent RWA Credit risk Operational
risk
140.1
1.9
11.5
0.30.1
0,8
1.7
11.5
1.7
High impact (incl. output floor)Low impact (incl. output floor)
• The aggregate expected increase in RWA is €1.0 trillion to €2.5 trillion, or a rise of 13% to 22% for the largest banks in Europe
• Credit risk is the main driver of RWA impact, due to both the size of the portfolio and the height of the impact
• Credit risk IRB portfolio increases strongly due to proposed output floors, which are calibrated at 72.5% in our analysis
• As a result, banks with relatively low risk weights for their IRB portfolios are expected to have a higher impact
• Similarly, for market risk, the impact of ‘Basel IV’ will be higher for banks with a high share of trading desks valued with internal models
• Next to the output floors, additional restrictions on the application of the A-IRB approach for credit risk is expected to have a significant impact (e.g. mandatory application of F-IRB for large corporates)
Comments
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Expected average RWA impact relative to current RWAWithin Europe, impact is expected to be highest for the Swedish banks driven by low current risk weights
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Note: only for countries with at least 2 banks in the sample
Source: BCBS, EBA, Strategy& analysis
9%
14%Spain
Ireland
Slovenia
7%
9% 20%
Italy
22%
Finland
Belgium
United Kingdom
16%Austria
22%
23%
Norway
19%France
Luxembourg
15%
16%
18%
Germany
38%
Denmark 49%
Netherlands
73%
29%
Sweden
Greece
Portugal
12%
8%
Malta
13%
12%
11%
12%
Cyprus
5%
5%
30%
40%
7%
12%
4%
6%
18%
16%
15%
12%
63%
4%
4%
Impact range
Min expected impact
Estimated Basel IV Impact for large
Dutch Bank
• ING: 15%-18% RWA increase
• Rabobank: 30%-35% RWA increase
• ABN AMRO: 35% RWA increase
• De Volksbank: 35% RWA increase
• NIBC: 20%-30% RWA increase
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Anticipated changes in the strategy of banks
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Potential way forward
Resulting, new strategic imperatives Potential way forward for banks
• Less intensive balance sheet usage: Reduce the deployment of own balance sheet to reduce capital requirements for existing business and grow the business in a more capital efficient way, e.g. by focusing on originate-to-distribute models
• Disintegration of the bank value chain: Reduce cost-structure and increase margins by outsourcing of non-core processes, while focusing on best-in-class competencies
• Full employment of digital technologies: Full integration and digitisation of processes as enabler to executive new strategic imperatives and to compete against agile and disruptive market players as
• Transformation of balance sheet requires definition of 5+ year vision (‘BS 2022’).
• To be successfully implemented over next years –potential implications on business setup
• Strategic exit management as important capability
Integration of bank value chain
Intensity of balance sheet usage
Low
High
LowHigh
2
1
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Basel IV focuses on the RWA side of the capital ratio
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Calculation of the capital ratios according to Basel III/CRR …
Common Equity Tier 1
Additional Tier 1
Tier 2 Instruments
Credit Risk
Add. RisksMarket
RiskOpRisk
>8% + capital buffers
… and topics covered by Basel IV:
SA-CRSecuriti-sations
IRB SA-CCR CVAStep-in
RiskFRTB OpRisk IRRBB
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Revised Capital Floors
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Preventing undue optimism in bank modelling practices, thereby ensuring that modelled capital requirements do not fall below a prudent level
Mitigating model risk
Addressing incentive-compatibility issues, as banks face incentives to use overly optimistic internal models to reduce risk-weighted assets and thereby maximise return on equity
Improving comparability by providing a standardised assessment of risk
Constraining variation in model-derived risk-weighted assets (RWAs) that arises from differences in bank and supervisory practices
The revised Floors are based on revised standardised approaches for credit, market and operational risk.
• The current capital framework includes an aggregate Basel I capital floor and granular floors related to specific asset classes and parameters.
• A permanent aggregate capital floor will replace the current floor
• The aggregate floor will be calculated as 72.5% of the Total Risk Weighted Assets under the standardised approaches.
Capital floors as an integral component of the capital framework
1
2
3
4
5
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Within credit risk, the highest impact is expected for the large corporates and retail mortgage portfolios
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Source: BCBS, EBA, Strategy& analysis.1 Impact relative to starting value for risk type, impact based on Strategy& perspective on expert estimates.
Asset class Credit risk impact (€Tn)
Corporates Large corporates
Specialised lending
Corporates – SME
Retail Retail – Mortgages
Retail SME
Retail – Other
Other Banks
Governments and
Authorities
Securitisations
Other
4.1
1.0
0.6
0.5
0.1
1.5
0.5
1.0
1.2
0.6
Low
impact1)
25%
35%
25%
20%
20%
20%
20%
10%
5%
5%
High
impact1)
35%
40%
25%
20%
20%
20%
25%
15%
10%
5%
Current RWA - STA
Min. Expected RangeCurrent RWA - IRB
Impact Range
0.8 0.2
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Effect on RWA of large corporate portfolios
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Examples from a portfolio of large corporates
Effect on risk weights
The effect of capital floor
20% 20%
50%
75% 75%
100%
17% 17%22%
29%
38%
61%
15% 15%20%
26%33%
53%
RW SA RW F-IRB RW A-IRB
For the IRB approach, PDs are calculated based on the ‘shadow bond’ modeling approach and benchmark LGDs are used, for the New Standardised Approach base risk weights are obtained from the BCBS look-up table, capital floor is set up at 72.5%
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SA credit risk
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Exposure
Equal to the accounting value remaining after specific credit risk adjustments (e.g. impairments).
Exposure Classes
Capital Requirements are based on the type of “Exposure Class”. Examples are: Governments, Institutions, Corporates, Retail.
Risk Weights
Capital requirements are determined by applying a risk weight per exposure category, based on the credit quality of the counterparty.
Exposure x Credit conversion factor (CCF) = Exposure after CCF
Exposure after CCF x SA risk weight Risk weighted SA exposure
Part of the revision tothe SA for credit risk
Corporates
External ratings allowed• Base RWs, subject to due
diligence
• Unrated: RW = 100%• SME: RW = 85%
No external ratings allowed• Investment grade: RW = 65%• SME: RW = 85%• Rest: RW = 100%
AAA to
AA-
A+ to A-
BBB+ to
BBB-
BB+ to
BB-
Below BB-
20% 50% 75% 100% 150%
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SA Credit Risk Specialised lending exposures (newly introduced)
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Specialised lending
• Currently, there is no specific exposure class for specialised lending under de SA.
• Exposure with little or no independent capacity to repay the obligation, apart from the income that is received from the asset(s) being financed (excluding real estate) and the terms of the obligation give the lender a substantial degree of control over the asset.
Issuer rating is available
Rating
Risk weight for specialised lending
AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- Below BB-
20% 100% 150%50% 75%
Issuer rating is not available
Object- and commodity trade financing
Project financing
100%
130% (pre-operational)
100% (operational) / 80% (operational, high quality
project finance - robustagainst adverse changes in the economic cycle and
business conditions)
Risk weights for specialised lending
Project finance- Single project providing revenue for repayment and serves as security -Large, complex and expensive installations
Object finance- Funding the acquisition of equipment - Repayment dependent on cash flows generated by the asset, which is also pledged to the lender
Commodity finance - Short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities- Loan repaid with proceeds of the sale of the commodity
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Simplified pricing example
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SA Corporate
(AAA rated)
with floor
14,50%
580.000
58.000
988.400
1.046.400
2,09%
Effects can be potentially mitigated, e.g. by using credit risk mitigation techniques,
by taking on the loan directly as a corporate (i.e. not in an SPV), syndicate
financing
* Hypothetical risk weight
Capital costs play an important role in the overall pricing models of banks. Below the effects of different risk weights on the pricing of a € 50 million shipping finance loan. Please note, this is a hypothetical and simplified example.
Loan €50 mln
Col
um
n1 A-IRB SL*
Slotting
approach SL
SA SL-
unrated
SA SL -
unrated with
floor
Risk weight 50% 70% 100% 72,5%
Required capital 2.000.000 2.800.000 4.000.000 2.900.000
Required return on equity 10% 200.000 280.000 400.000 290.000
Financing costs debt 2% 960.000 944.000 920.000 942.000
Total cost 1.160.000 1.224.000 1.320.000 1.232.000
% 2,32% 2,45% 2,64% 2,46%
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Alternatives for bank financing
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Private placements
PP market can be a solution for midcap companies that are not capable or willing to raise capital from the public market.
Crowd funding
Low awareness of crowdfunding opportunities and limited recognition of crowdfunding as suitable financing alternative amongst entrepreneurs
Alternative finance sources
Corporate lending
funds
Combines institutional investors’ capital with financial expertise and distribution networks of banks or asset managing firms
Public offering
Mainly intended for large corporates (Criteria listing Euronext: > 5yr old, equity > €5mln, capital to raise > €5mln)
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Discussion
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