Basileia III e Os Novos Indicadores de Liquidez - Jorg Hashagen
Transcript of Basileia III e Os Novos Indicadores de Liquidez - Jorg Hashagen
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Introduction to
Basel III LiquidityOctober 2012
Financial Risk Management
Jrg HashagenKPMG
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Agenda
I
Regulatory Requirements for Liquidity Standards
Financial Crisis and Consequences
II
Aspects of LCR SteeringIII
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Agenda
I
Regulatory Requirements for Liquidity Standards
Financial Crisis and Consequences
II
Aspects of LCR SteeringIII
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Financial Crisis and ConsequencesLiquidity Standards for Strengthening the Liquidity Base
Cause (August 2007)
Northern Rocks business was heavilydepending on borrowing on money markets.
Demand from international investors forsecuritized mortgages plunged. The bankwas unable to fulfill its considerable moneymarket obligations.
Consequence (September 2007)
Northern Rock had to be bailed out bythe Bank of England
Panic customers withdrew bn2 ofdeposits within 3 days
Final outcome (February 2008)
Northern Rock was nationalized
Cause (year 2008)
Lehman Brothers was heavily invested insecuritized subprime loans (low-ratedmortgages)
Subprime market dropped significantly
Assets became illiquid
Consequence (September 2008)
The bank had huge losses
Investors lost confidence
Refinancing conditions worsened
Lehman shares fell by approx. 50%
Final outcome (September 2008)
Lehman Brothers filed forChapter 11 bankruptcy
Largest default ever in the US
Parts of the bank were sold todiverse Investors (incl. Barclays)
Cause (September 2008)
AIG was heavily trading with Credit DefaultSwaps (CDS)
It lost its highest rating that until thenlimited the obligation to post collaterals
The company had to post additionalcollaterals in cash ($bn 14.5) as theunderlying assets deteriorated dramatically
Consequence (September 2008)
The Fed provided a secured creditfacility of max. $bn 85 to help thecompany
AIGs share price fell by 95%
Final outcome (September 2008)
Government got a 79.9% equitystake in AIG (nationalisation)
AIG was removed from the DowJones Industrial Average
Regulators focus on liquidity stress
Strengthening of regulatory requirements (Basel III: LCR, NSFR)Consequences
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Financial Crisis and ConsequencesLiquidity Standards for Strengthening the Liquidity Base
2008 2009 2011 201208/2009 12/2010
Basel IIIFramework forLiquidity RiskMeasurement
07/2011
Financial Crisis
2010
AIGFed takes over79,9% of the
shares
08/2008
LehmanBankruptcy
under Chapter11
02/2008
NorthernRock
Temporarynationalisation
December 2010: the BCBS introduced Basel III consisting of an international liquidity framework with quantitativeliquidity ratios (LCR, NSFR) and qualitative monitoring tools for the first time
Basel III aims to introduce a homogeneous liquidity standard and a minimum requirement:
Implementation as a regulation for the establishment of single rules and reducing of national electoral law
Harmonisation of the regulation for the banking sector and enhancement of transparency
Strengthening of the financial system and the liquidity provision of the institutions
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Financial Crisis and ConsequencesTime Frame of Implementation of the Liquidity Standards (Basel III)
2012 2013 2014 2015 2016 2017 20182011
Observation period LCR LCR
Observation period NSFR
Monitoring / QIS
NSFR
1.1.2015LCR as minimum requirement
1.1.2018NSFR as minimum requirement
1.1.2013Start obligatory reporting to
supervisor
Before the observation period start, banks report the liquidity standards on a best effort basis to their supervisoryauthority (monitoring / QIS)
The implementation of the liquidity standards LCR and NSFR into national law and regulation will take place afterthe start of the observation period on 01.01.2013
For Europe, Integration of the regulatory requirements will be finished by the EBA on basis of several technicalstandards until end of 2013 (e.g. the precise definition of liquid assets)
The liquidity standards have to be fulfilled continuously besides national requirements; standards have to bereported to the national supervisory authority monthly (LCR) or quarterly (NSFR) respectively
During times of stress the standards have to be evaluated on a daily basis; apart of this falling below the 100%-threshold and usage of the liquidity buffer will be temporarily allowed (in discussion!)
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Agenda
I
Regulatory Requirements for Liquidity Standards
Financial Crisis and Consequences
II
Aspects of LCR SteeringIII
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Regulatory Requirements for Liquidity StandardsBasel III Liquidity - Main Components of the Regulatory Framework
LCR
High-quality liquid assets
Total net cash outflow
within the next 30 days
NSFR
Short-term liquidity standard based on cash flowsand market values within a time horizon of 30 days
Strong relation to the liquidity buffer required by
CEBS
= 1
Available amount ofstable funding
Required amount ofstable funding
= 1
Middle/Long-term liquidity standard based on bookvalues and a time horizon of one year
Consistent requirements for LCR with respect toliquid assets
Monitoring Tools
Contractual maturity mismatch
Funding concentrations
Available unencumbered assets
LCR by significant currencies
Market-related monitoring tools
Basically a great part of the requirements is alreadyimplemented by the implementation of Basel IIIstandards and requirements
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Regulatory Requirements for Liquidity StandardsResults of the Monitoring / QIS
LCR =
High-quality liquid assets
Total net cash outflowwithin the next 30 days
Time horizon 30 days
NSFR =
Available amount of stable
funding
Required amount of stablefunding
Time horizon 1 year
The new liquidity standards under Basel III
Group 1: internationally active banks with Tier 1 capital excess 3 billion.
Group 2: all other banks
* Ergebnisse des Basel III-Monitoring fr deutsche Institute, Deutsche Bundesbank, 2012 ** Results of the Basel III montoring excercise, BIS, 20.09.2012
German banks International banks
June 2011 Dez 2011
Ratio in % LCR NSFR LCR NSFR
Group 1 68,4 87,3 66,1 89,6
Group 2 74,1 83,5 93,4 83,2
June 2011 Dec 2011
Ratio in % LCR NSFR LCR NSFR
Group 1 90 94 91,5 98,2
Group 2 83 94 97,7 95,4
***
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Agenda
I
Regulatory Requirements for Liquidity Standards
Financial Crisis and Consequences
II
Aspects of LCR SteeringIII
Liquidity Coverage Ratio (LCR)A
Net Stable Funding Ratio (NSFR)B
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Regulatory Requirements for Liquidity StandardsLiquidity Coverage Ratio (LCR) - Overview
HQ liquid assets
Net cash outflowsLCR =
=
Market value x
-
Asset Factor
Cash outflows x Runoff Factor
Cash inflows x Inflow Factor
=
=LCR 1
High-quality liquid assets
Total net cash outflowwithin the next 30 days
Objective is to ensure that the bank maintains an adequate level of unencumbered, high-quality liquid assets inorder to meet its liquidity needs during the next 30 days
Liqui needs are to be met in a stress scenario based on a combined idiosyncratic and market-wide shock, whichcontains amongst others the following assumptions
The liquidity standards are based on fixed factors predetermined by the supervisory authority (single rule book)
without any space for interpretation or economic modelling
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Regulatory Requirements for Liquidity StandardsRequirements for High-Quality Liquid Assets
HQ liquid assetsLCR =
High-Quality liquid assets
, if they can be easily and immediately converted into cash at little or no loss of value, , even in times of stress(Basel III Liquidity, Tz. 22).
Low credit and market risk (rating, currency, product type, etc.)
Ease and certainty of valuation (plain-vanilla products, )
Listed on a developed and recognised exchange market
Central bank eligibility
Active and sizable market
Presence of committed market makers Flight into quality
Asset must be unencumbered and available at any time (standard and stress periods)
May not be used for hedging or trading strategies
Controlled by treasury
Periodical testing of market access via outright sales or repos
Productcharacteristics
Marketability
Operationalminimumrequirements
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Regulatory Requirements for Liquidity StandardsLCR High-Quality Liquid Assets
HQ liquid assetsLCR =
Level 2Assets
Level 1 Assets
Marketable claims on or guaranteed by governments, central banks,other PSEs, multilateral development banks (not issued by financials)with a risk weight of 20% under Basel II standardized approach
Corporate bonds (not Financials!) and covered bonds with a ratingof at least AA-
Further conditions
max. price decline within 30 days of not more than 10%
eligible with 85% of market value
Cash
Central bank reserves (if available in times of stress) Marketable claims on or guaranteed by governments,
central banks, other PSEs, supranational organisations (notissued by financials)
with a risk weight of 0% under Basel II standardizedapproach
eligible with 100% of market value
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Regulatory Requirements for Liquidity StandardsLCR Cash Outflows
Net cash outflowsLCR =
Cash outflows within the next 30 days
Withdrawal of retail deposits (incl. SME)
Stable deposit Less stable deposits
Withdrawal of unsecured wholesale funding
Financial wholesale customer
with operational relationship
others
Nonfinancial corporates, sovereigns, central banks,multinational development banks, other PSEs
With operational relations and deposit insurance
With operational relationship
others
Factor
5%10%
Loss of secured funding
Covered by level 1 assets Covered by level 2 assets
Secured funding with domestic sovereigns, centralbanks or PSEs (risk weight 20%) that are not backedby level 1 or level 2 assets
All others
Committed lines (by counterparty)
Retail and SME
Nonfinancials, sovs, CB, PSEs (credit)
Nonfinancials, sovs, CB, PSEs (liqui)
Financials
Other essential outflows
Increased liquidity needs related to valuationchanges on posted collateral (not level 1)
Expected outflows from Derivatives (on a net basis)
Increased liquidity needs from embedded downgradetriggers
Interest payments, unsecured funding,
Factor
0 %
15 %
25 %
100 %25%
100%
5%
25%
75%20 %
100 %
100 %
100 %
BANK RUN
3 NOTCH DOWNGRADE &COLLATERAL CALLS
Drying-out of InterbankFunding 0 %
10 %
100 %
100 %
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Regulatory Requirements for Liquidity StandardsLCR Cash Inflows
Net cash outflowsLCR =
Maturing reverse repo and secured transactions
Covered by level 1 assets Covered by level 2 assets
Covered by other assets
Committed credit lines, liquidity facilities or othercontingent funding facilities
Other inflows by counterparty
Retail and SME*
Wholesale (FI)*
Wholesale (Non-FI)*
Deposits held at other financial institutions foroperational purposes
Deposits held at the centralized institution in acooperative banking network
Other inflows
Maturing assets (not level 1 or level 2)
Expected inflows from Derivatives (on a net basis)
Cash inflows within the next 30 days
* Necessary conditions
Only contractual inflows
Only fully performing inflows without any expected default
Minimum level of liquid asset holdingssince the inflows are capped at 75%
of total expected cash outflows
Factor
0%15%
100%
0%
Factor
50%
100%
50%
0%
0%
100%
100%
Drying-out of InterbankFunding
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Agenda
I
Regulatory Requirements for Liquidity Standards
Financial Crisis and Consequences
II
Aspects of LCR SteeringIII
Liquidity Coverage Ratio (LCR)A
Net Stable Funding Ratio (NSFR)B
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Regulatory Requirements for Liquidity StandardsNet Stable Funding Ratio (NSFR): Overview
Available Stable Funding
Required Stable FundingNSFR =
=
Book Value x ASF Factor
Book Value x ASF Factor
==NSFR > 1
Available Stable Funding(ASF)
Required Stable Funding(RSF)
Specific definition in CRD IV still open; further specifications will follow during the observation period
Objective of the NSFR is to promote structural changes in the liquidity risk profile of financial institutions fromshort-term funding towards a long-term funding policy as well as a restriction of the term transformation
To calculate NSFR, there will be assumed an firm-specific stress scenario, which considers amongst others thefollowing assumptions
Potential downgrade in a debt, counterparty credit or deposit rating,
Loss of the institutions reputation or credit quality,
A significant decline in profitability arising from heightened credit risk, market risk, operational risk and otherrisks.
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Regulatory Requirements for Liquidity StandardsNSFR Required Stable Funding
Required Stable FundingNSFR =
RSF components Factor
Unencumbered cash (and not held for planned use); Unencumbered short-term instruments, securities and loans to financial entities with remaining maturity< 1 year
0%
Unencumbered marketable securities resp. claims on or guaranteed by sovereigns, CB, BIS, IMF, EU, PSEs with RW * 0%, rem. mat. 1 year 5%
Unencumbered marketable securities resp. claims on or guaranteed by sovereigns, CB or PSEs, liquidity level 2, rem. mat. 1 yearUnencumbered corporate bonds or covered bonds of liquidity level 2, remaining maturity 1 year
20%
Unencumbered corporate bonds or covered bonds with rating A+ to A- and remaining maturity < 1 year,Gold, equity securities not issued by financial insti tutions, unencumbered loans to non-financial corp., sovereigns, CB, PSEs, rem. mat. < 1 year
50%
Mortgages (any maturity) with risk weight * 35%Other unencumbered loans (to non-financial institutions) with RW * 35% and remaining maturity 1 year
65%
Unencumbered loans to retail customers and SME with remaining maturity < 1 year 85%
All other assets 100%
Off-balance sheet positions
Credit- and Liquidity lines (conditionally revocable and irrevocable) 5%
Other contingent funding obligations **
LiquidityQualityofA
ssets
Positions requiring stable funding are assets and off-balance sheet positions based on book values
Assets with encumbrance period > 1 year receive a 100% factor. Assets with encumbrance period < 1 year are treated asunencumbered assets
Main challenges:
Delivery of book values on a granular basis, identification of marketability
* Risk weight under Basel II standardised approach** Basel III: to be specified by national supervisory authorities
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Regulatory Requirements for Liquidity StandardsNSFR Available Stable Funding
Available Stable FundingNSFR =
ASF components Factor
Tier 1 and tier 2 capital according to Basel II
Preferred stock (not included in tier 2) with effective remaining maturity 1 year
All other liabilities with effective remaining maturity 1 year
100%
Stable retail or SME deposits without maturity or remaining maturity < 1 year 90%
Less stable retail or SME deposits without maturity or remaining maturity < 1 year 80%
Unsecured wholesale funding and deposits from non-financial corporates, sovereigns, CB and PSE (without maturity or remaining maturity < 1 year) 50%
All other liabilities and equity categories 0%Stabilityofliab
ilities
Available stable funding consists of various liabilities based on book values
Main challenges:
Determination of equity components consistently to regulatory reportings definition
Avoiding of double counting by deductions from capital
Determination of book values on a granular basis
Distinction of stable and less stable deposits
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Agenda
I
Regulatory Requirements for Liquidity Standards
Financial Crisis and Consequences
II
Aspects of LCR SteeringIII
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Impact of the new regulations: what banks need to think about
ITFramework
Metrics &Metho-dologies
Gover-nance
BusinessModel
Governance, role of risk management
Risk appetite, liquidity risk policy andlimits
Liquidity transfer pricing and liquidityadjustments to business pricing
Modeling, stress testing
Scenario testing, andinterface with othermetrics and regulatoryrequirements
Reassess strategy, business model,funding model, asset and liabilitystructures, profitability
Take account of liquidity pressures andother regulatory reform initiatives(capital, bail-in debt etc)
Determine business activities andlocations which are no longer sufficientlyprofitable to continue
Take stock of short-term wholesalefunding and long-term lending
Data quality and frequency,IT systems, reporting
Monitoring positions on data,systems and controls, ALMsystem integration,regulatory and managementreporting, stress and scenariotesting
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In the future banks have to manage two effective regulatory regimes in parallel ...
...and compared to current internal models, LCR will become a restrictive regulatory requirement, hence LCRhave to be considered in the overall bank management / steering
LCR SteeringThoughts on LCR / NSFR Steering
Quantitative risk management requirements
LCR, NSFR
Qualitative risk management requirements
Internal model (Liquidity Ladder, Stress Testing)
Main tools for LCRsteering
Implications / requirements
Reconciliation internalmodel vs. LCR / NSFR
Governance formanaging LCR / NSRF
Simulation / Forecastingof LCR / NSFR
Liquidity reservesmanagement
IT InfrastructureBusiness / product
management
LCR / NSFR withinbusiness and funding
plan
Cost benefit allocation(FTP)
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Banks need to adjust their balance sheets to meet newrequirements
Actions to meet: Liabilities Assets
LCR Switch out of short-term wholesale funding (lessthan 30 days to maturity).Switch into longer-term wholesale funding and retaildeposits.
Switch into assets that count as high quality liquid assets(government bonds, cash held at central banks, and - subjectto limits covered bonds and liquid corporate bonds).
NSFR Switch into long-term (more than one year)wholesale funding and retail deposits.
Switch out of long term lending into short term (less than oneyear maturity) assets.
Lower yields on assets Higher cost of funding
Accentuated because all banks will be doing this at much the same time scramble for liquidity:
Aggressive competitionfor retail deposits
Increased demand formore-than-one-year-
maturity wholesale funding
Overseers have thepower to force debtholders to write-off
debt or convert it intoequity
Tougher requirements onrecovery plans will put
upward pressure on cost Limited access to longer-term funding at any price
for banks in somemarkets
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What is to be done: Liquidity Strategy and Planning
Approach on the strategic and planning level:
Articulate a liquidity risk appetite that is appropriate for the banks business strategy
Develop a strategy, policies and practices to manage liquidity risk in accordance with the risk appetite and toensure that the bank maintains sufficient liquidity, including liquidity buffer
Establish a funding strategy that provides effective diversification in the sources and tenor of funding, thatshould be part of the funding plans and be aligned with the budgeting and business planning process
Risk appetite
Lower risk appetite for thosebusinesses that are heavyusers of liquidity
Focus on transfer pricingwhich highlights sustainablebusinesses
Careful consideration toreduce liquidity optionalityfor clients and customers
Investment banking businesslikely to be less of a driver ofP&L
Reduction in leverage withinthe industry
Liquidity buffer
Reduction in assets which areconsidered buffer eligible
Firms will have limited desire
for assets where they cannotdemonstrate on-going andthrough the cycle liquidity
Credit linked notes / CDOs /CP of significantly les value tofirms
Requirement on firms toprove ongoing liquidity valuewithin their buffers.
Asset strategies
Pricing of assets which takesinto account liquidity value.(LTV being a significant driverof lending rate to consumers)
Reduced holding period fortrading book assets
Flow business more restrictedto saleable assets with deepmarkets (GEM as an example)
Credit flow desk lessdesirable
Integrated strategic approach to liquidity management (Assets and liabilities)
Funding plans
Regime is likely to severelyreduce cross subsidisation ofdifferent business lines
Firms likely to be increasinglyfocused on stable fundingsources such as retail depositsand wealth management arms
Fundamental change infunding plans away fromreliance on wholesalemarkets. Growth in fundingcapacity will be constrainedand this will impact assetaccumulation
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Liquidity transfer pricing complements the risk management role ofthe treasury function
Assets /Derivatives
Capital Markets Trading Book
Assets
Banking BookAssets
Derivatives
Cust. Business
Loans
Credit Lines
Model Books
Participations
Other Assets
Treasury Roles
Funding need
Collateral
Liquiditytransferprice
Funding
Collateral
Liabilities
Capital MarketsFunding
UnsecuredBonds
Covered Bonds
Customer Funding
Demanddeposits
Saving deposits
Model Books
Own equity
Reserves
Liquiditytransferprice
Liquidity Risk
Management CapitalManagement
CollateralManagement
Market Risk Management
Liquidity Gap Profile
FX RiskIR Risk
Money Market Funding
FundingCollateral
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A principle-based approach facilitates communication and effectiveimplementation
Principle 2
The liquidity transfer pricing systemshould incentivise the rightbehaviour. It must reflect the true
cost / credit of funding.
Principle 4
Marginal funding costs should beapplied to each transaction on anindividual basis.
Principle 6
Liquidity transfer pricing shall beapplied to all transactions (assets,liabilities, derivatives, ) in auniform way and at identical
prices.
Principle 3
In general, liquidity transfer pricingshould be arbitrage-free andmarket-based.
Principle 8
Liquidity transfer pricing andliquidity risk measurement /reporting are based on the sameexpected and contingent cash flowprofiles.
Principle 5
In general, the liquidity transferprice is set at the origination of abusiness transaction and shouldremain fixed until maturity of the
transaction.
Principle 7
The liquidity transfer price shouldtake into account all relevantcharacteristics of a transaction.
Principle 9
The liquidity transfer pricing shouldbe reflected in customer pricingand profitability analyses.
Principle 1
The liquidity transfer price shouldbe transparent and understandablefor all stakeholders involved.
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Liquidity transfer pricing has to be flexible in order to reflect thespecific business and market environment
Case 2: Extreme spreads during market crisis
Market crisis leads to excess market spreads
New investments are unable to earn these spreads
Uncontrolled rise in transfer prices can lead to halted loan businessand excess rates offered on deposits
Normalmarkets
Case 1: Structural investment need
ALM needs to invest excess customer deposits in capital markets
Credit risk and economic/regulatory capital do limit this investment
customerloans
capitalmarkets
investment
capitalmarketsfunding
customerfunding customer
loans
capital/money
marketsinvestment
customerfunding
Structural funding need Structural investment need
t
Crisis Future
Risk adjustedreturn oninvestments
Assumptions I.+II. not applicable Assumption II. not applicable
Fundingspread
Funds transfer price to correspond to realisable
returns on investments adjusted for credit risk
In times of identified crisis: strategic decisions on
spread level necessary
Underlying assumptions:I. Structural need for capital markets fundingII. Treasury able to invest / fund unlimited volumes
Funds transfer prices usually derived from funding spreadsobserved at the financial markets
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