Basileia III e Os Novos Indicadores de Liquidez - Jorg Hashagen

7/28/2019 Basileia III e Os Novos Indicadores de Liquidez - Jorg Hashagen

1/29


2/29

Introduction to

Basel III LiquidityOctober 2012

Financial Risk Management

Jrg HashagenKPMG


3/29

Agenda

I

Regulatory Requirements for Liquidity Standards

Financial Crisis and Consequences

II

Aspects of LCR SteeringIII


4/29

Agenda

I



II



5/29

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


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


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


6/29

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


7/29

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!)


8/29

Agenda

I



II



9/29

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


10/29

Regulatory Requirements for Liquidity StandardsResults of the Monitoring / QIS

LCR =


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

***


11/29

Agenda

I



II


Liquidity Coverage Ratio (LCR)A

Net Stable Funding Ratio (NSFR)B


12/29

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


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


13/29

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


14/29

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


15/29

Regulatory Requirements for Liquidity StandardsLCR Cash Outflows


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 %


16/29

Regulatory Requirements for Liquidity StandardsLCR Cash Inflows


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


17/29

Agenda

I



II


Liquidity Coverage Ratio (LCR)A

Net Stable Funding Ratio (NSFR)B


18/29

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.


19/29

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


20/29

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


21/29

Agenda

I



II



22/29

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


23/29

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)


24/29

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


25/29

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


26/29

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


27/29

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.


28/29

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


29/29

Date post:	03-Apr-2018
Category:	Documents
Upload:	jtnylson
View:	223 times
Download:	0 times

Basileia III e Os Novos Indicadores de Liquidez - Jorg Hashagen

Documents