Surveillance, Monitoring and Early Intervention

Transcription

1 12 th Asia-Pacific Regional Committee (APRC) Meeting and International Conference 24 April 2014, Kyoto, Japan Surveillance, Monitoring and Early Intervention PDIC President Valentin A. Araneta

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3 I. Introduction II. III. Outline Definition, Objectives and Approaches to Risk Assessment of Banks Risk Profile of Philippine Banks IV. Deposit Insurance Fund (DIF) Level V. PDIC Mix of Assessment Tools a) On-site Bank Examination b) Off-site Bank Rating Model (OBRM) c) Financial/Statistical Models Bank Failure Prediction Model Stress-Testing Model for Banks V. Bank Resolution Measures

4 DEFINITION Based on BCBS Working Paper No. 4 (December 2000) Authors: Ranjana Sahajwala & Paul Van den Berg Early Warning System refers to methods and processes used by regulators for monitoring and assessing banks on an on-going basis. Objectives Systematic assessment of banking institutions within a formalized framework both at the time of on-site examination & in between examinations through off-site monitoring; Identification of institutions & areas within institutions where problems exist or are likely to emerge; Prioritization of bank examinations for optimal allocation of supervisory resources & pre-examination planning; Initiation of warranted & timely action by the supervisor.

5 BROAD APPROACHES TO RISK ASSESSMENT OF BANKS Based on Survey of BCBS 1. Supervisory bank rating systems (e.g. CAMELS Rating) Issue: Static/Backward looking. 2. Financial ratio & peer group analysis systems - banks grouped generally by asset size; financial ratio of bank compared (a) with its own past trend and; (b) trend of peers. 3. Comprehensive bank risk assessment systems - assigns rating to each unit of bank operation; require intensive on-site exam & special visits (6mos. to 3yrs to complete). Issues: Resource intensive & time consuming; most suitable for large and complex institutions. 4. Statistical Models - considered true early warning models ; focus is on the future direction of bank performance; Types: a) Rating estimation (mutinomial model); b) Failure or survival model (binary logit model); c) Expected loss model (expected loss on credit impact on capital); d) Other Models. Issues: Models exclude factors such as management, controls, credit culture, and other qualitative factors; Not fully developed, i.e., not tested vs. all economic cycles.

6 Profile of Philippine Banks & PDIC EWS Tools Amounts are in Billion Pesos, as of December 31, 2013 Bank Type No. of Banks Total Deposits (TD) PDIC Exposure (Est. Insured Deposits or EID) EID/TD Rear-View Totals 673 7, , % CAMELS Rating Sytem KB 36 90% 85% 22% TB 71 8% 10% 29% RB 566 2% 5% 63% Off-site Bank Rating Model PDIC EWS Tools Forward-Looking Financial/ Statistical Models Bank Stress- Testing & Bank Failure Prediction Models KB or Commercial Bank represent the largest group, resource-wise, of financial institutions in the country. They offer the widest variety of banking services among financial institutions. TB or Thrift Bank caters to small-and-medium enterprises and individuals. They provide short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services. RB or Rural Bank sector is made up of cooperative, microfinance-oriented, and regular rural banks, mostly familyowned, promoting and expanding the rural economy by providing the people in the countryside with basic financial services.

7 Deposit Insurance Fund Level Deposit Insurance Fund (DIF) Capital account of PDIC Represents overall capacity of PDIC to cover anticipated and unanticpated losses arising from bank failures Composed of: -Permanent Insurance Fund -Estimated Insurance Losses -Retained Earnings Determination of Adequate Level of DIF Ratio of DIF to Insurance Reserves Target (IRT) Ratio of DIF to the Estimated Insured Deposits (EID)

8 Indicators of DIF Adequacy Ratio of DIF to Insurance Reserves Target (IRT) Ratio represents potential charges to the DIF arising from anticipated and unanticipated losses IRT is the sum of: anticipated loss = 100% x EID of Banks at Risk (BAR)* unancticipated loss = 2.5% of EID of non-bar banks* * BAR or non- BAR banks are determined using the Offsite Bank Rating Model

9 Indicators of DIF Adequacy Ratio of DIF to EID - target of 5% A strategic long-term target Compares DIF to the EID of the whole banking industry Methodology recommended by the World Bank/ First Initiative consultant The study showed that 5% target is: - Sufficient to cover actual cases of failed banks for the worst two contiguous years. - Able to absorb losses of at least one large bank under ordinary market condition (not systemic) - Provides additional margin for unanticipated risks

10 PDIC Mix of Assessment Tools 1. On-site Bank Examination - may be done jointly or independently of the Central Bank. 2. Off-site Bank Rating Model (OBRM) quarterly assessment of banks on the basis of bank-submitted reports, on-site exam reports, and other information available to PDIC where banks are assigned CAMELS rating. 3. Financial/Statistical Models (Early Warning System) a. Failure Prediction Model - assess probability of failure within the next 12 months. b. Bank Stress Testing Model using hypothetical scenarios/ sensitivity analysis, assess financial soundness of banks over the next 12 periods, usually quarterly

11 PDIC EWS Tools Bank Failure Prediction Model Stress-Testing Model for Banks Both models developed by World Bank under the Financial Sector Reform and Strengthening (FIRST) Initiative; in collaboration with PDIC. The objective is to enhance PDIC s ability to manage the Deposit Insurance Fund (DIF) and ensure its adequacy thru improving analytical tools for estimating future losses Improve PDIC s surveillance and oversight capabilities as well as mitigate risks. Project was completed in 2013 and fully implemented in 2014.

12 Sources of Information QUANTITATIVE Financial Reporting Package (FRP), a set of financial statements for prudential reporting purposes composed of the Balance Sheet, Income Statement and Supporting Schedules, designed to align with the provisions of the Philippine Financial Reporting Standards (PFRS)/ Philippine Accounting Standards (PAS) and Basel Accords Capital Adequacy Framework. QUALITATIVE PDIC Bank Examination Report (BER) Available Central Bank Information Risk-Based Capital Adequacy Report, i.e. BASEL requirements

13 Framework for All Banks, net of closures after cut off OBRM Rating = 1, 2, 3 Choosing Pool of Banks for Exam EID > P50M PDIC has not examined bank w/in past 12 months POOL OF BANKS FOR EXAM

14 Authority of PDIC to Examine Banks: PDIC authority to examine banks is provided under its Charter Conduct of examination needs prior PDIC Board and CB approval. PDIC to observe 12-month interval from closing date of CB examination. PDIC may conduct special examination if there is a threatened or impending bank closure (TIBC). In case of special examination, there is no need for CB approval but appropriate coordination should be done. PDIC may inquire into or examine deposit accounts in case there is finding of unsafe and unsound (U&U) banking practice.

15 PDIC EWS Tools: Offsite Supervisory Bank Rating System The Off-Site Bank Rating Model (OBRM) is a tool used by PDIC in assessing/rating banks performance and condition according to CAMELS, based on bank-submitted reports (Balance Sheet, Income Statement, etc.), examination reports and compliance with selected PDIC regulations: Capital Adequacy Asset Quality Management/Governance Earnings Liquidity, and Sensitivity to Market Risk BANK

16 Capital Adequacy Asset Quality Management/ Governance Earnings Liquidity Sensitivity to Market Risk BANK SUBMITTED REPORTS OTHER MARKET INFO Risk Category 5 Risk Category 4 Risk Category 3 CB- SHARED REPORTS / INFO CAMELS Risk Rating The Off-site Bank Rating Model Process Risk CLASS Non-BAR Risk Category 2 Risk Category 1 Bank-At-Risk (BAR) 1 1 These are banks requiring stricter surveillance/monitoring given poor condition and adverse findings.

17 PDIC EWS Tools: BANK FAILURE PREDICTION Features & Implementation Comprised of 3 models with bank failure defined as (1) bank closings, (2) capitalization less than 2%, and (3) both closings and/or capitalization<2%. Uses 5 bank condition and performance indicators/ratios representing CAEL as follows: Gross Problematic Assets-to-Unimpaired Capital, Past Due Loans-to-Gross Loans, Net Interest Income-to Ave. Interest Earning Assets, Profit (Loss) after taxes-to-ave. Assets (ROA), and Quick Assets-to-Total Assets. Excel based, simple and user-friendly Familiar structure for data entry using PDIC financial ratios 1-year forecast horizon

18 Screenshot of Model Results/ Template

19 PDIC EWS Tools: STRESS TESTING MODEL Features The Stress Testing Model is an excel based projection model principally designed to evaluate large banks and monitor problematic banks in a forward-looking manner. It simulates the potential impact of assumed stress variables/set of assumptions on a bank s capital adequacy, profitability, assets, liabilities and liquidity over a chosen projection horizon. Projection horizon of 12 periods may be monthly or quarterly

20 PDIC EWS Tools: STRESS TESTING MODEL Applications Provides financial soundness indicators (e.g. stressed Tier 1, Tier 2, CAR levels; financial ratios; recapitalization requirements) Allows for stress testing to be applied on a single bank or groups of banks. Allows for combining all the banks and applying stress testing on a system wide basis.

21 PDIC EWS Tools: STRESS TESTING MODEL Applications Assess sustainability of mergers and acquisitions going forward. Financial projections may be generated reflecting bank s business plans; launching/offering new product lines; unloading portfolios. Other Application being Developed: Estimation of cost of closure

22 Stress Testing Model -Structure INPUT MAPPING AND ASSUMPTIONS OUTPUT IMPLEMENTATIONS

23 PDIC EWS Tools: STRESS TESTING MODEL Limitations Though inspired by real bank practices, certain simplifications were assumed which may not capture the entire breadth and depth of potential effects of shock variables. Projections are linear though some feedback loops are embedded. There are no econometric analysis. The Model does not measure coefficients between macro indicators and risk indicators. Neither are the correlations between asset classes or liabilities to risk factors assessed. Assessment is done for the entire bank. No divisional nor cross-divisional stress testing may be done.

24 PDIC BANK RESOLUTION FRAMEWORK Prompt Corrective Action Bank Resolution Financial Assistance (FA) (Stand alone/regular FA) Merger and Consolidation (M&C) and Purchase & Assumption (P&A) Receivership (Appointment given by the MB/CB to PDIC) Assisted M&C, P&A Unassisted M&C, P&A Payout Rehabilitation Commercial, Thrift Rural & Coop Banks Thrift, Rural & Coop Banks CB Relief & Incentives Liquidation Investor Investee Help Desk* CFIEP SPRB Plus SPCB Legend: CB undertaking PDIC undertaking Joint CB-PDIC undertaking * Applies to all banks and non-banks

25 Other Bank Strengthening Programs Investor-Investee Helpdesk, facilitate MCAs by providing a market place where investors interested in merging with or acquiring banks, can meet banks looking for buyers. Countryside Financial Institutions Enhancement Program (CFIEP), Module 3: provides incentive to MCAs of CFIs involving at least one (1) undercapitalized CFI in order to prevent closures, attain economies of scale, achieve higher lending capacities, diversify risks, and improve the quality of banking services. Strengthening Program for Rural Banks (SPRB) Plus, expands the original SPRB to include strong and well-managed TBs and KBs as among eligible Strategic Third Party Investor (STPI) or so-called white knights entitled to incentives when investing in problematic country-side based banks. Strengthening Program for Cooperative Banks (SPCB), Basically similar to SPRB Plus above, except that the players are limited to cooperative banks and non-bank institutions majority owned by cooperatives. Investor- Investee Helpdesk Bank Strengthening Programs SPRB/ SPRB Plus CFIEP Module III SPCB

26 Surveillance and Early Intervention Challenges Reliability of data submitted, particularly those by small banks;