Addressing The New Capital Accord (Basel II) with SAS

Transcription

1 Addressing The New Capital Accord (Basel II) with SAS Rik van de Weerthof SAS International Charles Duclos Cap Gemini Ernst & Young France

2 Agenda! Summary of the Accord! Addressing some of the issues directly related to the CFO function! Our Value Proposition! Partnership in France with CGE&Y

3 The New Capital Accord: Summary! Definition! The New Basel Capital Accord, or Basel II is a set of broad policy guidelines that each country s supervisors can use to determine the supervisory policies they apply.

4 The New Capital Accord: Summary! Purpose! The new framework is intended to align capital adequacy assessment more closely with the key elements of banking risks and! to provide incentives for banks to enhance their risk measurement and management capabilities.

5 The New Capital Accord: Summary! Scope! Expected that more supervisors will follow! Basel I that was adopted by over 100 countries around the globe.! The New Basel Capital Accord will be applied on a consolidated basis to internationally active banks.! Includes, on a fully consolidated basis, holding companies that are parents of banking groups.! The Accord will also apply to all internationally active banks at every tier within a banking group, also on a fully consolidated basis.

6 The New Capital Accord: Summary

7 The New Capital Accord: Summary! Time Line! Not 2004! Not 2005! Close of Year 2006! But need to act NOW

8 The New Capital Accord: Summary! Major differences between Basel I and Basel II The existing Accord Focus on a single risk measure One size fits all Broad brush structure The proposed new Accord More emphasis on banks own internal methodologies, supervisory review, and market discipline Flexibility, menu of approaches, incentives for better risk management More risk sensitivity

9 3 Pillars Minimum Capital Requirements Supervisory Review Market Discipline

10 3 Pillars Minimum Capital Requirements Supervisory Review Market Discipline Assets Fixed Liabilities Equity Variable Cash Debt

11 3 Pillars Minimum Capital Requirements Supervisory Review Market Discipline Cash + Variable Assets Working Capital FX Cash varies in market value Assets Fixed Variable Liabilities Equity Money Market Investments vary in market value The trading book varies in market value Assets vary in market valuea Cash Debt The banking book varies in market value

12 3 Pillars Minimum Capital Requirements Supervisory Review Market Discipline Assets vary in market value (esp. non-fixed assets) Assets Fixed Variable Liabilities Equity A B/S should be in balance (assets = liabilities) Shareholders (equity) lose first, then debt What would happen if asset value drops 50%? There needs to be a cushion of capital to absorb losses Cash Debt This is the CAPITAL ADEQUACY or MINIMUM CAPITAL REQUIREMENT as defined in PILLAR I (CAD II, NCAF) of the New Capital Accord (=Basel II)

13 3 Pillars Minimum Capital Requirements Supervisory Review Normal Capital Adequacy Reserve Market Discipline Assets Fixed Variable Cash Liabilities Equity Cap. Res. Debt

14 3 Pillars Minimum Capital Requirements Supervisory Review Market Discipline The higher the Capital Adequacy Reserve the lower the Working Capital and the lower the Return on Assets

15 3 Pillars Minimum Capital Requirements Banks MUST produce risk measures for Capital Adequacy Calculation: possible with standardized and internal measurement approach They WANT to do this as accurately as possible to preserve profitability: possible with internal measurement approach Supervisory Review Meaningful differentiation of risk types Completeness and integrity of rating assessment Oversight of the rating system and processes Criteria of rating system Estimation of PD Data collection and IT systems Use of internal rating systems Internal validation Disclosure Market Discipline Strong emphasis on risk reporting and disclosure of measures and techniques

16 3 Pillars Minimum Capital Requirements Banks MUST produce risk measures Standard for Capital Analytics Adequacy Calculation: possible with standardized and internal measurement approach Business Rules They WANT to do this as accurately as possible to preserve Advanced profitability: Analytics possible with internal measurement approach Supervisory Review Meaningful differentiation of risk types Data Model Completeness and integrity of rating assessment Oversight of the rating system and Mapping processes Criteria of rating system Estimation of PD Data collection and IT systems Data Mgt Use of internal rating systems Internal validation Disclosure Market Discipline Strong emphasis on risk reporting Disclosure and disclosure of measures and techniques Standard Reports Insight

17 Coming back to Capital Adequacy Determination... Minimum Capital Requirements Supervisory Review Market Discipline Market Credit Warehouse Various Reporting Tools Operational

18 Coming back to Capital Adequacy Determination... Minimum Capital Requirements Supervisory Review Market Discipline Market Internal Measurement Approach Credit Internal Ratings Based Approach Foundation Approach Advanced Approach Warehouse Various Reporting Tools Operational Basic Indicator Approach Internal Measurement Approach

19 Market Credit Operational Coming back to Capital Adequacy Determination... Minimum Capital Requirements Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach Total capital charge Solvability ratio > 8%

20 CAD & SAS: standardized approach in market and credit risk Minimum Capital Requirements Market Credit Operational Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach 1) Find all individual exposures (E) (possibly reduced by mitigation techniques)

21 Market Credit Operational CAD & SAS: standardized approach in market and credit risk Minimum Capital Requirements Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach 1) Find all individual exposures (E) (possibly reduced by mitigation techniques 2) Determine risk (defined as RISK WEIGHT) A) classification of exposure types B) Look up risk weight (RW)

22 Example: Corporates (credit risk)! If not rated, Weight = 100%! else:

23 Market Credit Operational CAD & SAS: standardized approach in market and credit risk Minimum Capital Requirements Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach 1) Find all individual exposures (E) (possibly reduced by mitigation techniques 2) Determine risk (defined as RISK WEIGHT) A) classification of exposure types B) Look up risk weight (RW) 3) weighted Assets (RWA) = E*RW 4) Total weighted Assets (TRWA) = SUM(E1 N*RW1...N) 5) TRWA * 8% = capital charge (minimum 8% of total capital)

24 CAD & SAS: standardized approach in market and credit risk Minimum Capital Requirements Market Credit Operational Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach Focus on exposure aggregation business rules mapping

25 Market Credit Operational CAD & SAS: IM approach for market risk Minimum Capital Requirements Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach Focus shifts to analytical refinement: Value at Delta Normal Monte Carlo Simulation Historical Simulation Stress Testing MTM P&L Scenario Analyses etc.

26 CAD & SAS: BI approach for operational risk Minimum Capital Requirements Market Credit Operational Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach Ingredients that determine capital reserve: A single indicator (e.g. gross income) to indicate exposure Supervisory adjustment factor EI *α

27 Market Credit Operational CAD & SAS: SA approach for operational risk Minimum Capital Requirements Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach Ingredients that determine capital reserve: A single indicator (e.g. gross income) PER BUSINESS LINE to indicate exposure Supervisory adjustment factor PER BUSINESS LINE N i= 1 EIi * β i

28 Market Credit Operational CAD & SAS: IMA / AMA for operational risk Minimum Capital Requirements Internal Measurement Approach Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach N i= 1 Ingredients that determine capital reserve: A single indicator (e.g. gross income) indicate exposure idem Loss Given Event idem Probability of Event idem Supervisory adjustment factor N j= 1 EI i, j * LGEi, j * PEi, j * i, γ j

29 CAD & SAS: credit risk, from SA to IRB Minimum Capital Requirements Market Internal Measurement Approach Credit Operational Internal Ratings Based Approach Basic Indicator Approach Foundation Approach Advanced Approach Internal Measurement Approach

30 From standardized approach Current Calculation of Capital Charge Σ Exposure weight 8% x x = Capital charge

31 To Internal Ratings Based Approach Current Calculation of Capital Charge Σ Exposure weight 8% x x = Capital charge PD PD (Σ ) EAD BRW LGD M Granularity 8% Capital charge x x x +/- x = Calculation of capital charge under IRB-Approach PD Probability of default M Maturity EAD Exposure at default BRW Benchmark risk weight LGD Loss given default

32 Addressing pillar 2 and 3... Minimum Capital Requirements Supervisory Review Market Discipline Market Credit Warehouse Various Reporting Tools Operational

33 Where SAS Management for Banking adds value (1)! Reduction in Capital Reserves! Increase in Working Capital = Capital Reserve under current circumstances (S.A.) - Capital Reserve under IRB or (Old BIS ratio - New BIS ratio) * Capital! Increase in Working Capital * ROA = profit increase

34 Where SAS Management for Banking adds value (2)! Improved Accuracy! Moving from regulatory capital to economic capital gives better and more accurate insight in actual risk in the portfolio! This allows you to take more appropriate actions and hedge against risks in a cheaper way.

35 Where SAS Management for Banking adds value (3)! based pricing! Price = Minimum required rate of return + Premium! Premium is function of risk of individual customer exposure AND marginal risk added to portfolio! Understanding the sources and levels of risk allows banks to transfer the price of risk back to the customer or to a third party! This improves the overall risk / reward profile of the bank, increasing the expected income while reducing the risk exposure

36 Where SAS Management for Banking adds value (4)! RAPM & RAROC! Gaining a better understanding of the risks vs the reward of a certain investment allows for better investment decisions that are in line with the required (strategic) risk / reward profile of the bank

37 Where SAS Management for Banking adds value (5)! Improved Asset Allocation / ALM! The ability to achieve a risk / reward profile that is in line with the expected expenditures at the appropriate times

38 Where SAS Management for Banking adds value (6)! Better Positioning! The ability to offer different products (investment funds, pension plans, loan contracts, etc.) through various positioning levels! This attracts a wider and more diverse group of customers! Through additional diversity, the overall risk profile of the bank may decrease while adding new exposures

39 Where SAS Management for Banking adds value (7, 8, 9)! Effects on income volatility, credit rating and cost of capital! Reduce income volatility! Increase creditworthiness, credit rating and market perception! This reduces cost of capital, thus increasing profitability

40 Where SAS Management for Banking adds value (10)! Effects of better market perception! Increase of market value! Wealth creation for shareholders

41 Where SAS Management for Banking adds value (11)! Reduce expected AND unexpected losses due to exposure to! Market! Credit! Operational

42 Where SAS Management for Banking adds value (12)! End-to-End & Enterprise Wide! No need to invest in different functional systems (MR, CR, OR..)! No need to invest in different IT systems (data mgt, analysis, reporting..)! Reduction in IT resources! Comparability and Transparency

43 Basel II at! Basel II Credit : Wed 13:45-14:25 and 14:30-15:10 at the Industry Knowledge Center! Basel II Credit : Wed 16:25-17:05 at the Solutions Knowledge Center! Basel II Operational : Wed 17:10-17:50 at the Solutions Knowledge Center! Multiple presentations on Internal Rating Systems! Stream Thu in Room 8

44 The bigger picture! Software! Methodologies! Knowledge solutions! Services! Partners

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