Panel I: Credit Risk

Transcription

1 Panel I: Credit Risk

2 RWAdensity = RWA Total Assets

3 Reducing variation in CRWA Constraints on the use of internal model approaches The proposed changes to the IRB approaches aim to: 1. reduce complexity, and improve comparability 2. address excessive variability in the capital requirements

4 Reducing variation in CRWA Constraints on the use of internal model approaches Proposes: To remove the option to use IRB approaches for certain exposures To reduce variability in (RWA) for portfolios where the IRB approaches remain available

5 Revisions to the SA for Credit Risk 2 nd CD/ Dec. 2015, Comments by 11 March 2016 Objectives: 1. To balance simplicity and risk sensitivity 2. To promote comparability by reducing variability in RWA 3. To ensure that SA is a suitable alternative & complement to the IRB It is Not aimed at increasing Capital requirements

6 Current SA: what is the problem? Mechanistic reliance on External assessor: ECAI 1 st CD: remove references to external ratings/2 risk drivers Overly complex, insensitive to specific risks 2 nd CD: reintroduce ratings: Countries that allow use of ratings for reg. purposes alternative approaches: Countries that don t allow ratings for reg. purposes What about comparability?

7 Proposed Revisions 1. Exposures to banks 2. Exposure to Corporates (Specialized lending) 3. Subordinated debt, equity & other Capital instruments 4. Retail portfolio 5. Real estate exposure class (RRE, CRE, ADC) 6. Off-B/sheet 7. Defaulted exposures 8. MDB s 9. CRM framework

8 QIS on the 1 st CD: data as of 31/12/ banks from 27 countries 30 G-SIB s 92 were Group 1 banks 119 were Group 2 banks 300 QIS templates submitted for the 2015 Basel data collection exercise: 242 provided data for the analysis and 153 were from Europe Data is weighted towards European jurisdictions, what about other regions??

9 QIS on the 1 st CD: overall results 1. Average RW: increases for: Specialized lending Banks Corporate Modest increases: CRE RRE Unchanged: retail MDB Sovereign as well 2. Capital requirements would increase substantially

10 Panelists Mrs. Sahar El-Damaty: Deputy executive Director & Board member Chief Risk Officer (CRO) Emirates NBD - Egypt Mr. Khaled Abdel Samad: Chief Risk Officer (CRO) Lebanon & Golf Bank (LGB) Mr. Bashir Yakzan: Chief Risk Officer (CRO) BBAC, Lebanon

11 Currency mismatch Currency of the loan is different from that of the borrower s main source of income 1 st CD: retail & RRE 2 nd CD: more broadly Unhedged exposure: borrower that has no natural or financial hedge against FX Risk arising from currency mismatch 50% add-on to unhedged exposure

12 Off-balance sheet exposures: UCC Ex.: unused balances 1 st CD: all CCFs should be greater than 0%. Proposal is 10%. Respondents: Will adversely affect lending and economic growth, 0% CCF more appropriate 10% CCF would be particularly unjustified for the corporate segment, loans are closely monitored and banks could reduce such credit lines immediately.

13 Off-balance sheet exposures: UCC Supervisors note that: Consumer protection laws, risk management capabilities, reputational risk or other factors appear to constrain banks ability to cancel such commitments in practice. Many of the commitments assigned to this category may only be cancelled subject to certain contractual conditions (therefore, they are not really unconditionally cancellable). New proposal: CCF between 10% and 20% for retail, and all non retail will be higher (general commitments)

14 Retail exposures 4 potential risk drivers to increase granularity: (a) debt-service coverage ratio (b) secured vs unsecured exposures (c) maturity of the exposure (d) length of the relationship with the customer. Analysis revealed that options (b) & (d) were clearly superior to (a) & (c) Option (b) was the best performing driver on the basis of the evidence observed definition of secured vs unsecured was not specifically defined for QIS purposes, the submissions might not be entirely comparable.

15 Mr. Khaled Abdel Samad: Chief Risk Officer (CRO) Lebanon & Golf Bank (LGB) Banks and Retail Class

16 Corporate exposures 1 st CD: No ratings Risk drivers are leverage and revenues, RW s (60% - 300%) QIS results: unrated corporates are dominant (SMEs & non-smes) Leverage behaved reasonably well compared to PDs Revenue is less closely related to PDs.

17 Specialized Lending exposures 1 st CD: to align the SA with the IRB by introducing the IRB s five subcategories Higher risks and losses than other types of corporate exposures

18 Specialized Lending exposures the higher of a 120% RW and the RW of the counterparty: - Project finance - Object finance - Commodities finance - IPRE finance the higher of a 150% RW and the RW of the counterparty: - Land acquisition, - Development and construction finance.

19 Corporate exposures Mrs. Sahar El-Damaty: Deputy executive Director & Board member, Chief Risk Officer (CRO) Emirates NBD - Egypt

20 Real Estate Loans & Regulatory Capital Under Basel I CRE RW 100% RRE RW 50% Under Basel II RRE & CRE: RW based on Collateral not Counterparty 20

21 Real Estate Loans & Regulatory Capital Under Basel II's SA, RRE RW 35% Substantial margin of additional security over the loan, Strict valuation rules for the property. CRE RW 50%, exception, and subject to specific and strict operational requirements. 21

22 2014 CP maintained distinction : RRE & CRE introduced 2 specialised lending subcategories: income-producing real estate (IPRE) and land acquisition, development & construction (ADC).

23 Treatment of RRE in the CP 2014 RW (from 25% to 100%) based on 2 risk drivers: 1. loan-to-value (LTV) ratio; and 2. debt servicing coverage (DSC) ratio, Both measured at origination

24 RRE: Responds QIS results show: PD & LGD tended to correlate closely to the LTV ratio. DSC ratio was found to be: a relatively good discriminator of risk for the exposures concerns about the consistency of its definition RRE received a higher RW (40%), large concentrations in the 60 80% LTV bucket.

25 Commercial real estate Empirical evidence from the QIS is not conclusive as to the CRM benefits of commercial real estate as collateral, Results suggested that LTV ratios within a conservative range may be appropriate for risk weighting methodology for commercial real estate.

26 Mr. Bashir Yakzan: Chief Risk Officer (CRO) BBAC, Lebanon Real Estate exposures