Tai Tailore l l ored to Sma d d to Small ll ll Mar Markets: - - PowerPoint PPT Presentation
Tai Tailore l l ored to Sma d d to Small ll ll Mar Markets: k ets: Im Implementation of Basel III p lementation of Basel III Liquidity Requirements Liquidity Requirements Ch i Christopher Wilson h Wil Financial Supervision and
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Risk premia Risk premia in in the interbank market the interbank market (bps) Repo haircut index – Repo haircut index – corporate and
struct structur ured financ finance sec ecuri urities
45% 50% 250
(bps) structured structured financ finance sec securi rities (%)
25% 30% 35% 40% 150 200 10% 15% 20% 25% 50 100 0% 5% Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3
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____________________________________________________________________________________________________________________________________Sources: Bloomberg; BIS; and IMF staff calculations.
“Regulatory overkill is identified as the
PWC Banking Banana Skins 2006 1.
Too much regulation regulation 2.
Credit Risk 3.
Derivatives 4.
Commodities 5 Inter Interest rate rates
Interest rates rates 6.
High dependency cy on technol
gy 7.
Hedge f fund unds 8.
Corporate ate gover
nance 8.
Corporate governance governance 9.
Emerging markets ging markets 10. 10.……….. ………..
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The crisis exposed banks’ inadequate liquidity risk profile management and inaccurate liquidity risk pricing through:
200 2001 2008 008 CA CAGR (£ (£bn) (£bn) (% (%) Gr Group
Liquidity Liquidity Ratio atio
Gr Group Customer Loans 201.0 435.2 12.6 Customer Deposits 140.5 222.3 7.8 Total Assets 274.7 630.9 12.6 Tangible Shareholders Equity (£m) 9,823 17,792 10.4 Loans/Deposits Ratio (%) 143 196 Wholesale funding < 1 year 89 8 119 4
Funding Funding Mix ix
Loans / deposits ratio
Wholesale funding < 1 year 89.8 119.4 Leverage (Assets/TSE) (x) 28 35 Re Retail Customer Loans 132.1 255.3 9.9 Customer Deposits 102.0 143.7 5.0
Rising short-term wholesale funding and leverage
Funding Funding Mix Mix
~2x
Re Retail B il Business ness
Corporate ( (including Business B Banking in 2001 2001) Customer Loans 55.1 123.0 14.4 Customer Deposits 22.2 38.5 10.5 In Internat atio ional nal Customer Loans 14.4 61.0 29.5
~1.5x avg deposit growth
Corporate Business Corporate Business
Customer Deposits 3.7 6.6 29.6 Treasury Deposits 12.6 33.5 15.0 Insu surance & & I Invest stment G l I (G W i P i ) (£ ) 1 064 1 799 7 8
General Insurance (Gross Written Premiums) (£m) 1,064 1,799 7.8 Investment Sales 7.8 11.2 5.3
____________________________________________________________________________________________________________________________________Source: Parliamentary Commission on Banking Standards, 2013, “’An Accident Waiting to Happen’: The Failure of HBOS,” HL Paper 144 HC 705.
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2000 2000 2013 2013
Sound Practices for Managing Liquidity in Banking Organizations Sound Practices for Liquidity
2008 2008
1988 Basel 1 LCR q y Risk Management Basel 1 Capital Accord 2004
2010 2010
1996 Market Risk Amendment to Capital Basel 2 Capital Accord NSFR
2014 2014 8
Basel 3 to Capital Accord
LDR ratio 100%, Current Assets/ Current Liabilities (100%)
South Korea South Korea
LDR ratio 100%, Current Assets/ Current Liabilities (100%)
South Korea South Korea U.K. U.K. U.K. U.K.
C i
U.S.A. U.S.A.
C i
U.S.A. U.S.A.
(100%) (100%) Sterling Stock floor, scenario analysis
U.K. U.K.
Sterling Stock floor, scenario analysis
U.K. U.K.
Coverage ratio Coverage ratio No quantitative ratio, scenario analysis
Japan Japan
No quantitative ratio, scenario analysis
Japan Japan Australia ralia Australia ralia
9% HQLA/total liabilities & 5 day name crisis 9% HQLA/total liabilities & 5 day name crisis
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Principles for Sound Liquidity Risk Management g
Principles for Sound Liquidity Risk Management
Principles for sound liquidity risk management
Management g
Principles for sound liquidity risk management
g
Principles for sound liquidity risk management g
Adequate Severe stress scenarios Liquidity risk tolerance Adequate liquidity cushion Allocate costs, benefits and k Contingency scenarios risks Identify & measure full
funding plan range of liquidity risks
Intraday liquidity risk and collateral Market discipline
14 Detailed guidance on the risk management and supervision of funding and liquidity risk
Stock of High Quality Liquid Assets Net cash out over 30-day period under stress > 100% Available Amount of Stable Funding Required Amount of Stable Funding > 100%
LCR: to ensure that a bank maintains an adequate level
quality assets that can be d i h NSFR: a full balance-sheet metric, compares an estimate
an estimate of required stable f di h 1 converted into cash to meet liquidity needs for a 30-day time horizon under an acute liquidity stress scenario funding over the 1 year horizon, under more prolonged but less acute stress than in the LCR
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Cash Securities issued or guaranteed by sovereigns or CBs with 20% RWA (15% haircut) RMBS with AA and better ratings (25% haircut) N fi i l d b CB reserves Securities issued or guaranteed by sovereigns or CBs Non-financial corporate debt securities and covered bonds with AA and better ratings (15% Non-financial corporate debt securities with ratings between A+ and BBB- (50% haircut) Non-financial common equity by sovereigns or CBs
with AA- and better ratings (15% Haircut) Non financial common equity shares included in a major stock index (50% haircut)
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depth)
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characteristics of customers
transaction
5% for trade finance
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5% for trade finance
haircut ratio for HQLA)
Maturing secured lending transactions
Credit or liquidity facilities/Operational deposits at other banks
(50% roll-over assumed)
Other inflows
Net derivative cash inflows
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inflows
Available Amount of Stable Funding Required Amount of Stable Funding > 100%
Cash Cash Shor Short t
Dema Demand
term term
Sho Short Term t Term
Long Long term term
Long term Long term No maturi No maturity ty
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Availa ailable ble S Stable le F Funding ing (liabilitie bilities) s) Availabili ty factor Requir ired S ed Stable le F Funding ing (asse (assets ts)
Require d factor
Tier 1 - Tier 2 capital, preferred shares in f Ti 2 d th li biliti ith 100 100 Cash, securities and non-renewable loans to financials ith t it < 1 h t t ti l t d d excess of Tier 2, and
residual maturity > 1 y with maturity < 1y; short-term actively traded instruments Stable deposits from retail and Small business customers with residual maturity < 1 y 90 90 Unencumbered debt issued or guarantee by sovereigns, CBs or IFIs, with remaining maturity > 1 y and rating > AA
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Less stable deposits from retail and Small Business customers with residual maturity < 1 y 80 80 Unencumbered corporate bonds and covered bonds with an effective maturity o ≥ 1y, rated at least AA, traded in deep, active and liquid markets, and have demonstrated to remain liquid in a stressed market environment.
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Wholesale funding by non financial corporates 50 50 Loans to non financial corporate with residual maturity
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Wholesale funding by non-financial corporates, sovereigns, central banks, MDBs with residual maturity < 1 y 50 50 Loans to non-financial corporate with residual maturity <1y. Unencumbered equity securities listed
a major exchange and included in a large capital market index and unencumbered corporate bonds or covered bonds rated AA- to A- with maturity of ≥ 1 y, which are traded in deep, active and liquid markets and have demonstrated to
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deep, act e a d qu d a ets a d a e de
remain liquid in a stressed market environment. Gold All
liabilities and equity not included above Mortgages
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Loans to retail with residual maturity <1y
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All other assets
100
Undrawn amount
committed credit and liquidity facilities
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Balance Sheet Bank A Bank B RSF Factors Required Stable
> 1 Year
Factors Assets: Liquid short-term assets 5 30 0% Loans (retail > 1 year) 85 35 85% Mortgages (> 1 year) 10 35 65% Stable Funding
30days
g g ( y ) Total 100 100 Run-off rates ASF Factors Available Stable Liabilities: Stable retail deposits 25 75 3% 90% Interbank (unsecured) 75 25 100% 0% Equity 10 10 0% 100% Funding LCR (1) Liquid assets 5 30 (2) Net 30-day cash outflow 76 27 Required: Ratio (1) / (2) 7% 110% ≧ 100% NSFR (1) Available stable funding 33 78 Liquidity Coverage Ratio Net Stable
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NSFR (1) Available stable funding 33 78 (2) Required stable funding 79 53 Required: Ratio (1) / (2) 41% 148% ≧ 100% Net Stable Funding Ratio
Phases 2013 2014 2015 2016 2017 2018 2019 Leverage Ratio Migration to Pillar 1 Minimum Common Equity Capital Ratio Parallel run 1 Jan 2013 – 1 Jan 2017 Disclosure starts 1 Jan 2015 Minimum Common Equity Capital Ratio 3.50% 4.00% 4.5% Capital Conservation Buffer 0.63% 1.25% 1.88% 2.5% Minimum common equity plus capital conservation buffer 3.50% 4.00% 4.50% 5.13% 5.75% 6.38% 7.0% 4.50% buffer Phase-in of deductions from CET1* 20% 40% 60% 80% 100% 100% Minimum Tier 1 Capital 4.50% 5.50% 6.0% C apital 6.00% Minimum Total Capital 8.0% Minimum Total Capital plus conservation buffer 8.63% 9.25% 9.88% 10.5% Capital instruments that no longer qualify as Ti 1 i l Ti 2 i l 8.00% 8.00% Phased out over 10 year horizon beginning 2013 non-core Tier 1 capital or Tier 2 capital Liquidity coverage ratio – minimum requirement 60% 70% 80% 90% 100% Net stable funding ratio
Introduce minimum
Liquidity y g g
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Net stable funding ratio
standard
* Including amounts exceeding the limit for deferred tax assets (DTAs), mortgage servicing rights (MSRs) and financials. transition periods L
Holding greater amounts of HQLA Funding structures improved, competition for deposits Loan to deposit ratios moderating p g
d f Over-crowding of certain assets Interaction between liquid assets, RoE and asset quality Adjustments not uniform across banks and regions Shortage of HQLA, shallow markets
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BCBS MEMBERSHIP Non-Internationally Active Banks Internationally Active Banks
NSFR
Risk Risk
Management Management
T ke
Qualitative guidance for liquidity risk management
Breadth and depth of markets (limited price decline or increase in haircut even during stressed market conditions) Level 2 HQLA liquid enough? Central Bank reserves?
Ability to categorize liabilities into the LCR definitions Historical data l b f ff Calibration of run-off rates
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Step 1: Assess the pre-conditions for the applicability of the LCR Can be made by looking at the money market conditions and the liquidity of government securities. Does a repo market exist for government securities? Is the market for government securities liquid (look at bid-ask spread, volumes, price volatility, etc). Does the market exhibit different liquidity at different maturities? Are y, ) q y there other liquid markets? Step 2: Consider evaluating assumptions for the LCR Particularly in the cases of crisis countries, with somewhat unstable banking systems, the appropriateness of the assumptions used for the LCR could be usefully reviewed in light of the current country’s experience. Step 3: Assess the current level of the banks’ short term liquidity position Can be made by looking at a number of ratios. Liquid Assets to Total Assets is a commonly used but not fully appropriate measure as it does not provide information about the adequacy of a given stock of liquid assets. More in line with the rationale of the LCR is the ratio of Liquid Assets to Short Term More in line with the rationale of the LCR is the ratio of Liquid Assets to Short Term Funding (where deposits should not or should only partially be included). Loans to Deposits ratio can also provide some useful insight with high values calling for more in depth analysis. S 4 A h b k ’ l R i l i f b k ’ i i h Th b k ’ li h Step 4: Assess the banks’ structural liquidity position and the possible impact of the NSFR Requires an evaluation of banks’ maturity mismatch. The banks’ reliance on short term wholesale funding should be investigated. The ratio of such funding to total liabilities (excluding equity) should also be determined. At aggregate level, a large external debt can be a signal of potential vulnerability. A proxy impact of the NSFR can be assessed at bank level if adequate data is disclosed using methodology proposed by IMF WP/14/106
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QIS
National Di ti
(e.g. Level 1 & 2A & 2B assets)
framework
Discretion
framework
practical to expect banks to increase their HQLA holding
ALA treatment
each option
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Option 1: CLF Option 2: Use of foreign currency Option 3: Additional use of
Does not change banks’ asset and
HQLA
Suited for banking systems with already
Level 2 assets
Useful for jurisdictions with a deep and well- banks asset and liability characteristics Difficult to design and l b f d high levels of liquid foreign assets C ld d h h developed capital markets Need careful f l d calibrate fees and haircuts to provide right incentives Could introduce higher foreign exchange risk assessment of liquidity
times of stress
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Contractual maturity mis- match
match Concentration
Market-related monitoring tools
tools
Available unencumbered assets LCR by significant currency
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2015 2015 2013 2013
2014 2014
guidance outlining main LCR
2015 2015
industry
regulations project team
take from QIS Hold targeted definitions
up QIS
id i regulations
transition arrangements, parallel run, discussions with industry consider main policy questions
crucial phase-in etc
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supervisory practices, BCBS, October 2013
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