dr Amine Awad in the UAB conference - february 2011 presents views on Reasons behind the International Financial Crisis
Major Components of Basel III
Lebanon’s Action Plan to fully implement Basel III
The Path to Product Excellence: Avoiding Common Pitfalls and Enhancing Commun...
Basel iii a comprehensive regulatory response february 2011
1. Banking Control Commission
Basel III
A Comprehensive Regulatory Response
(The Lebanese Road - map)
Dr Amine Awad
Executive Director, Lebanon’s Banking Control Commission
Member of the Higher Banking Council
Coordinator of Basel III Implementation Task Force
Beirut February 10, 2011
2. Banking Control Commission
Outline
Reasons behind the International Financial
Crisis
Major Components of Basel III
Lebanon’s Action Plan to fully implement
Basel III
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3. Basel I 1988 Banking Control Commission
Capital / Risk weighted assets ≥ 8%
One Type of Risk
Credit Risk
4 categories of risk weights :0%,20%,50% & 100%.
(One Size Fits All)
Off – balance sheet items converted to on an – balance sheet
amount with appropriate risk weight
Date of Impl. : 1992 3
4. Banking Control Commission
Market Trend
In the early 1990s,
many banks did not
have the Capital to Equity
support the credit
risks they were
taking on their
balance sheets.
Credit Risks
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5. Banking Control Commission
Consequences of Basel I
The Credit Crunch:
Shifts observed from Commercial and Industrial Loans into
Treasury Securities
Example:
Commercial loans were assigned a 100% risk weight which requires
high capital, while Treasuries were assigned a 0% risk weight which
requires no capital
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6. Banking Control Commission
Consequences of Basel I
Securitization:
Regulatory capital standards may have played a role in the
expansion of Securitization.
Example:
Off-balance sheet guarantees were not subject to capital
requirements, so shifting from loans to these guarantees
provided a way to reduce effective regulatory capital
requirements.
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7. Banking Control Commission
Illiquid Individual
Financial Financial
Assets Assets
Special Vehicle
S S
E E
.C .C
Liquid & Tradable Liquid & Tradable
Capital Market Capital Market
Instruments Instruments7
8. Banking Control Commission
(Mortgage-Backed Securities (MBS
- In M.B.S. the Principal and Interest of the
individual mortgage loan are paid to the new MBS
holders.
- The leading issuers of these securities were the US
government-sponsored agencies:
Freddie Mac *
Fannie Mae *
Ginnie Mae *
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9. Banking Control Commission
How the Market evolves
Residential mortgages fit the best the securitization
process, because:
* Their long maturities (15-20 years or more)
* Mortgage lendings are backed by charge over
Real Estate.
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12. Structured Finance: Banking Control Commission
The Complex Scheme of Securitization
End borrowers Broker
$
I&P ($)
Mortgages
Servicer Originator
$
Insurance
I&P ($) Mortgages company
Conduit/trust/
SPV/SPE/SIV $
MBS
Investment bank
(underwriter) $
MBS, I&P ($)
Rating agency Institutional
investor $
Financial
returns ($)
End lenders
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13. During This Period Banking Control Commission
Basel II was implemented
Global Capital Adequacy Supervisory Review Market Discipline
* Quantity of * ICAAP * Information on Risk
Capital to Management
Cover Risks * SREP
(CR + MKT + * Timely quantitative &
OP( qualitative information
Capital ≥ 8%
CR + MKT + OP Risks ( Weighted )
15. What’s new in Basel III Banking Control Commission
OLD NEW OLD NEW NEW
OLD
* Quantity of * Quality of * ICAAP * Leverage Ratio * Compensation
* Information
Capital to Capital Policy Disclosure
on Risk
Cover Risks * SREP * MIS as a Major Management
(CR + MKT + * Capital Management * Corporate
OP( Conservation Tool… Governance Practices
* Timely
Buffer quantitative &
* Stress Tests * Pressure to fully
qualitative
* Liquidity implement Pillar 3 +
information
Ratios (LCR + * Countercyclical IFRS7…
NSFR( Capital Buffer
* Capital Charge
on OFF B/S...
16. Banking Control Commission
Emergency Measures
Several meetings of the G20 leaders that lead to adopt the
following Roadmap:
1- Upgrade the F.S.F. to become the F.S.B. (with more
enforcement power), asking the latter to issue a new set of
regulations aiming at strengthening the International
Financial Sector
2- Work on finding new Accounting Standards and Financial
Rules and Management Practices that avoid the pro
-cyclicality in the markets.
3- Find new Regulatory and Supervisory frameworks that
avoid the reoccurrence of such crisis in the future (no more
silos).
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17. Banking Control Commission
Major Elements of Basel III
Under Pillar I:
The quality, consistency, and transparency of the capital base
will be raised.
The risk coverage of the capital framework will be
strengthened.
Build up of capital buffers in good times that can be drawn
upon in periods of stress
New Liquidity Risk Measurement
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18. Banking Control Commission
Major Elements of Basel III
Under Pillar 2:
A Leverage Ratio as a supplementary measure to the Basel
III risk-based framework
New Risk Management Approach
Stress Tests in F.I.’s
Concentration Risk
Improvement of Corporate Governance practices
Under Pillar 3:
Full Implementation of Pillar 3(full Transparency & timely
Disclosures)
Full Implementation of IFRS 7 (Full reporting to all
stakeholders) 18
19. Banking Control Commission
New Definition of Capital
The following key changes are proposed:
The quality and consistency of the common equity
element of Tier 1 capital will be significantly
improved
The required features for instruments to be
included in Tier 1 capital outside of the common
equity elements will be strengthened.
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20. Banking Control Commission
Tier 1 – Other Elements
To be included in Tier 1, instruments will need to
be sufficiently loss absorbent:
- They need to be subordinated
- Have full discretionary non cumulative dividends or coupons
- Neither have a maturity date nor an incentive to redeem.
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21. Banking Control Commission
Tier 1 – Other Elements
“Innovative” features such as step-ups, which over
time have eroded the quality of Tier 1, will be
phased out.
The use of call options on Tier 1 capital will be
subject to strict governance arrangements which
ensure that the issuing bank is not expected to
exercise a call on a capital instrument unless it is
in its own economic interest to do so.
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22. Banking Control Commission
Tier 2
Tier 2 capital will be simplified.
There will be one set of Tier 2, removing subcategories of
Tier 2.
All Tier 2 capital will need to meet the minimum standards
of being:
* Subordinated to depositors and general creditors
* Have an original maturity of at least 5 years.
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23. Banking Control Commission
No More Tier 3
Tier 3 capital will be abolished.
This will ensure that capital used to meet market
risk requirements will be of the same quality as
capital used to meet credit and operational risk
requirements.
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24. Banking Control Commission
Harmonized Structure of Capital
Total regulatory capital will consist of the sum of
the following elements:
(Tier 1 Capital (going-concern capital
a. Common Equity
b. Additional Going-Concern Capital
(Tier 2 Capital (gone-concern capital
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25. Banking Control Commission
Harmonized Structure of Capital
There will be 3 components of the Capital Adequacy
Ratio: Conservation
Gross CAR (+) Buffer (=) Total CAR
Common Equity/RWA ≥ 4,5% 2,5% 7%
Tier 1 Capital /RWA ≥ 6% 2,5% 8,5%
Total Capital /RWA ≥ 8% 2,5% 10,5%
P.S: In addition to a Countercyclical Buffer Range ( 0% to 2,5% )
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26. Banking Control Commission
More Capital to Cover Additional Risks
Additional Capital to cover:
1) Trading Book Portfolio
2) Securitization Instruments
3) Other off – Balance sheet Items
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27. Banking Control Commission
New Leverage Ratio
- A supplementary measure to the Basel III risk-based framework
- The purpose is to avoid building excessive leverage in the banking
system
- Helps to address model risk and measurement error
Includes: All Assets + Certain off Balance Sheet items at 100%
Measured as per accounting Balance Sheet: Net of provisions and
valuation adjustments
?)Capital Measure: Tier 1 Capital (or Core Tier 1 Capital
??P.S. If adopted, Under Pillar I or Pillar II
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28. New Liquidity Risk Banking Control Commission
After having limited its Capital Charge on Market Risk (i.e.
mainly Interest Rate Risk) Basel III introduces a new
Liquidity Ratio with 2 Components:
1) Liquidity Coverage Ratio (L.C.R.) (2015)
With a short term (30 days) horizon, based on Cash Flow:
Stock of High Quality Liquid Assets 100%
Net Cash Flow for the next 30 days
2) Net Stable Funding Ratio (N.S.F.R.) (2018)
With a longer term (1 year) horizon, based on Liquidity
Transformation (or Mismatch):
Amount of Stable Funding (Available( 100%
Amount of Stable Funding (Required(
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29. Banking Control Commission
Under Pillar II
1) Countercyclical Capital Buffer, above Regulatory Capital
Including Dynamic Provisions (i.e. provisions in good
years to cover losses of capital in bad years)
2) New Risk Management Practices
* Do not Rely on Rating Agencies only
* Do not Rely on one Model only
* Do not Rely on Mathematical Models only
3) Stress Testing, a major tool of Risk Management
4) Capital charge to cover:
* Concentration Risk
* Counterparty Risk…
5) Strong Management Information System (M.I.S.) that helps
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Decision Taking.
30. Banking Control Commission
Under Pillar III
Improvement of Corporate Governance Practices
Compensation Committee
Board Audit Committee
Board Risk Committee
Independent and Expert Board Members
Criteria for the Appointment of Directors
Business Continuity Planning
Succession Plan…
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31. Banking Control Commission
Lebanon’s Action Plan to Implement
Basel III
1)The B.C.C.L. has sent (in April 2010) its comments on the
following C.P.’s of the B.C.B.S.:
* Strengthening the Resilience of the Banking Sector (Dec. 2009)
* International Framework for Liquidity Risk Measurement (Dec. 2009)
* Good Practice Principles on Supervisory Colleges (March 2010)
2) B.C.C.L. issued a Memo (January 2010) asking Banks to
have strong M.I.S.
3)The B.D.L. will issue soon a new circular based on the new
“Principles for enhancing Corporate Governance” issued by
the Basel Committee (March 2010), that follows the
Corporate Governance chart issued by ABL in January 2011.
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32. Banking Control Commission
Lebanon’s Action Plan to Implement
.(Basel III (Cont
4)The B.C.C.L. made a study (Q.I.S.) to measures the impact of
the implementation of Basel III on Lebanese banks. (based
on 30 June, 2010 figures); the results are discussed on a case
- by - case basis with every bank.
5)The B.C.C.L. issued ICAAP templates to banks, which will
help performing its SREP missions in banks (October 2010
for submission in June 2011)
6)The B.C.C.L. issued new regulations relating to the
implementation, as of January 2011, of :
* IFRS 9
* IFRS 7 (in preparation)
7)B.D.L. & B.C.C.L. are in the process of issuing a new
Liquidity methodology, based on the New Concept of L.C.R.
and the Basel paper on “Liquidity Risk Management”
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33. Banking Control Commission
Lebanon’s Action Plan to Implement
.(Basel III (cont
8)B.C.C.L. performed in September 2010 a Stress
Test on banks, to study the impact of a variation
of the interest rates on their “Profitability” and
“Equity”.
9)B.C.C.L. is preparing a serie of Stress Tests on
banks, with different scenarios (during 2011)
10)B.D.L. is studying the implementation of a
“Dynamic Provisioning Process” in banks.
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