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18 October 2007www.sagora.eu
The impact of the CRD on the leasing industry in plain language
Dr. Mathias Schmit
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Managing Risk in Leasing Business
Agenda
• CRD: Impact on financial performance
• Business opportunities under the CRD
• Conclusions
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Managing Risk in Leasing Business
Basel II: A new framework
CAPITAL DISCLOSURESUPERVISION
FINANCIAL STABILITY
capital requirements
based on market, credit, and
operational risk
disclosure including the
control of risks
qualitative supervision internal process & risk control
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Managing Risk in Leasing Business
Basel II or CRD?
• First draft of Basel II in 1999
• EU Official Journal on 30/06/2006 Ref: L 177/201
• How far along is the national transposition process?
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Managing Risk in Leasing Business
CRD complemented…• ”
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Managing Risk in Leasing Business
Basel II Credit Risk and the Balance Sheet
new risk weights for
capital requirements
ROE will be impacted
credit spreads will change
credit spreads will
change
Balance sheet
RRE/CRE
Loan
Leasing
Other
Funding
Funding
Capital
Off-balance instruments
Capital
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Managing Risk in Leasing Business
Regulatory capital for real estate investment
• Capital may differ from a ratio of 1 to 5 in respect to:
– The approach adopted by the credit institution• STD: product vs. counterparty approach• IRB approaches (PD, LGD)
– The type of product / Counterparty (STD)• CRE/ Lease/ Specialized lending• Retail / Corporate / PSE• What if a lease to a PSE?
– Qualitative requirements are met or not• Independent valuation• Legal certainty• Insurance
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Managing Risk in Leasing Business
Source: Schmit M., Journal of Banking and Finance, April 2004.
Basel I I vs. Internal Model - Automotive leasing -
(age: 12-23 months, maturity: >47 months)
0123456789
10
Standardised IRBF(corporate;LGD: 40%)
IRBA (retail) Internal Model
%
Standardised
IRBF (corporate;LGD: 40%)
IRBA (retail)
Internal Model
Hiiiiiiiiiiiii !!!
Yeahhhhh!!
OK but…
Regulatory capital for equipment lease
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Managing Risk in Leasing Business
EU translation : IRB Guaranteed Residual Values or Bargain Option
Basel II EU Directive
lease exposures as the minimum lease payments under IAS 17
Guaranted residual value
0%
20%
40%
2,6%
3,7%
4,8%
2,6%
2,6%
2,6%
Assumptions:PD=1%LGD=30%
Guaranteed residual value
Guarantee: conditions on the guarantor and on the guarantee
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Managing Risk in Leasing Business
Evolving business environment• Competition and pressures
– Pressure to have higher RV (e.g. car manufacturers)
– Business needs and opportunities are evolving
• Product lifecycle decreases
• Assess the value chain to define adequate actions
• New regulations (IAS, Basel II, etc…)
– Give new incentives and opportunities to leverage business benefits if:
• All impacts of regulations are clearly understood by all parties (and thus to the bank partners and other stakeholders)
• A clear vision of the business partners emerges to generate collaborative advantages
• A wide buy-in by the different stakeholders
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Managing Risk in Leasing Business
New opportunities
Vendor Bank
•Portfolio management
•Market and commercial knowledge
•Ancillary services
•Risk appraisal
•Calibration and managing RV
•Risk coverage (premium)
•Buy risk mitigants
•Reduction in ‘excess capital requirement’
•Response to change pricing dynamics
Client
•Fleet management •Leasing contract
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Managing Risk in Leasing Business
New opportunities
• Identify your potential partners given your strategic objectives
– Multi or mono brand vendor
– Proposed ancillary services
– Re-marketing strengths
– Etc…
• Understand the benefit and risks of all parts of the business value chain
– Customers: creditworthiness, volume, country
– Structure of the transactions
– Vendor characteristics and services
• Build your win-win relationship
– Adequate structure
– Mitigate risk if needed: e.g. lower LGDs, PD, EAD
– Adequate rewards: risk vs. volume
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Managing Risk in Leasing Business
Conclusions
• The better knowledge of risk is key to be compliant and/or in
line with the best practices
– Regulated vs. non-regulated
– Lease specificities
• Having an integrated risk management framework will allow
to better identified and assessed business opportunities
• Rethinking leasing business relationships will offer new
opportunities under the EU implementation of the CRD
• Examples of new business models already (being) achieved
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Managing Risk in Leasing Business
Some references• Schmit M., “Credit risk in the leasing industry”, Journal of Banking and Finance, 2004, 28,
pp. 811-833.
• Schmit M., “Is automotive leasing a risky business?”, Finance, forthcoming.
• Schmit M., “The new Basel capital accord and the future of the European financial system”, Report of a CEPS (Centre for European Policy Studies) Task Force, pp. 47-50, 2004.
• Laurent M- P and M. Schmit, “Estimating “distressed” LGD on defaulted exposures: A portfolio model applied to leasing contracts”, in Recovery risk: the next challenge in credit risk management, a RiskBooks publication edited by Altman E., A. Resti and A. Sironi, pp. 307-322, 2005.
• Laurent M-P, “Asset return correlation in Basel II: Implications for credit risk management”, under review in Risk.
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Managing Risk in Leasing Business
For More Information
Dr. Mathias Schmit
Partner
SAGORA, Lease and Risk Management
Avenue de Haveskercke, 28
B-1190 Brussels
Mobile: (32)-496.93.22.70
Email: [email protected]
Website: www.sagora.eu
Thank you for your attention !
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Managing Risk in Leasing Business
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Managing Risk in Leasing Business
(Un)guaranteed Residual Values
Major step forward
RESULT Substantial gains of capital and opportunity cost
Initial text Actual calculation of capital requirement for leasing:
100% * 8% * RV to be set aside over all the term of the lease
(100% /T) * 8% * RV each year
Major commitment in terms of cost of opportunity
Inappropriate compared to the risk incurredBUT
