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Basel III challengesAgenda
• Introduction
• New capital ratios
• Liquidity standards
• Current market situation & further steps
• Appendix
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1
IntroductionBasel III timeline - milestones
2008 Jun 2011 Jul 2011 May 2012 Jan 2013
Basel III
Dec 2010Nov 2010
CRD/CRR
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2
IntroductionKey elements of the new Capital Requirements Regulation and Directive
Basel III
Capital reform Governance & SupervisionLiquidity standards
Long term: Net stable funding
Short term: liquidity coverage ratio (LCR)
Capturing all risks
Quality, consistency and transparency of capital base
Disclosure & regulatory
Maximum harmonisation
g gratio (NSFR)
Controlling leverage
Capturing all risks
Strengthened corporate & risk governance
g yreporting
Increase importance of the CROBuffers
R ti
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
Remuneration
Basel III challengesAgenda
• Introduction
• New capital ratios
• Liquidity standards
• Current market situation & further steps
• Appendix
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
New capital ratiosCapital reform – overview of key changes
New capital ratiosCommon equityTier 1Total capital
Raising the quality of capitalFocus on common equityStricter criteria for Tier 1Harmonised deductions from capital
C it l ti =Available Capital
Total capitalCapital conservation buffer
Harmonised deductions from capital
Capital ratios =Risk-Weigthed Assets (“RWA”)
Enhancing risk coverageCounterparty credit riskSecuritisation products
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
Securitisation productsOther risks
New capital ratiosIncreasing capital ratios
Core Tier 1 – 2% CET 1 – 4 5%Core Tier 1 – 2% CET 1 – 4,5%….Tier 1 – 4% Tier 1 – 6%
Tier1 + Tier 2 + Tier 3 – 8% Tier1 + Tier 2 – 8%........
Additi l it l b ff i tAdditional capital buffer requirement
Gradual introduction
6© 2012 KPMG Tanácsadó Kft., a magyar jog alapján bejegyzett korlátolt felelősségű társaság, és egyben a független tagtársaságokból álló KPMG-hálózat magyar tagja, amely hálózat a KPMG International Cooperative-hez (“KPMG International”), a Svájci Államszövetség joga alapján bejegyzett jogi személyhez kapcsolódik. Minden jog fenntartva.
New capital ratiosCapital Buffers
Capital conservationbuffer
Countercyclical capitalbuffer
Systemic riskbuffer
The build-up in good times of buffers can be drawn down in periods of stress.
buffer
• Against losses during periods of financial and economic stress
buffer
• To build up the protection of the banking sector in periods of excess aggregate credit
buffer
• To prevent and mitigate long term non cyclical systemic ormacro prudential risk not
d b th b ff• Shall be 2,5% with a
possible regulatory derogation
growth
• The long-term maintenance of the lending capacity of the banking sector
covered by other buffers
• May be 0-3% or more, set by the competent authority
• Strengthening of shock absorbing ability on institution level
banking sector
• Shall be 0-2,5% or more, set by the competent authority
Sh ll b b d th
• May also apply for exposures in other member states
• Shall be based on the deviation of the credit-to-GDP ratio in a long term trend
• The Common Equity Tier 1 capital used to cover Pillar 2 risk shall not be used to meet the buffer
7© 2012 KPMG Tanácsadó Kft., a magyar jog alapján bejegyzett korlátolt felelősségű társaság, és egyben a független tagtársaságokból álló KPMG-hálózat magyar tagja, amely hálózat a KPMG International Cooperative-hez (“KPMG International”), a Svájci Államszövetség joga alapján bejegyzett jogi személyhez kapcsolódik. Minden jog fenntartva.
The Common Equity Tier 1 capital used to cover Pillar 2 risk shall not be used to meet the buffer requirements.
• If buffer requirements are not met capital conservation measures shall apply.
New capital ratiosCapital requirements and capital buffers
Total Minimum Capital+ Conversation Buffer %Systemic to
10%
8% Additional Tier 1 2,5%
0-3%Risk Buffer
Countercyclical
Ri k B ff mig
ht ri
se t
high
er
Tier 2
Tier 1 including:
8%
6%
Additional Tier 1
Conservation
Buffer
0-2Risk Buffer
1 C
apita
l man
d ev
en h
4%
Common Equity Tier 1
Buffer
7%
ed fo
r CET
12,5
% a
2%
2012 2013 2014 2015 2016 2017 2018 2019
Nee
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
New capital ratiosLeverage ratio
Leverage ratios of major global banks,end-2006
Risk-based capital ratios of major global banks, end-2006
Source: BOE, 2012
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
New capital ratiosLeverage ratio
Wh i l i t t?
• Contributed to the global financial crisis• In the lead up to the crisis, many banks reported strong risk-based capital ratios while
f ff
Why is leverage important?
still being able to build high levels of on- and off-balance sheet leverage
Prudential purposes
• Build-up of excessive leverage in the system• Non-risk-based volume based• Additional safeguard against attempts to the risk-based requirements• Against model and measurement riskAgainst model and measurement risk
Implementation
2016 20172014 20182013 2015
Observation periodDisclosure
A li ti (Pill I)
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10
Application (Pillar I)
Basel III challengesAgenda
• Introduction
• New capital ratios
• Liquidity standards
• Current market situation & further steps
• Appendix
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11
Liquidity standardsLiquidity risk management failures
■ Rapidly growing mortgage portfolio from wholesale market funding
(70%)
Long term str ct ral balance sheet problems■ Long term, structural balance sheet problems
■ Risky assets and high leverage, lack of sufficient buffers
■ Short term liquidity crisis
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12
Liquidity standards Quantitative minimum liquidity requirements
Combined idiosyncratic and market wide stress scenarioCombined idiosyncratic and market wide stress scenario
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13
Liquidity standards Short-term resilience to liquidity disruptions
Liquidity Coverage Ratio = ≥ 100%Stock of high quality liquid assets1
Net cash outflows over a 30 day period2
Expectations for high quality liquid assets
Fundamental characteristics:Low credit and market risk
Market related characteristics:Active and sizeable market (broad and deep)
Easy and certain valuation
Low correlation with risky assets
Listed on developed exchange
Presence on market
Low market concentration
Flight to quality
Eligible at central banks as collateral
Level 1 assets Level 2 assets
g
Operational requirements: well diversified , legally and practically readily available during the next 30 days,
unencumbered assets, periodically testing market tradability, assets will not be used in other ongoing operations.
Level 1 assets Level 2 assetsCan be an unlimited share of the pool No more than 40% of the stock of liquid assets after
haircuts have been applied
Held at market value and not subject to a haircut Should be well diversified in terms of type of assets, type of issuer, counterparties
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
, p
A minimum 15% haircut is applied in each type
Liquidity standards Short-term resilience to liquidity disruptions
Level 1 →100% Level 2 →85%• Cash
• Central bank reserves
• Marketable securities to sovereigns, Central banks (…) that are:
– assigned 20% RW under Basel II standardized
• Marketable securities/claims on sovereigns, central banks (…).
– assigned 0 % RW under Basel II standardized– traded in large, deep and active repo or cash markets
ith l l l f t ti
gapproach
– traded in large, deep and active repo or cash markets with low levels of concentrations
– proven record as a reliable source of liquidity in stressed markets (repo and sale) (maximum decline i i i i h i t 30 d i d10%)with low levels of concentrations
– proven record as a reliable source of liquidity in the markets even during stressed conditions; and
– not an obligation of a financial institution or its affiliated entities
in price or increase in haircut over 30 day period10%)– not an obligation of a financial institutions or its
affiliated entities
• Corporate bonds and covered bonds:– not issued by a FI or a bank and their affiliated
• Government debt securities in domestic currency (non 0% RW) , issued by the sovereign or the central bank in the country in which the liquidity risk is being taken or in the bank’s home country
not issued by a FI or a bank and their affiliated entities
– both at least AA- or with no external rating and are internally assessed as AA- equivalent (using approved internal rating systems) - additional criteria will be developed during the observation period
• For non-0% RW sovereign or central bank debt securities issued in foreign currencies so that it matches the currency needs of the bank in that jurisdiction
– traded in large deep and active repo or cash market with low level of concentration
– proven record as a reliable source of liquidity in stressed markets (repo and sale) (maximum decline in price or increase in haircut over 30 day period10%)
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
15
10%)
Liquidity standards Short-term resilience to liquidity disruptions
Net cash outflows over a 30 day period = outflows – Min {inflows, 75% of outflows}2
No double counting – if assets are included in the numerator of the ratio (stock of liquid assets), do not count as inflows.
Only includes contractual inflows from outstanding exposures that are fully Only includes contractual inflows from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon.
„Stable” definition: part of an established relationship making withdrawal highly unlikely;
held in a transactional account, including accounts to which salaries are regularly credited;
fully covered by public guarantee or deposit insurance scheme.
Operational relationship definition: clearing, custody, cash management services in the context of an established relationship.
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16
Liquidity standards Short-term resilience to liquidity disruptions
Cash outflows Factor Cash outflows Factor Retail deposits
• Stable• Less stable• Term deposits with residual maturity
5%10%0%
• Non financial corporate and central banks and PSEs liquidity facilities
• Other legal entity customer, credit and liquidity facilities
10%
100%• Term deposits with residual maturity
>30 days with a withdrawal with a significant penalty or no legal right to withdraw
Secured funding• Backed by level 1 assets
0%
0%
and liquidity facilities Additional requirements (…)
Cash inflowsBacked by level 1 assets• Backed by level 2 assets• Secured funding transaction with
domestic sovereign central banks or PSEs (max RW 20%) that are not backed by L1 or L2 assets
0%15%25% Reverse repos and securities borrowing
with the following as collateral:• Level 1 assets• Level 2 assets
0%15%
• All other secured funding transactions Unsecured wholesale funding
• Stable small business customers• Less stable small business customer • Legal entities with operational
relationships
100%
5%10%
25%
• All other assets Credit of liquidity facilities Operational deposits held at other financial Other inflows by counterparty
• Retail (e.g. repayments for fully performing loans)
100%0%0%
50%relationships
• Non-financial corporate, (…) • Other legal entity customers
Undrawn portion of committed credit and liquidity facilities to:
• Retail and small businesses clients
25%75%100%
5%
performing loans)• Non financial wholesale
counterparties • Financial institutions from
transaction other than the ones above
50%
100%
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
17
• Non financial corporate, sovereigns (..) 10% • Net derivative receivables 100%
Liquidity standards Medium and long-term crisis scenario
Significant deterioration of earning capacity due to the durable existence of credit,
Medium and long-term crisis scenarioMedium and long-term crisis scenario
g g p y ,market, operational or other types of risk.
Prospect of possible downgrades by credit rating agencies on bank’s bonds or counterparty risk rating.
Name related reputational crisis.
Net Stable Funding Ratio = > 100%Available amount of stable funding (ASF)
Net Stable Funding Ratio Required amount of stable funding (RSF)
„Stable funding” means as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon underfinancing expected to be reliable sources of funds over a one year time horizon under conditions of extended stress.
„Required funding”: Mainly assets and off balance exposures that an institution has to cover with additional resources.
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
18
Liquidity standards Medium and long-term funding of the assets and activities of banks
Available Stable Funding Factor Required Stable Funding Factor• Tier 1 & Tier 2 capital instruments
• Preferred shares and capital in excess of Tier 2
allowable amount with effective maturity >1 year 100%
• Cash• Securities with remaining maturity <1yr• Non-renewable loans to financials with remaining mat rit <1 rallowable amount with effective maturity >1 year
•Other liabilities with effective maturity >1 year100% remaining maturity <1yr
•(..) 0%
Stable deposits of retail and small business Debt issued or guaranteed by sovereigns, central banks ( ) with 0% risk weight under
customers (non-maturity or residual maturity <1yr) 90%central banks (..) with 0% risk weight under Basel II standardized. 5%
Less stable deposits of retail and small business customers (non-maturity or residual maturity <1yr)
80% Unencumbered non financial seniorcorporate bonds (..),maturity≥ 1 year
20%
Wholesale funding provided by non financial • Unencumbered listed equity securities ( )Wholesale funding provided by non-financial corporate customers, sovereign central banks, multilateral development banks and PSEs. (non maturity or residual maturity <1 yr)
50%
• Unencumbered listed equity securities (..) maturity ≥1 year• Gold• Loans to non-financial corporate clients, sovereigns, central banks, and PSEs with a maturity < 1 year
50%
y y
All other liabilities and equity 0% Unencumbered residential mortgages (..) 65%
Other loans to retail clients and small businesses having a maturity <1yr
85%
All th t
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19
All other assets 100%
Basel III challengesAgenda
• Introduction
• New capital ratios
• Liquidity standards
• Current market situation & further steps
• Appendix
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20
Current market situation & further stepsResults of the Basel III monitoring exercises - liquidity
Institution Banking group
Number of banks LCR Outflows* Inflows* NSFR
BCBS Group 1 102 91% 21 5% 5 7% 98%BCBS Group 1 102 91% 21,5% 5,7% 98%
BCBS Group 2 107 98% 13% 4,40% 95%
EBA Group 1 44 72% 20% 5,5% 93%
*as a percentage of balance sheet liabilities
EBA Group 2 112 91% 11,9% 3,9% 94%
47% of the banks in the Basel III monitoring sample already meet or exceed the minimum LCR requirement, and 62% have LCRs that are at or above 75% (BCBS).
€1.8 trillion liquid assets shortfall (€61.4 trillion total assets, BCBS)
The results show that banks in the sample had a shortfall of stable funding33 of €2.5 trillion at the end of December 2011 (BCBS)
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21
December 2011. (BCBS)
Current market situation & further stepsResults of the Basel III monitoring exercises - capital
Institution Banking group
Number of banks
Average CET 1
CET 1 shortfall
Average leverage ratio
Changes in RWA
BCBS Group 1 102 7 70% €374 1 billion 3 50% 18 1%*BCBS Group 1 102 7,70% €374,1 billion 3,50% 18,1%
BCBS Group 2 107 8,80% €21,7 billion 4,40% 7,5%*
EBA Group 1 44 7,70% €198,6 billion 2,90% 18,40%
*BCBS includes trading book impacts
EBA Group 2 112 10,30% €25,6 billion 3,30% 8,80%
The analysis shows that Group 2 banks are generally less leveraged than Group 1 banks, and this difference increases under Basel III when the requirements are fully phased in.
As a point of reference the sum of profits after tax and prior to distributions across the same sample ofAs a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in 2011 was €356 billion.The sum of Group 2 banks' profits after tax and prior to distributions in 2011 was €24 billion.
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22
Current market situation & further stepsCapital stress index
401 200%Mrd Ft
20
30
600
900
0
10
0
300
-10-300
2005
.II.
III.
IV.
2006
.I. II. III.
IV.
2007
.I. II. III.
IV.
2008
.I. II. III.
IV.
2009
.I. II. III.
IV.
2010
.I. II. III.
IV.
2011
.I. II. III.
IV.
2012
.I. II. III.
2 2 2 2 2 2 2 2
Tőkepuffer szabályozói követelmény fölöttTőkehiány szabályozói követelmény teljesítéséhezTőke Stressz Index (jobb skála)
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
23
Source: MNB.
Current market situation & further stepsForeign capital injection
55
60
300
400%Mrd Ft
35
40
45
50
100
0
100
200
20
25
30
35
-400
-300
-200
-100
20-400
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
. jún
Adózott eredményAdózott eredményFizetett osztalék (ellentétes előjellel)Tőkeemelés összegeOsztalékfizetési arány (jobb skála)
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
24
Source: MNB.
Current market situation & further stepsLiquidity stress index
50
75
1 000
1 500%Mrd Ft
-25
0
25
50
-500
0
500
1 000
-100
-75
-50
25
-2 000
-1 500
-1 000
500
-125-2 500
2009
.jan
.fe
br.
már
c.áp
r.m
áj.
jún. júl.
aug.
szep
t.ok
t.no
v.de
c.20
10.j
an.
febr
.m
árc.
ápr.
máj
.jú
n. júl.
aug.
szep
t.ok
t.no
v.de
c.20
11.j
an.
febr
.m
árc.
ápr.
máj
.jú
n. júl.
aug.
szep
t.ok
t.no
v.de
c.20
12.j
an.
febr
.m
árc.
ápr.
máj
.jú
n.
2 2 2 2
Likviditási többlet a szabályozói követelmény fölöttLikviditási szükséglet a szabályozói követelmény teljesítéséhezLikviditási Stressz Index (jobb skála)
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
25
Source: MNB.
Current market situation & further stepsOutflow of funds
34
36
38
140
144
148Mrd EUR%
28
30
32
34
128
132
136
140
20
22
24
26
112
116
120
124
20112
2009
.dec
2010
.jan
febr
már
cáp
rm
áj jún júl
aug
szep
tok
tno
vde
c20
11.j
anfe
brm
árc
ápr
máj jún júl
aug
szep
tok
tno
vde
c20
12.j
anfe
brm
árc
ápr
máj jún júl
aug
szep
tok
tno
vde
c
Külföldi források - előrejelzési sáv (jobb skála)Külföldi források (jobb skála)Hitel/betét arányHitel/betét arány - előrejelzés
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26
Source: MNB.
Current market situation & further stepsDistance of the banking system’s Basel III ratios from the requirements (June 2012)
100100percentpercent
7575
5050
2525
00LCR NSFR
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
27
Current market situation & further stepsPreparation
Strategic gap analysis
Impact assesment
• Assumptions
Technical preparation
• Data collection
Liquidity risk management
• Measurement
Capital management
• Increased focus
Business model and strategy
• ConsumerAssumptions• Projections• Management
actions
Data collection• Processes• Monitoring• Reporting
Measurement• Contingency
funding plan• Stress test• Fund transfer
pricingLi idit b ff
Increased focus• Growing
complexity• Capital
optimization• Capital planning
and allocation
• Consumer relations
• Revise focus on business lines and segments
• BS adjustmentsP d t i i• Liquidity buffers
• Governanceand allocation
• Ex post and ex ante management
• Product pricing• Raising new
capital• Review funding
strategies• RAROC
measurement• Governance
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
28
Basel III challengesAgenda
• Introduction
• New capital ratios
• Liquidity standards
• Current market situation & further steps
• Appendix – Liquidity case studies
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
29
© 2012 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network ofcompany and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavour to provide accurateindividual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
The KPMG name, logo and ‘cutting through complexity’ areThe KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.