The application of the practice - World Bankpubdocs.worldbank.org/.../01-BRRD-Workshop-Bernhard-Freudenthaler-KPMG.pdfKPMG illustrates the application of the proportionality principle

The application of the proportionality principle in practice:Preparing recovery plans for smaller (national) banks

KPMG Austria

Vienna, April 2015

1© 2015 KPMG Austria, österreichisches Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative („KPMG International“), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten. Printed in Austria. KPMG und das KPMG-Logo sind eingetragene Markenzeichen von KPMG International.

Agenda

1. BRRD transposition into national legislation

2. Proportionality principle in Austria

3. KPMG approach for establishing recovery plans for LSIs


1. BRRD transposition into national legislationDevelopment of the regulatory framework for recovery and resolution planning for Austrian banks

BIRG – Banking Intervention and Restructuring Act since 2014 – Banks with balance sheet total > EUR 30 billion had to draw up a recovery plan until 30th of June 2014 and a resolution plan until 31st of December 2014

BIRG is now substituted through BaSAG (Recovery and Resolution Act); smaller banks (LSIs) have to convey the recovery plans to the FMA until 30th of September or 30th of November 2015 according to the FMA regulation (“BaSaPV”)

Basis of the BaSAG: BRRD – Bank Recovery and Resolution Directive (2014/59/EU) Cancellation of waivers for banks BS < EUR 5 billion Obligation to draw up recovery plans for ALL Austrian banks

12. June 2014 (published)1. Jan 2014 (entered into force) 1. Jan 2015 (entered into force)

Transposition of BRRD into national legislation:− detailed requirements concerning the preparation

of recovery plans (including implementation of the EBA-standards)

− introduction of resolution tools into national legislation (including bail-in)

Material changes from BIRG− obligation for preparing resolution plans lies with

the resolution authority− the supervision is equipped with extensive powers

(establishment of a new, independent resolution authority, possibility of early intervention measures)

Recovery plans− to be prepared by the credit institution− more detailed requirements by the EBA a few

months after taking effect

Resolution plans− to be prepared by the regulator− introduction of specific resolution tools− provision of specific legal prerequisites for

resolution of banking groups and banks with international operations

− introduction of the European resolution fund

Recovery plans− to be prepared by the credit institution− balance sheet total more than EUR 30

billion: Deadline 30th of June 2014− balance sheet total below EUR 30

billion: Deadline 30th of June 2015

Resolution plans− to be prepared by the credit institution− balance sheet total more than EUR 30

billion: Deadline: 31st of December 2014− balance sheet total below EUR 30

billion: Deadline: 31st of December 2015

Banking Intervention and Restructuring Act (BIRG)

Bank Recovery and Resolution Directive (BRRD)

Amendment Recovery and Resolution Act (BaSAG)


1. BRRD transposition into national legislationElements of the new BaSAG (2015) compared to BIRG (2014)

BaSAG(2015)

FMA asResolution Authority

Resolution Colleges

Resolution Tools

Austrian Resolution

FundsRecovery

Plan

Early Intervention

Resolution Plan


1. BRRD transposition into national legislationExpectations of the Austrian supervision with regard to the elaboration of recovery and resolution plans are described in explanatory notes

„Explanatory Notes 2014 on the Establishment of Recovery Plans“

„Explanatory Notes 2014 on the Establishment of Resolution Plans“

The explanatory notes for the drawing up of recovery plans should be critically scrutinized and applied by the banks

„Explanatory Notes 2015 on the Establishment of Recovery Plans according to BaSAG“


Agenda





■ Simplified Obligations for LSIs pursuant to the Austrian Bank Recovery Plan Regulation (Bankensanierungsplanverordnung – “BaSaPV”)

■ BaSaPV specifies:− contents and details of recovery plans− first submission date and updating frequency− contents and details of the information required from institutions

The Austrian supervisory authority (FMA) issued a national regulation in accordance with article 4 (3) BaSAG regarding simplified obligations for LSIs


■ BIRG (2014) included a waiver for Banks BS < EUR 5 billion

■ Cancellation of the waiver with the final implementation of BRRD into national legislation through BaSAG (2015)

■ Competent authorities can impose full, unsimplified obligations at any time4

3

1

■ Obligation to draw up recovery plans for ALL Austrian banks, except for − members of an IPS or − subsidiaries of a credit institution where the parent draws up a group

recovery plan covering all substantial institutions

2

BaSaPV■ Austrian Bank Recovery Plan

Regulation:

■ When drawing up the BaSaPV FMA took the criteria defined in article 4 (1) BRRD into consideration


> 50 %

> 30 %• Institution BS ≤ EUR 5 billion• EU-parent consolidated BS ≤ EUR 5 billion• IPS consolidated BS ≤ EUR 5 billion

BaSaPV is dividing Austrian LSIs into categories according to the following criteria2. Proportionality principle in Austria

Classification of Austrian LSIs

Category 1

Category 2

Category 3

• Institution BS ≤ EUR 350 million• EU-parent consolidated BS ≤ EUR 350 million• IPS consolidated BS ≤ EUR 350 million

• Institution BS > EUR 5 billion• EU-parent consolidated BS > EUR 5 billion• IPS consolidated BS > EUR 5 billion

• Cross-border business > 30 % BS

• Interbank business > 50 % BS

Cross-border business ≤ 30 % BS

Interbank business ≤ 50 % BS

1 2 3


The number of scenarios for LSIs depends on the category defined in BaSaPV2. Proportionality principle in Austria

ScenarioCategory System-wide Idiosyncratic Combination

Category 1

Category 2

Category 3

✘ ✘

✘

The Austrian regulator recommends category 2 and 3 institutions to include one slow-moving and one fast-moving scenario

1 2 3



The Austrian regulation uses indicators defined by EBA in the draft guidelines as compulsory and optional

Capital

Liquidity

Profitability

Asset Quality

■ Common Equity Tier 1 Ratio (CET-1)■ Total Capital Ratio■ Leverage Ratio (LR)

■ Liquidity Coverage Ratio (LCR)■ Short-term Wholesale Funding Ratio■ Net Outflow of Retail and Corporate Funding■ Cost of Wholesale Funding

■ Return on Assets (ROA)■ Return on Equity (ROE)■ Significant Losses due to Administrative/Regulatory Fine or Adverse Court Ruling

■ Impaired and Past Due Loans / Total Loans (NPL)■ Coverage Ratio (Loans and Debt Instruments)■ Non-Performing Loans by Counterparty Sector

Category 1+2 Category 3

Comparing EBA indicators to BaSaPV categories

Category 3 institutions have to choose three additional indicators, one from each category liquidity, profitability and asset quality

Three Additional indicators for category 3 LSIs compared to category 1 and 2

1 2 3

/ or

/

/

/

/ or

/ or

/ or



Category 1 Category 2 Category 3

Classification Criteria

Institution BS ≤ EUR 350 million EU-parent consolidated BS ≤ EUR 350

million IPS consolidated BS ≤ EUR 350 million

Institution BS ≤ EUR 5 billion EU-parent consolidated BS ≤ EUR 5

billion IPS consolidated BS ≤ EUR 5 billion Cross-border business ≤ 30 % BS Interbank business ≤ 50 % BS

All other LSIs BS < EUR 30 billion

Scenarios System-wide System-wide and Idiosyncratic

System-wide, Idiosyncratic und Combination

Indicators Common Equity Tier 1 Ratio (CET-1) Total Capital Ratio Liquidity Coverage Ratio (LCR) Return on Assets (ROA) Impaired and Past Due Loans / Total

Loans (NPL)

Common Equity Tier 1 Ratio (CET-1) Total Capital Ratio Liquidity Coverage Ratio (LCR) Return on Assets (ROA) Impaired and Past Due Loans / Total

Loans (NPL)

Common Equity Tier 1 Ratio (CET-1) Total Capital Ratio Liquidity Coverage Ratio (LCR) Return on Assets (ROA) Impaired and Past Due Loans / Total

Loans (NPL) One additional indicator from the

categories liquidity, profitability and asset quality

First Submission Date 2015-11-30 2015-09-30 2015-09-30

Updating Frequency Every 2 years Once a year Once a year

Simplified obligations for Austrian LSIs according to BaSaPV at one glimpse


Agenda





Practical example: Introduction

■ Autobank of a leading German carmaker■ Headquartered in Salzburg (Austria)■ Operates mainly in CEE through branches■ High share of cross-border business■ Refinancing mainly through German banks

■ Balance Sheet total: EUR 2 bn■ Cross-border business: EUR 800 mio

(40% of BS)■ Interbank business: EUR 1,2 bn (60% of BS)

■ Target group: high-net-worth individuals with financial assets > EUR 500.000 in German speaking countries

■ Headquartered in Vienna■ Family owned since 1892

■ Balance Sheet total: EUR 150 mio■ Cross-border business: EUR 60 mio

(40% of BS)■ Interbank business: EUR 30 mio (20% of BS)

KPMG illustrates the application of the proportionality principle for LSIs in Austria by using two example banks

3. KPMG approach in establishing recovery plans

Automotive Bank Private Bank

Description

Key Financials

How does the proportionality principle affect these banks when developing recovery plans?


• Institution BS ≤ EUR 5 billion• EU-parent consolidated BS ≤ EUR 5 billion• IPS consolidated BS ≤ EUR 5 billion

Practical example: Classification of example banks3. KPMG approach in establishing recovery plans

Classification of Austrian LSIs

Category 1*

Category 2

Category 3

• Institution BS ≤ EUR 350 million• EU-parent consolidated BS ≤ EUR 350 million• IPS consolidated BS ≤ EUR 350 million

• Institution BS > EUR 5 billion• EU-parent consolidated BS > EUR 5 billion• IPS consolidated BS > EUR 5 billion

• Cross-border business > 30 % BS

• Interbank business > 50 % BS

Cross-border business ≤ 30 % BS

Interbank business ≤ 50 % BS

Autobank Private Bank

✘

✘

✘

✘

> 50 %

> 30 %

Result: Category 3

since its a residual category

Result: Category 1

* In category 1 cross-border and interbank business are not considered. The balance sheet amount is the only criteria used.

First submission date: 2015-09-30




3. KPMG approach in establishing recovery plans

Overview of the general structure of a recovery plan and weighting of the single elements

• Description of the group structure and business model • Identification of critical functions and core business areas• Identification of internal and external interconnectedness

1. Strategic Analysis

• Indicators for early identification of critical situations and monitoring the effects of applied recovery options

2. Indicators

• Financial measures to restore sustainable financial stability• Non financial measures (such as communication measures), to support

the effectiveness of financial measures

3. Recovery Options

• Detailed description of progress of existence-threatening crisis (near default), assessing the validity of defined recovery options, to verify indicators, structures and processes (governance)

4. Scenarios

• Organizational structures and processes for monitoring the recovery indicators (monitoring), escalation and decision on activation of recovery measures in times of crisis and updating the recovery plan

5. Framework & Governance

• Description of required information for the elements of the recovery plan• Description of the processes for short-term provision of the required information for the

implementation of recovery options (e.g. sale of portfolios)

6. Information Management

• Planning the integration of the recovery plan in the overall bank management• Measures to remove impediments, which conflict with the activation of recovery options

7. Implementation Plan

10 %

5 %

35 %

15 %

15 %

10 %

10 %

Cor

e El

emen

ts

A recovery plan essentially comprises the following seven elements:

PP

PP = Proportionality principle especially applicable

PP


3. KPMG approach in establishing recovery plans – Indicators

Practical example: Identification of minimum indicators for the example banks

Capital

Liquidity

Profitability

Asset Quality

■ Common Equity Tier 1 Ratio (CET-1)■ Total Capital Ratio■ Leverage Ratio (LR)

■ Liquidity Coverage Ratio (LCR)■ Short-term Wholesale Funding Ratio■ Net Outflow of Retail and Corporate Funding■ Cost of Wholesale Funding

■ Return on Assets (ROA)■ Return on Equity (ROE)■ Significant Losses due to Administrative/Regulatory Fine or Adverse Court Ruling

■ Impaired and Past Due Loans / Total Loans (NPL)■ Coverage Ratio (Loans and Debt Instruments)■ Non-Performing Loans by Counterparty Sector

Private BankAutobank

Minimum indicators applicable to the example banks

• Instead of applying the entire minimum list of indicators according to EBA the Autobank as category 3 institution has to include only 8 indicators in their recovery plan, whereas the number of indicators is reduced to 5 for the Private Bank.

• The reduced number of indicators is reflected in decreased administrative costs when developing recovery plans and monitoring the indicators over the course of time.

Results and benefit of applying the proportionality principle

Thank you!

Contact

Porzellangasse 51A - 1090 [email protected]

Bernhard FreudenthalerSenior Manager, Financial Services Advisory

KPMG Austria, an Austrian Member Firm of KPMG International, a Swiss cooperative.

Tel. +43 1 31 332 - 138Fax +43 1 31 332 - 500

© 2015 KPMG Austria, Austrian member firm of the KPMG network ofindependent member firms affiliated with KPMG InternationalCooperative („KPMG International“), a Swiss entity. All rights reserved.Printed in Austria. KPMG and the KPMG logo are registeredtrademarks of KPMG International.

Documents

The application of the practice - World Bankpubdocs.worldbank.org/.../01-BRRD-Workshop-Bernhard-Freudenthaler-KPMG.pdfKPMG illustrates the application of the proportionality principle