Changing Landscape
Pillar 1
Changes
Credit risk
InternalModels Standardized
FIRB
AIRBStandardized
Market risk
Operational risk
IMA Standardized
AMABIA
TSA / ASA
WB-IMF-FED Revised SA - Oct 17, 2016 2
Changing Landscape
Pillar 1
Changes
Credit risk
InternalModels Standardized
FIRB
AIRB
Cred.Standardized
Market risk
Operational risk
IMA Standardized
AMABIA
TSA / ASA
WB-IMF-FED Revised SA - Oct 17, 2016 3
Basel II – SA – Proposed Revisions
Objectives
• To make it more risk sensitive
• To reduce reliance on external ratings
• To increase comparability with IRB approach
• To increase comparability with SA in other jurisdictions – by reducing national discretion
Wider consultation
• Involved a few non-BCBS jurisdictions in the task force (Chile, UAE, Jersey, Philippines, Poland, Thailand,)
• First consultation issued in December 2014
• WBG Survey finding on First CD submitted to Basel Committee (available on BISwebsite at http://www.bis.org/bcbs/publ/comments/d307/wbsaor.pdf )
• Second consultation issued in December 2015
• Expected to be finalized around the new year (2017)WB-IMF-FED Revised SA - Oct 17, 2016 4
World Bank Survey
• Supported by the Basel Consultative Group
• Issued to over 100 jurisdictions
• Received completed responses from 53 jurisdictions
WB-IMF-FED Revised SA - Oct 17, 2016 5
WB-IMF-FED Revised SA - Oct 17, 2016 7
1 Albania2 Argentina3 Armenia4 Bahamas5 Bolivia6 Bosnia & Herzegovina7 Brazil8 Cambodia9 Cayman Islands
10 China11 Colombia12 Costa Rica13 Croatia14 Czech15 Dominican Republic16 Dubai-DIFC17 Egypt18 Haiti19 Honduras20 India21 Indonesia22 Isle of Man23 Israel24 Jersey25 Jordan26 Kenya27 Lebanon
28 Lithuania29 Macedonia30 Madagascar31 Malaysia32 Mauritius33 Mexico34 Morocco35 Nicaragua36 Pakistan37 Palestinian Territories38 Panama39 Paraguay40 Peru41 Philippines42 Russia43 Rwanda44 Saudi Arabia45 Serbia46 South Africa47 Tajikistan48 Tanzania49 Thailand50 Trinidad & Tobago51 Tunisia52 Uruguay53 Vietnam
Exposure on MDBs
Current framework
Highly rated MDBs – zero RW; Other MDBs – as per external rating (see below)
Proposed framework
• Highly rated MDBs – zero RW (but ….);
• Other MDBs –
• as per external rating (same as above) or
• 50% if jurisdiction does not permit use of external
rating;WB-IMF-FED Revised SA - Oct 17, 2016 8
Exposure on banks
CD - 1
Current framework
WB-IMF-FED Revised SA - Oct 17, 2016 9
Sub debt & non-equity
capital instruments
Equity listed on recognized
stock exchanges
All other equity
250% 300% 400%
• Is Net NPA an effective measure of credit risk in banks
Exposure on banks: Survey feedback (1)
• CET1 Vs Tier 1 and Leverage ratio
• Alternative to CET 1 capital
10WB-IMF-FED Revised SA - Oct 17, 2016
Exposure on banks: Survey feedback (2)
• Can exposures to banks subject to higher minimum capital
requirements justify a lower risk weight?
• Is Pillar 3 disclosure by banks an acceptable source for a
counterparty creditor bank to verify the risk drivers?
11WB-IMF-FED Revised SA - Oct 17, 2016
Exposure on banks: Survey feedback (3)
• Breach of any prudential requirement – 300% RW
• Use of consolidated bank’s ratios when solo are not available
• Proposed need for alternate risk drivers for non-Basel III banks
12WB-IMF-FED Revised SA - Oct 17, 2016
Exposure on banks: CD 2ECRA
SCRA
Equity Sub-debt
250% 150%
13WB-IMF-FED Revised SA - Oct 17, 2016
Grade A Capacity to meet financial commitments; timely; over life of exposure; irrespective of economic cycles & business conditions; must exceed published minimum regulatory requirements & buffers established by the home supervisor
Grade B Substantial credit risk; capacity to repay in full dependent on stable or favourable economic or business conditions; must meet published minimum regulatory requirements
Grade C Material default risks; limited margin of safety; adverse business, financial or economic conditions very likely to lead (or have led) to defaults; has breached published minimum regulatory requirements or adverse audit opinion,
Exposure on Corporate
If Risk drivers not provided 300% RW
New corporate – first year 110% RW
Equity exposure 300% RW if listed on recognised stock exchanges; 400%, if not
CD - 1
Current framework
15WB-IMF-FED Revised SA - Oct 17, 2016
16WB-IMF-FED Revised SA - Oct 17, 2016
Exposure on corporates: Survey feedback
• Risk drivers
– 53% (27): Revenue either needs to be replaced by a more sensitive risk driver or
its computation needs to be clarified
– 31% (16): Leverage either needs to be replaced by a more sensitive risk driver or
its computation needs to be clarified
– 85% (45): risk sensitivity can be improved by including additional risk drivers
like industry sector and external ratings
• Availability of financial ratios
– 28% (14): Corporates do not provide data on revenue & leverage
– 49% (25): These data are provided at annual or longer intervals
Corporate: Specialised Lending
Current framework
• Currently no distinct treatment under SA; available under IRB approach
CD - 1
17WB-IMF-FED Revised SA - Oct 17, 2016
Specialised Lending – Survey feedback• Will introducing specialised lending categories enhance the
risk of sensitivity of the standardised approach?
• What percentage of total assets will constitute specialised
lending?
18WB-IMF-FED Revised SA - Oct 17, 2016
WB-IMF-FED Revised SA - Oct 17, 2016 19
Current framework
Equity exposures
•
• 400%, if not
300% if listed on recognised stock exchanges
CD - 1
Project finance exposures
Project financing: Survey feedback
• Likely influence on project financing models in EMDEs -
where banks may currently fund projects at the development
stage through equity finance
• Materially or significantly higher capital requirements in 56%
of RJs (24 out of 43) because of the revised treatment
20WB-IMF-FED Revised SA - Oct 17, 2016
Current framework
• Basel II SA refers to small businesses;
• Exposures on those that meet eligibility criteria is 75% (included in retail)
• Others – like corporate – 100% if unrated
CD - 1
• Exposures on those that meet eligibility criteria will be 75% (included in
retail)
• Others – included under corporate, can range from 100 to 130% depending
on leverage.
Exposures on SMEs
21WB-IMF-FED Revised SA - Oct 17, 2016
Non-retail SMEs : Survey feedback• Do leverage and revenue appropriately reflect the credit risk
of non-retail SMEs in your jurisdiction?
• The proposed risk weight bucketing for exposures to non-
retail SMEs will increase from 75% to at least 100%. Is the
proposal for this risk weight bucketing appropriate?
22WB-IMF-FED Revised SA - Oct 17, 2016
Exposure on Corporate – CD 2
• Jurisdictions that do not allow use of external ratings
• Flat 75% for investment grade assessments
• Flat 100% for the rest
• Equity exposures – 250%
• Subordinated debt – 150%
• Flat 85% for corporate SMEs; entities where the reported sales of the consolidated
group of which the firm is a part is less than €50 million
• Flat 50 RW add-on for unhedged fx exposures (denominated in a currency different
from the borrowers’ main source of income)
23WB-IMF-FED Revised SA - Oct 17, 2016
Project finance exposures – CD2
24WB-IMF-FED Revised SA - Oct 17, 2016
• As per issue specific external rating, if available
• Other debt exposures will be risk weighted as below:
– Project finance:
• Pre-operational phase 150%
• Operational phase 100%
• Operational phase: … the entity that was specifically created to finance the project has (i) a
positive net cash flow that is sufficient to cover any remaining contractual obligation, and (ii)
declining long term debt.
– Object finance & commodities finance 120%
– Land acquisition, development & construction exposures – moved under “real estate
exposure class” – 150%
• Equity exposures – 250%
• Subordinated debt – 150%
Retail exposures
26WB-IMF-FED Revised SA - Oct 17, 2016
Criteria Current Framework Proposed FrameworkOrientation criterion The exposure is to an individual person or
persons or to a small business; excludes RRE
The exposure is to an individual
person or persons or to an SME
borrower; excludes RRE
Product criterion Revolving credits and lines of credit (including
credit cards and overdrafts), personal term
loans and leases (e.g. instalment loans, auto
loans and leases, student and educational
loans, personal finance) and small business
facilities and commitments
No change
Granularity criterion Regulatory retail portfolio should be sufficiently
diversified; may set a numerical limit that no
aggregate exposure to one counterparty can
exceed 0.2% of the overall
regulatory retail portfolio
No aggregate exposure to one
counterparty can exceed 0.2% of the
overall regulatory retail portfolio
Low value of individual
exposures
The maximum aggregated retail exposure to
one counterpart cannot exceed an absolute
threshold of €1 million
No change
Risk weight 75% No change
Unhedged fx exposure No risk weight Additional 50% RW (75% + 50%)
• Is there a need to increase the risk sensitivity of the regulatory retail
portfolio? 60% - No; 40% - Yes
• Is it appropriate to apply a flat risk weight add-on to retail exposures where the
currency of the loan is different from that of the borrower's income?
Retail exposures: Survey feedback
27WB-IMF-FED Revised SA - Oct 17, 2016
Current framework
• Exposures that meet eligibility criteria is 35%
• Others:
– 75% if the exposure qualifies as retail exposure
– Else, like exposure on corporate – max 150%
CD – 1
• Exposures that meet eligibility criteria will be risk weighted as per their LTV and DSC ratios.
• Others: similar to current approach – will be treated as unsecured retail or corporate
exposure – 75% to 130%
• Flat add-on where loans denominated in currency other than the borrower’s main source of
income
Exposures secured by residential real estate
28WB-IMF-FED Revised SA - Oct 17, 2016
Exposures secured by RRE – Survey feedback• Do the chosen risk drivers (LTV and DSC ratios) have sufficient predictive power
of loan default and/or loss incurred for exposures secured by RRE?
• Should the DSC ratio and the value of the property be kept as constant as
measured at origination in the calculation of the LTV ratio?
• Where the counterparty is not an individual (a small business), is the LTV an
adequate risk driver or should it be supplemented by the DSC ratio or any other
risk driver?
29WB-IMF-FED Revised SA - Oct 17, 2016
Exposures secured by RRE – Survey feedback (2)
• Ability to compute LTV and DSC ratios
30WB-IMF-FED Revised SA - Oct 17, 2016
• 22 can compute DSC ratio
• 29 can compute LTV ratio
• 19 have requested additional specific guidance to ensure
consistent calculation of the ratios across banks and jurisdictions
• Is it appropriate to apply a flat risk weight add-on to exposures secured by RRE
where the currency of the loan is different from that of the borrower's income?
• Exposures on those that meet eligibility criteria will be risk weighted as per their LTVratios
• Flat 50 RW add-on for unhedged fx exposures (denominated in a currency different fromthe borrowers’ main source of income)
Ineligible exposures – higher of 100% or RW of Counterparty
Exposures secured by residential real estate – CD 2
Ineligible exposures – 150%
31WB-IMF-FED Revised SA - Oct 17, 2016
Exposures secured by commercial real estateCurrent framework
• 100% risk weight
• National discretion to reduce to 50% for well secured portion, in well developed & long established
markets
Proposed framework
• Exposure that is secured by immovable property that is not a residential property
• Exposures on those that meet eligibility criteria will be risk weighted as per their LTV ratios
• Flat 50 RW add-on for unhedged fx exposures (denominated in a currency different from the borrowers’
main source of income)
Ineligible exposures – higher of 100% or RW of Counterparty
32WB-IMF-FED Revised SA - Oct 17, 2016
Ineligible exposures – 150%
Off-balance sheet exposures – Survey feedback• Do instruments allocated to each of the CCF categories share a similar
probability of being drawn? And are probabilities implied by the CCF's accurate?
• What is the likely impact on risk weighted assets in your jurisdiction because of
the higher CCF of 10 percent for commitments that are unconditionally
cancellable and 75 percent for commitments other than those that are
unconditionally cancellable?
35WB-IMF-FED Revised SA - Oct 17, 2016
Credit Risk Mitigation (CRM)
Current framework
• Simple (substitution) and comprehensive (off-set) approaches for financial collateral;
• Substitution approach for guarantors who have a lower risk weight than the counterparty
Proposed framework
• Simple and comprehensive approaches remain, but proposal to introduce “investment grade” classification
instead of external rating.
– A security of which the issuer has an adequate capacity to meet its financial commitments under the security for the
projected life of the asset or exposure; meaning that: (i) the risk of default by the obligor is low and (ii) the full and timely
repayment of principal and interest is expected.
• Eligible Guarantors: Credit protection given by the following entities can be recognised when they have a lower
risk weight than the counterparty:
– a. Sovereign entities, public sector enterprises (PSEs), MDBs, banks, securities firms, and prudentially regulated financial
institutions;
– b. Parent companies, subsidiaries, and affiliate companies of the counterparty – where the credit worthiness is not
positively correlated with the borrower’s credit risk;
– c. other entities identified as “investment grade” that meet all of the following conditions provided that the credit
protection is not provided to a securitisation:
• For corporate entities, must have securities outstanding on a recognised security exchange;\
• where their credit worthiness is not positively correlated with the borrower’s credit risk;
37WB-IMF-FED Revised SA - Oct 17, 2016
Past Due Loans (Defaulted exposures)
Proposed framework
• IRB definition of defaulted exposure adopted (90 dpd + qualitative)
• Defaulted RREs (net of specific provisions & partial write-offs)– General RREs – 100%
– Income producing RREs – 150%
• Other defaulted exposures (net of specific provisions & partial write-offs)– Unsecured or unguaranteed portion – 150%
– Secured/ guaranteed portion as per CRM framework
38WB-IMF-FED Revised SA - Oct 17, 2016
Current frameworkSpecific provisions as %
of outstanding amount of
the loan
Applicable risk weight on unsecured portion net of specific provisions
Past due loans secured by
collateral other than those
recognised for CRM
All other
past due
loans
<15 100 150 150
15 to < 20 100
20 to < 50 50 100
50 and above 100 - 50 100 - 50
Past Due Loans: Survey feedback• Is it appropriate to re-define this asset class to include all past due assets (not
just past due loans)?
• Is it appropriate to assign a flat risk weight for all past-due assets?
39WB-IMF-FED Revised SA - Oct 17, 2016
Past Due Loans: Survey feedback (2)
• Is it appropriate to include an add-on to the applicable risk weight - which may
vary as a proportion of the amount of provisions? Would holding of higher level
of provisions for past due asset warrant a lower risk weight than for a
performing asset?
40WB-IMF-FED Revised SA - Oct 17, 2016
Current and Proposed Framework: Summary
41WB-IMF-FED Revised SA - Oct 17, 2016
ASSET CLASS CURRENT PROPOSED
Min Max Min Max
Sovereign 0 150 0 150
PSEs 20 150 20 150
MDBs 0 150 0 150
Banks 20 150 30 250
Corporates 20 150 20 250
Retail 75 100 75 100
RRE 35 100 25 150
CRE 50 100 60 150
OBS Items CCF CCF
Commitments
- Unconditionally
cancellable
0 10
- others <= 1 year 20 50 to 75
- others > 1 year 50 50 to 75
NIFs & RUFs 50 50 to 75
Whether the proposed changes will make the
revised framework simpler than the current
framework?
42WB-IMF-FED Revised SA - Oct 17, 2016
Whether the proposed changes will make the
revised framework simpler than the current
framework? Survey feedback
43WB-IMF-FED Revised SA - Oct 17, 2016
Likely overall impact (CD – 1) Survey feedback
44WB-IMF-FED Revised SA - Oct 17, 2016
• Materially or significantly higher capital requirements in 74% of RJs
(32 out of 43). Sources of additional capital requirement are:
– Higher credit conversion factors for off-balance sheet items: about
(32 out of 44)
– Exposure to banks: about 65% of RJs (29 out of 45)
– Project finance exposures: about 56% of RJs (24 out of 43)
– Exposures to non-retail SMEs: about 56% of RJs (25 out of 45)
73% of RJs
– Exposures secured by residential real estate: about 47% of RJs (21 out of 45)
Overall survey feedback
Makes the framework less simple (39 RJs) – without adequately compensating with a more consistent or comparable outcome
Leads to :
- Higher capital requirements (32 RJs);
- Higher cost of borrowing (34 RJs);
- Higher cost of computing and disclosing risk drivers (RDs) (15 RJs)
Likely unintended consequences:
- Pressure to implement Basel III (37 RJs);
- Adverse impact on project financing (38 RJs);
- Adverse impact on lending to SMEs (12 RJs)
45WB-IMF-FED Revised SA - Oct 17, 2016
Survey feedback: Main areas for reconsideration
Risk drivers
• Alternate RD for non-Basel III banks (CET1 Ratio)
• Alternate RD for corporates (Revenue)
• Alternate RD for exposures secured by RRE (DSC ratio)
• Additional guidance for computation of risk drivers to promote consistency and comparability
Treatment of
• Conversion factors for off-balance sheet items
• Non-retail SME exposures
• Equity exposure to corporates
• Specialized lending
Scope for greater role for national discretion and Pillar II
46WB-IMF-FED Revised SA - Oct 17, 2016
Thank You
World Bank Group
1818 H Street
Washington, DC 20433