seminar - hot topics treasury - pwc · 14/06/2018 · basel iv focuses on the rwa side of the...

Seminar - Hot topics treasury

Basel III & IV

www.pwc.com

Strictly private and confidential

14 June 2018

PwC 14 June 2018


1 Welcome and introduction 3

2 Basel IV 6

3 Discussion 20

Contents

2Seminar - Hot topics treasury

PwC 14 June 2018


Welcome and introduction

1 Welcome and introduction


PwC 14 June 2018


With you today



Niels VinkManagerCapital Markets and Accounting Advisory ServicesT: +31 (0)88 792 46 03M: +31 (0)6 13 24 17 [email protected]

Gerbrich WagenaarSenior Associate Capital Markets and Accounting Advisory ServicesT: +31 (0)88 792 54 81M: +31 (0)6 53 43 46 [email protected]

PwC 14 June 2018




PwC 14 June 2018


Basel IV

2 Basel IV


PwC 14 June 2018


Banking Supervision in the EU Single Rule Book

2 Basel IV


Act on Financial Supervision (“Wft”)

Frameworks(Basel III, G-SIBs, D-SIBs)

CRD IV –Directive

EBA Standards

ESMA Standards

CRR –Regulation

Solvency Regulation

Own funds Liquidity LeverageCounterparty Risk Capital Buffers

http://www.bis.org/index.htm

PwC 14 June 2018


The Basel (R)Evolution

2 Basel IV


Pre-Basel

Credit risk

Credit + Market risks

Credit + Market + Operational

risks

Credit + Market + Operational

risks

Overview Pillar I Ratios

Large exposures

1988 Basel

Capital Accord

1996 Amendment

2004 Finalisation

of Revised Basel II

Framework

2007 Implementation

of revised framework

2010 Introduce

New Framework

No standardised rules on capital adequacy for banks. Rules depend on bank regulators of individual countries. No rules in some countries.

1988 Basel set rules for credit risk only.

1996 BCBS adds rules for market risk.

Basel II rules for credit, market and operational risks

Basel III changed the level and quality of capital, and introduced the CVA capital charge, a leverage ratio requirement and new liquidity standards.

‘Basel IV’ changes the whole capital requirements (i.e. RWA) framework for all risk types. This will present one of the biggest challenges for the financial industry in years.

PwC 14 June 2018


RWA impact

2 Basel IV


Aggregated RWA impact estimate in €Tn

Source: BCBS, EBA, Strategy& analysis.1 Impact relative to starting value for risk type, impact based on Strategy& perspective on expert estimates.

Low impact1 15% 0%0% 13%0%

20% 50%30% 22%30%High impact1

Resulting

RWA

CVA & CCRMarket riskCurrent RWA Credit risk Operational

risk

140.1

1.9

11.5

0.30.1

0,8

1.7

11.5

1.7

High impact (incl. output floor)Low impact (incl. output floor)

• The aggregate expected increase in RWA is €1.0 trillion to €2.5 trillion, or a rise of 13% to 22% for the largest banks in Europe

• Credit risk is the main driver of RWA impact, due to both the size of the portfolio and the height of the impact

• Credit risk IRB portfolio increases strongly due to proposed output floors, which are calibrated at 72.5% in our analysis

• As a result, banks with relatively low risk weights for their IRB portfolios are expected to have a higher impact

• Similarly, for market risk, the impact of ‘Basel IV’ will be higher for banks with a high share of trading desks valued with internal models

• Next to the output floors, additional restrictions on the application of the A-IRB approach for credit risk is expected to have a significant impact (e.g. mandatory application of F-IRB for large corporates)

Comments

PwC 14 June 2018


Expected average RWA impact relative to current RWAWithin Europe, impact is expected to be highest for the Swedish banks driven by low current risk weights

2 Basel IV


Note: only for countries with at least 2 banks in the sample

Source: BCBS, EBA, Strategy& analysis

9%

14%Spain

Ireland

Slovenia

7%

9% 20%

Italy

22%

Finland

Belgium

United Kingdom

16%Austria

22%

23%

Norway

19%France

Luxembourg

15%

16%

18%

Germany

38%

Denmark 49%

Netherlands

73%

29%

Sweden

Greece

Portugal

12%

8%

Malta

13%

12%

11%

12%

Cyprus

5%

5%

30%

40%

7%

12%

4%

6%

18%

16%

15%

12%

63%

4%

4%

Impact range

Min expected impact

Estimated Basel IV Impact for large

Dutch Bank

• ING: 15%-18% RWA increase

• Rabobank: 30%-35% RWA increase

• ABN AMRO: 35% RWA increase

• De Volksbank: 35% RWA increase

• NIBC: 20%-30% RWA increase

PwC 14 June 2018


Anticipated changes in the strategy of banks

2 Basel IV


Potential way forward

Resulting, new strategic imperatives Potential way forward for banks

• Less intensive balance sheet usage: Reduce the deployment of own balance sheet to reduce capital requirements for existing business and grow the business in a more capital efficient way, e.g. by focusing on originate-to-distribute models

• Disintegration of the bank value chain: Reduce cost-structure and increase margins by outsourcing of non-core processes, while focusing on best-in-class competencies

• Full employment of digital technologies: Full integration and digitisation of processes as enabler to executive new strategic imperatives and to compete against agile and disruptive market players as

• Transformation of balance sheet requires definition of 5+ year vision (‘BS 2022’).

• To be successfully implemented over next years –potential implications on business setup

• Strategic exit management as important capability

Integration of bank value chain

Intensity of balance sheet usage

Low

High

LowHigh

2

1

PwC 14 June 2018


Basel IV focuses on the RWA side of the capital ratio

2 Basel IV


Calculation of the capital ratios according to Basel III/CRR …

Common Equity Tier 1

Additional Tier 1

Tier 2 Instruments

Credit Risk

Add. RisksMarket

RiskOpRisk

>8% + capital buffers

… and topics covered by Basel IV:

SA-CRSecuriti-sations

IRB SA-CCR CVAStep-in

RiskFRTB OpRisk IRRBB

PwC 14 June 2018


Revised Capital Floors

2 Basel IV


Preventing undue optimism in bank modelling practices, thereby ensuring that modelled capital requirements do not fall below a prudent level

Mitigating model risk

Addressing incentive-compatibility issues, as banks face incentives to use overly optimistic internal models to reduce risk-weighted assets and thereby maximise return on equity

Improving comparability by providing a standardised assessment of risk

Constraining variation in model-derived risk-weighted assets (RWAs) that arises from differences in bank and supervisory practices

The revised Floors are based on revised standardised approaches for credit, market and operational risk.

• The current capital framework includes an aggregate Basel I capital floor and granular floors related to specific asset classes and parameters.

• A permanent aggregate capital floor will replace the current floor

• The aggregate floor will be calculated as 72.5% of the Total Risk Weighted Assets under the standardised approaches.

Capital floors as an integral component of the capital framework

1

2

3

4

5

PwC 14 June 2018


Within credit risk, the highest impact is expected for the large corporates and retail mortgage portfolios

2 Basel IV


Source: BCBS, EBA, Strategy& analysis.1 Impact relative to starting value for risk type, impact based on Strategy& perspective on expert estimates.

Asset class Credit risk impact (€Tn)

Corporates Large corporates

Specialised lending

Corporates – SME

Retail Retail – Mortgages

Retail SME

Retail – Other

Other Banks

Governments and

Authorities

Securitisations

Other

4.1

1.0

0.6

0.5

0.1

1.5

0.5

1.0

1.2

0.6

Low

impact1)

25%

35%

25%

20%

20%

20%

20%

10%

5%

5%

High

impact1)

35%

40%

25%

20%

20%

20%

25%

15%

10%

5%

Current RWA - STA

Min. Expected RangeCurrent RWA - IRB

Impact Range

0.8 0.2

PwC 14 June 2018


Effect on RWA of large corporate portfolios

2 Basel IV


Examples from a portfolio of large corporates

Effect on risk weights

The effect of capital floor

20% 20%

50%

75% 75%

100%

17% 17%22%

29%

38%

61%

15% 15%20%

26%33%

53%

RW SA RW F-IRB RW A-IRB

For the IRB approach, PDs are calculated based on the ‘shadow bond’ modeling approach and benchmark LGDs are used, for the New Standardised Approach base risk weights are obtained from the BCBS look-up table, capital floor is set up at 72.5%

PwC 14 June 2018


SA credit risk

2 Basel IV


Exposure

Equal to the accounting value remaining after specific credit risk adjustments (e.g. impairments).

Exposure Classes

Capital Requirements are based on the type of “Exposure Class”. Examples are: Governments, Institutions, Corporates, Retail.

Risk Weights

Capital requirements are determined by applying a risk weight per exposure category, based on the credit quality of the counterparty.

Exposure x Credit conversion factor (CCF) = Exposure after CCF

Exposure after CCF x SA risk weight Risk weighted SA exposure

Part of the revision tothe SA for credit risk

Corporates

External ratings allowed• Base RWs, subject to due

diligence

• Unrated: RW = 100%• SME: RW = 85%

No external ratings allowed• Investment grade: RW = 65%• SME: RW = 85%• Rest: RW = 100%

AAA to

AA-

A+ to A-

BBB+ to

BBB-

BB+ to

BB-

Below BB-

20% 50% 75% 100% 150%

PwC 14 June 2018


SA Credit Risk Specialised lending exposures (newly introduced)

2 Basel IV


Specialised lending

• Currently, there is no specific exposure class for specialised lending under de SA.

• Exposure with little or no independent capacity to repay the obligation, apart from the income that is received from the asset(s) being financed (excluding real estate) and the terms of the obligation give the lender a substantial degree of control over the asset.

Issuer rating is available

Rating

Risk weight for specialised lending

AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- Below BB-

20% 100% 150%50% 75%

Issuer rating is not available

Object- and commodity trade financing

Project financing

100%

130% (pre-operational)

100% (operational) / 80% (operational, high quality

project finance - robustagainst adverse changes in the economic cycle and

business conditions)

Risk weights for specialised lending

Project finance- Single project providing revenue for repayment and serves as security -Large, complex and expensive installations

Object finance- Funding the acquisition of equipment - Repayment dependent on cash flows generated by the asset, which is also pledged to the lender

Commodity finance - Short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities- Loan repaid with proceeds of the sale of the commodity

PwC 14 June 2018


Simplified pricing example

2 Basel IV


SA Corporate

(AAA rated)

with floor

14,50%

580.000

58.000

988.400

1.046.400

2,09%

Effects can be potentially mitigated, e.g. by using credit risk mitigation techniques,

by taking on the loan directly as a corporate (i.e. not in an SPV), syndicate

financing

* Hypothetical risk weight

Capital costs play an important role in the overall pricing models of banks. Below the effects of different risk weights on the pricing of a € 50 million shipping finance loan. Please note, this is a hypothetical and simplified example.

Loan €50 mln

Col

um

n1 A-IRB SL*

Slotting

approach SL

SA SL-

unrated

SA SL -

unrated with

floor

Risk weight 50% 70% 100% 72,5%

Required capital 2.000.000 2.800.000 4.000.000 2.900.000

Required return on equity 10% 200.000 280.000 400.000 290.000

Financing costs debt 2% 960.000 944.000 920.000 942.000

Total cost 1.160.000 1.224.000 1.320.000 1.232.000

% 2,32% 2,45% 2,64% 2,46%

PwC 14 June 2018


Alternatives for bank financing

2 Basel IV


Private placements

PP market can be a solution for midcap companies that are not capable or willing to raise capital from the public market.

Crowd funding

Low awareness of crowdfunding opportunities and limited recognition of crowdfunding as suitable financing alternative amongst entrepreneurs

Alternative finance sources

Corporate lending

funds

Combines institutional investors’ capital with financial expertise and distribution networks of banks or asset managing firms

Public offering

Mainly intended for large corporates (Criteria listing Euronext: > 5yr old, equity > €5mln, capital to raise > €5mln)

PwC 14 June 2018


Discussion

3 Discussion


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and may sometimes refer to the PwC network. Each member firm is a separate legal

entity. Please see http://www.pwc.com/structure for further details.

Questions?

seminar - hot topics treasury - pwc · 14/06/2018 · basel iv focuses on the rwa side of the...

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