the capital odyssey -...
TRANSCRIPT
Adrian Docherty, Head of Bank Advisory, BNP Paribas
International Association of Credit Portfolio Managers (IACPM), Berlin, 19 May 2017
The Capital Odyssey Contemporary perspectives on bank risk and capital management
Disclaimer
The views expressed in this presentation are the author’s personal views, not the views of BNP Paribas S.A.
Disclaimer
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© BNP Paribas (2017). All rights reserved.
The views expressed in this presentation are the author’s personal views, not the views of BNP Paribas S.A.
January 2017 2
January 2017 4
Focus on Risk and Capital Management
Today’s Focus
Brand Logistics
Risk Capital
What are the Key Components of Banking?
January 2017 5
The Odyssey: Where We’ve Been
2007
January
2017
May Basel III
More Capital
Resolution
CET1 Levels: Mission Accomplished?
3.7
13.1
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
Prevailing Rules
Basel III fully loaded equivalent
Regulatory CET1 Ratio for European Banks (%)
Source: BNP Paribas
January 2017 6
Significant balance sheet restructuring
and recapitalisation
CET1 ratios rising at c.1pp p.a.
Recent slowdown in solvency increase
January 2017 7
The Odyssey: What Lies Ahead
2007
January
2017
May Resolution
Capital
Basel IV
Expected Loss
Provisioning
Even More
Capital?
Basel III
More Capital
Resolution
A
B
C
D
Have we passed the point of “optimisation”?
6 79
13 14 1418 20 22
15
Nguyen 2014 Yan et al 2012 Basel LEI 2010 BoE 2015 Mendicino et al
2015
Martinez-Miera &
Suarez 2014
European Actuals
FY 2016
Miles et al 2011 Firestone et al
2017 (US Fed)
Kashkari Plan
(Minneapolis Fed)
Authoritative estimates of solvency levels beyond which value destruction occurs (ie. economic costs > economic benefits)
(fully loaded Basel III, % of RWAs)
Source: Basel Committee, Federal Reserve and academic studies; BNP Paribas estimates, assumptions and conversions to fully-loaded Basel III
January 2017 9
Resolution Capital
January 2017 11
Q. How Much Solvency is Enough?
A. Twice As Much As You Need
Target ratios roughly double reg-cap (20-25-30% of RWAs as a norm)
€800bn of instruments to be issued in the next few years
FR / UK / CH / US: €80bn already and well received
EU harmonisation around credit hierarchy and French-style Senior Non-Preferred
Basel IV: A Matter of Principle
January 2017 13
Basel II’s risk-sensitivity in question:
“flat capital requirements are better”
Maximum harmonisation doctrine,
focusing on low RW businesses
Dec 2014: Basel proposes floor to IRB
capital requirements
H2 2016: European fightback
End-2016 deadline missed
Op Risk: AMA/SMA out, SA instead
Floors lead to (terminal?) rifts in Basel
Interregnum while Tarullo is replaced
Improving IRB supervision (eg. TRIM)
Background State of Play
IFRS 9: Serious and Soon
tinyurl.com/ELcartoon or goo.gl/sGB6p6
Expected Loss Accounting Video
March 2017 15
(in bp of RWAs)
Source: EBA, Exane BNP Paribas, BNP Paribas
59 75
100+
Average Top 20% Outliers?
Solvency Impact of IFRS 9
Volatility
Buffer
150?
IFRS 9: A Process Error
January 2017 16
EL provisioning is a bad development
↑ Complexity
↑ Procyclicality
↑ Subjectivity
No impact study
Move from incurred loss to EL provisions = need for Basel rethink
Official response: 5-year phasing not temporary neutralisation
Capital Allocation = Competitive Advantage
March 2017 19
Economic Profit
Zero Capital Profit
Net Revenues
Gross Revenues
LIABILITIES
Equity
Debt Capital
Funding
Credit Losses
OpEx
ASSETS
Liquid Assets
Risk Assets
Customer
Services
Overhead Target Horizons
Interest
income
Fee income
Cost of Capital
Cost of
Funding
Cost of
Liquidity
Cost of ECL
OpEx
Contribution
Contribution Confidence,
timeframe
Actual and Latent Risks: The “Dirty Dozen”
January 2017 21
Rates, QE, tapering
Deglobalisation, Brexit
Trump administration
Market liquidity drain
Greece et al.
Precautionary recapitalisations
Banks shrinking
Asset bubbles
Indebtedness
Conflicts
Rise of the machines
Disruption & obsolescence…
Markets Unflustered by Latent Risks
January 2017 22
0
8
16
24
32
40
48
56
64
72
80
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Market indices this century
Equities (MCSI)
Volatility (VIX)
January 2017 24
Risk and Capital Management: The Basis for Competitive Advantage
Disintermediation of
balance sheet resources
(=CPM!)
Brand Logistics
Risk Capital
What are the Key Components of Banking?
Smooth apps and end-
to-end automation Fresh new and/or non-
bank providers
Increased role for
experts. Scope for “big
data”
Unmet needs
Broader franchises
Modern approach
Better businesses
January 2017 25
Evolving Role of CPM
2017
May Basel III
More Capital
Resolution
Fragile Macro
Disruption &
Obsolescence
Resolution
Capital
Basel IV
Expected Loss
Provisioning
Even More
Capital?
Capital Allocation
Active Balance Sheet
Disintermediation
Capital Velocity
Portfolio Risk
Management