bancacommerciala romana the importance of risk management ... · bancacommerciala romana the...

Banca Commerciala Romana

The importance of risk management in a

more regulated banking framework

Summer Academy 2017 of Romanian Banking Institute

Bernhard Spalt, Chief Risk Officer

4.7.2017

2

Under more regulation

• What is the importance of risk management ?

• What is the role of risk management ?

• What is the added value of risk management ?

Regulatory banking landscape is hugely regulated than before the financial crisis.

OPENING

3

Regulatory frameworkof present days has a

deep root in the financial crisis…The redefinition of Regulatory framework is

a carefully designed and executed transformation.

4

In the midst of the Financial Crisis the urgency for action and direction was very well understood.

President of the European Commission, Jose Manuel Barroso mandated

The High Level Group of Financial Supervision chaired by Jacques de Larosiere

to give advise on future of European regulation and supervision.

the REPORT was presented with substantial effect for the future

development of the European financial intermediation.

4 months which made a critical difference

February 2009 …

October 2008…

https://www.esrb.europa.eu/shared/pdf/de_larosiere_report_en.pdf?351e1b35ec1ca5e855d2e465383a311f

HISTORY


5

De Larosière Report 2009 was created in stressed situation, but pointed to the root causes.

“This report is published as the world faces a very serious economic and financial crisis.

The European Union is suffering.

An economic recession.

Higher unemployment.

Huge government spending to stabilize the banking system – debts that future generations will have to pay back.

Financial regulation and supervision have been too weak or have provided the wrong incentives. Global markets have fanned the contagion. Opacity, complexity have made things much worse.”

“In spite of some progress, too much of the European Union's framework today remains seriously fragmented. The regulatory rule book itself. The European Unions' supervisory

structures. Its crisis mechanisms.”


HISTORY


6

De Larosière Report 2009 laid down the directional development of regulatory framework

“This report lays out a framework to take the European Union forward.

Towards a new regulatory agenda – to reduce risk and improve risk management; to improve systemic shock absorbers; to weaken pro-cyclical amplifiers; to strengthen transparency; and to

get the incentives in financial markets right.

Towards stronger coordinated supervision – macro-prudential and micro-prudential. Building on existing structures. Ambitiously, step by step but with a simple objective. Much stronger,

coordinated supervision for all financial actors in the European Un ion. With equivalent standards for all, thereby preserving fair competition throughout the internal market.

Towards effective crisis management procedures – to build confidence among supervisors. And real trust. With agreed methods and criteria. So all Member States can feel that their investors,

their depositors, their citizens are properly protected in the European Union.”

“We must begin work immediately.”


HISTORY


7

Overall 24 recommendation of de Larosière Report for repair of EU Financial System created a transformation agenda

Fixing Basel 2 rules

“Recommendation 1: The Group sees the need for a fundamental review of the Basel 2 rules.. gradually increase minimum capital requirements;... tighten norms on liquidity management; “

Recommendation 10: “… Member States and the European Parliament should avoid in the future legislation that permits inconsistent transposition and application;”

“Recommendation 13: The Group calls for a coherent and workable regulatory framework for crisis management in the EU…”

“Recommendation 14: Deposit Guarantee Schemes (DGS) in the EU should be harmonized … and provide high, equal protection to all bank customers throughout the EU.”

“Recommendation 16: A new body called the European Systemic Risk Council (ESRC), to be chaired by the ECB President, should be set up … with the logistical support of the ECB...”

“Recommendation 17: an effective risk warning system shall be put in place …“

Creating trust and protection

Stability through macro prudence


1

2

3

HISTORY


8

In consecutive years the Capital levels increased singificantlyHISTORY

12.311.2 11.0

13.8

11.2

16.7 16.3

18.219.2

18.0

Czech Republic Hungary Austria Romania Slovakia

2008 2016 (e)

Source: ECB

9

Already a large transformation

of financial services is visible…Banking sector is under significant

regulatory scrutiny, while new players are knocking

on the door.

10

Consolidating regulatory landscape of EU Single Market for Financial Services

Single Rulebook

Consumer Protection

Macro Prudential

SupervisionSingle Supervisory

Mechanism & Supervisory

collages

Trust and Service Availability

Market stability

Rules, regulations and protection

Supervisorycollaboration

Romanian Gov. Emergency Ord. 99/2006 upd.

Romanian Law no 312/2015

NBR Regulation no. 5/2013

NBR Regulation no. 16/2012

CRR (EC 575/2013)

EBA guidelines and technical standards

… applicable EU regulations

EU

lan

dsc

ape

Tran

slat

ion

to

R

om

ania

n

regu

lati

on

… local adaptation of EU regulation

TRANSFORMATION

11

European Banking Authority (EBA) as a main policy owner of the Single Rulebook just disclosed its Annual Report

ANDREA ENRIAEBA CHAIRPERSON

“Eight years have elapsed since the G20 leaders met in Pittsburgh, in September

2009, and defined a broad reform agenda to repair the international regulatory framework. We are now in the final

stages of implementation of that agenda. It has been a daunting task but we are

now close to the finishing line.”

TRANSFORMATION

12

Main efforts and development in 2016 in completion of Single RulebookCRD IV

CRR

Banking Recovery

& Resolution

SingleRulebook

Guidelines for deposit guarantee schemes

Guidelines for cooperation between deposit guarantee schemes

Guidelines for stress test for deposit guarantee schemes

RTS on preferential treatment of cross-border intragroup support

Guidelines for disclosing confidential information under BRRD

Draft guidelines on appropriate basis for the target level of resolution financing

Consults on minimum requirements for own funds and eligible liabilities (MREL)

Consults on standards on MREL reporting by Resolution Authorities

Draft technical standards on specialized lending exposures

Technical standards on benchmarking of internal approaches

Technical standards on harmonized definition of defaults

Consults guidelines on PD estimation, LGD estimation and treatment of defaulted assets

Consults guidelines for application of the IRB approach

Technical standards on assessment methodology to validate market risk models

Draft guidelines on mapping ECAI on securitization position

Draft technical standards on margin requirements for non centrally cleared institutions

Draft guidelines on credit risk management practices and accounting for expected losses

Consults on treatment of connected clients for large exposures

Draft technical standards on assessment methodology for the validation of credit risk models

RTS

RTS

RTS

RTS

RTS

RTS

CP

CP

RTS

CRD IV completion with main focus on IRB models and assumptions

BRRD completion with standardizing DGS testing and MREL definitions

Guidelines on amended standards on supervisory reporting

Reviews guidelines on internal governance

Pillar 3 disclosure requirements

Consults on suitability of banks and inv. firms members of the man. body and key function holders

CRR completion

RTS

CP

RTS

CP

CP

CP

RTS

RTS

CP

CP

RTS

RTS

CP

RTS

TRANSFORMATION

Source: EBA Annual Report 2016

13

Macro - prudential intervention in the region reflects main concern from credit growth

28

1

6

2

Credit growth & leverage

Exposure conc.

Mat. mismatch and & illiq.

Misaligned incentives

2

2

6

1

3

1

7

3

3

Art 124 - Risk weights on CRE

Art 124 - Risk weights on RRE

Debt-service-to-income…

Loan amortisation

Loan maturity

Loan-to-deposit (LTD)

Loan-to-value (LTV)

Other

Stress test / sensitivity test

3

1

12

3

9

2011

2012

2014

2015

2016

# of measures with active status, selected CEE countries (CR, CZ, HU, RO, SK, SL)

MacroPrudentialSupervision

per intermediate objective credit growth and leverage broken down to instrument and initiation period

Across the region

with building up leverage

Countries coping with

legacy leverage

Mainly countries with legacy

leverage issue

Common policy practice also in early stage of leverage issue

TRANSFORMATION

BNR was the first who actedSource: ESRB, National measures of macroprudential interest in the EU/EEA

14

Countercyclical

Buffer

Capital

Conservation B.Systemic Risk Buffer

Czech Republic0.5%-2017

1.0%-20182.5% 3.0%

Hungary 0%1.25%-2017

2.5%-20190%

Romania -1.25%-2017

2.5%-2019-

Croatia 0%2.5% 3.0%

Slovakia 0.5% - 20172.5%1.0%-2017

2.0%-2018

Austria 0.15% 1.25%-2017

2.5%-2019

0.5%-2017

2.0%-2019

Slovenia1.25%-2017

2.5%-2019-

SSM

Non-SSM

0%

O-SII Buffer

-

0.125% – 2017

0.5% - 2020

1.0% - 2017

1.0%

1.0%-2017

0.5%-2017

2.0%-2019

-

Buffer regimes by country – actual status 21.06.2017

15

Main development in 2016 in context of of Consumer Protection and Financial Services

PAD)

Guidelines on key information documents for retail investors in the EU

Draft guidelines on separations of payment card schemes and processing entities under the IFR

Consults on strong customer authentication and secure communications under PSD2

Consults on professional indemnity insurance or comparable guarantee for payment initiation and account information service providers

Consults on technical standards on fee termination and disclosure under PAD

Guidelines on the remuneration of sales staff

Consults on the authorization and registration under PSD2

Draft guidelines on cooperation and exchange of information for passporting under PSD2

RTS

CP

CP

RTS

PSD 2 preparations gets into final stage1

RTS

CP

CP

CCD

MCD

PSD2

CP

European Commission issued Action Plan for Financial Services, COM(2017) 139 final2

The Action Plan sets out further steps towards a genuine technology-enabled Single Market for retail financial services where consumers can get the best deals while being well protected. In the long run, the distinction between domestic and cross-border providers of financial services should no longer matter. This also has implications for providers who will be able to take full advantage of the potential of a vast Single Market.

Consumer Protection

TRANSFORMATION

Source: 1EBA Annual Report 2016; 2European Commission, https://ec.europa.eu/info/publications/consumer-financial-services-action-plan_en

16

Consumer Financial Services Action Plan“Better products, more choice”

PAD)

CCD

MCD

PSD2

Consumer Protection

3 Easier product switching: The Commission will explore further steps to make it easier for consumers to switch to more advantageous retail financial services, building on what has already been achieved through the Payment Accounts Directive.

2018 2 ndhalf

4 Quality comparison websites: The Commission will work with stakeholders to enhance the quality and reliability of financial services comparison websites, by promoting the uptake of existing principles and through voluntary certification schemes.

2018 1 sthalf

7 Deeper Single Market for consumer credit: The Commission will explore ways of facilitating access to loans across borders whilst ensuring a high level of consumer protection. In this context, the Commission will also consider ways of addressing in a more efficient manner consumer over-indebtedness linked to credit activities.

2018 1 sthalf

8 Fair consumer protection rules: The Commission will examine national consumer protection and conduct rules to assess whether they create unjustified barriers to cross-border business.

2018 2 ndhalf

9 Better creditworthiness assessments: The Commission will seek to introduce common creditworthiness assessment standards and principles for lending to consumers and work to develop a minimum set of data to be exchanged between credit registers in cross-border creditworthiness assessments.

2018 2 ndhalf

10 FinTech for retail financial services: Based on the work of the FinTech Task Force and the public consultation, the Commission will determine which actions are required to support the development of FinTech and a technology driven Single Market for financial services.

2017 Q4

11 Digital identity checks: The Commission will facilitate the cross-border use of electronic identification and know-your-customer portability based on eIDAS to enable banks to identify customers digitally.

2017 Q4

12 Online selling of financial services: The Commission will monitor the distance selling market to identify the potential consumer risks and business opportunities in this market and, on that basis, decide on the need to amend distance selling (including disclosure) requirements.

2018 1 sthalf

TRANSFORMATION

17

What can nowadaysRisk Management still contribute

under such tightly regulated rulebook ?Risk Management remains as a

main differentiation factor for winning institutions.

18

Latest Financial Stability Report of BNR addresses two main risk management areas of attention for banks in Romania

ANDREA ENRIAEBA CHAIRPERSON

“The Financial Stability Report does not identify any severe systemic risk. The assessment points to a high systemic risk of a prevailingly external nature (yet posting less sharp dynamics), three moderate systemic risks of domestic origin (of which oneis on the rise), and a

low, but new, systemic risk.”

“Swift expansion in loans to households is indicative of a possible build-up of vulnerabilities across the banking sector.”

“The non-performing loan ratio fell below 10 percent, but remains above the 8 percent red threshold set by the European Banking

Authority, which calls for further efforts aimed at resolving non-performing exposures.”

REALITY

19

Case study:Calibrating debt leverage with balancing social and

economic perspective

REALITY

20

Household debt on macro level stays significantly below the level of peer countries

HOUSEHOLD LOANS ON GROSS DISPOSBALE INCOME (2015), in %

source: Eurostat, Database, Annual Sector Accounts (Non-financial transactions nasa_10_nf_tr), Financial Flow and Stocks (Financial balance sheets, nasa_10_f_bs)

DEVELOPMENT OF HOUSEHOLD DEBT ON GROSS DISPOSBALE INCOME, in %

269

233

196

108 103 95 9073 62 60 60 58 46 42 40 38 36 23

DK NL CY ES BE GR FR EE IT PL CZ SK SL LA HU BU LI RO

27 25 23

5046

40

56 57 60

50 54 58

2013 2014 2015

RO

HU

SK

CZ

REALITY

21

1%

44%

13% 12% 11%

19%

0 1500 less 1500 - 2000 2000 -2680 2681-3500 3500 more

A B C D E F

LABOR POPULATION

Private Individual population with regular employment shows significant proportion of lower income clients

58% 23% 19%

lower income

middle income

high income

REALITY

source: National Institute of Statistics, Romania

22

Philosophy of maximum client leverage rooted on

protecting vulnerable segments, but ensuring fair chance to credit

The bank recognize the sensitivity of the low income segment and therefore wants to protect and devote specific attention to it.

Key pillars of the risk policy concerning the calibration of maximum DTI and acceptance criteria

• Risk profile of the debtors and transaction, including exchange rate risk, interest rate risk,

• Vulnerability of the debtors concerning their debt bearing capacity (eligible income)

• Fair and equal chance to get a credit for all consumers

• Stress test on portfolio view

1

2

3

4

REALITY

23

Main logic of the maximum client debt leverage calibration in the risk policy of the bank

Low risk and Lowvulnerability

Higher debt burden capacity

High risk and High vulnerabilityLow debt burden

capacity

Low High

Strong

Weak

Eligible Income

Rating(Risk Profile)

Increasing vulnerability and decreasing shock resistance

Decreasing debt capacity

Key element of the concept is to protect the sensitive and vulnerable segments, while keeping the lending conditions for the stable and low risk segments and create a social and economic balance into the credit flow.

Increasing riskDecreasing debt

capacity

REALITY

24

Case study: building sustainable Work Out strategy and organization

after years of portfolio clean up

REALITY

25

BCR managed to quickly decrease its NPLs

BCR strengthens the focus on efficiency of recoveries

Remaining NPL stock has high coverage

2013

25.7%

11.8%

2014

20.2%

2015

11.3%

2016 2017 Q1

29.2%

NPL%

87.5%

65.8%

75.8%

2013 2017 Q1

2015 20162014

77.4%

85.3%

Organic recovery process

Efficient work out operational model

Increased recoveries

Note: Consolidated data

NPL Coverage, %

BCR succeeded to decrease NPLs substantially and simultaneously increase NPL covereage

1

2

3

Future Work Out enhancement targets

Note: Consolidated data

REALITY

26

Quantitative target picture Qualitative target picture

Year 3Year 1Year 1 Year 3

%

%

Year 3Year 1

EUR

Year 3

NPL ratio NPL stock

NPL coverageCash recovery

Regulatory requirements

Capacity benchmarks

Units Status Client1 Case1Client/

FTECase/ FTE

Early Coll Dept Early Collection 68 6912 91 0382 808 1071

Hard Coll DeptHard Collection inhouse 13 204 17 281 210 274

Hard Collection outsourced 11 589 14 141 5795 7071

Enforcement Dept Enforcement Dept Retail 4 239 5 444 326 419

Retail Legal Office

Retail Legal enforcement (outsourced) 3 710 5 089 371 509

Retail Legal insolvency 753 1 116 753 1116

Ready for debt sale 5 318 6 906 5318 6906

Legal other (prelegal, preenforcement, post

enforcement, other)9 643 12 170 9643 12170

All

Department /Division Head

Other support / expert staff

Enforcement Dept Enforcement Dept Corporate

Total FTE

Necessity to do more: Clear the balance sheet. Our target picture for portfolio to be reached by 2019 efficient

operating setup

REALITY

27

Portfolio & workout strategies Target operating setup Implementation actions

Workout Strategic Framework

Project Management toolkit and reports

Organization

Skills & capacities

Performance management

Monitoring & Reporting

IT systems and tools

Create fact base on current treatment strategies

Develop target picture

Review and enhance workout strategies

Prepare business case

Develop roadmap

Ensure Project management

2

3

4

5

6

7

8

9

10

1

We address portfolio & workout strategies, target operating setup and implementation actions both for Retail / Corporate

11

REALITY

28

The present environment is optimal for reducing NPL and refocusing Work Out

Target defined, quantitative and qualitative

Activities on the new WO Strategy design started

Strategy implementation and results

1 2 3

Targets are obvious, drive down NPL stock and reinforce

WO organization which can take care of revitalization of

client business in time and cost efficient manner.

Management of the Bank has a dedicated focus and priority on establishing the Work Out

change process quickly.

REALITY

29

What is the importance of risk management ?

Risk Management is a strong differentiation factor between the successful and unsuccessful institutions.

CLOSING

30

What is the role of risk management ?

Establishing a framework in which the Risk Appetite is clear, and penetrating into the DNA of the institution. (through people, processes, procedures)

CLOSING

31

What is the added value of risk management ?

Navigating the business context within the regulatory framework and risk appetite of the institution.(through controls and sensible risk policies)

CLOSING

32

Thank you for your attention.

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