funding plan & business model assessment

BanksBusinessModelsunderreview

ImpactsonFundingPlan

March14th 2016|MarcusEvans15th AnnualLiquidity Event| RoyalHorseguard Hotel,London

22

RegulatoryContext

SREPProcessOverview

OverviewofProspectiveRegulatoryReportings

BusinessModelAssessment&FundingStrategy

KeyTakeaways

Agenda

3Source:Moody’s

EMEA

2019 2018 2017 2016 2015 2016 2017 2018 2019

G-SIBSurcharge

FSBDataGapInitiative Basel 3buffers

Basel 2

B3 ratios

CA res.mortgage

LCRLCR

Reporting fin.conglomerates

D-SIBframework

SA-CCR

BCBS 239

Reg.capCCPexposuresIFRS9

NSFR

CVAreview

FRTB

LeverageRatio

IRRBB review

Revised SAapproach CR

ConcentrationLargeExposures

TLAC

New securitizationframework UKFDSF

CRD IV/CRR

COREP /FINREP

PRA / IMFST

B3 (IRB)

Vickers Reform

LCR

CRD IV

G-SIBSurcharge

EBA SREP ECB CA

STPRA Int’lbanks

PRA CAD /Piillar 2

BoE/PRA ST

BoE/PRA ST

EU-wide ST

EBA Liquiditymonitoring

Financialconglomerates

LCR

LCR

FSBDataGapInitiative

BCBS 239

Reg capCCPexposures

SA-CCR

IFRS9

FSBDataGapInitiative

ECB Anacredit

LCR

BoE /PRA ST

BoE /PRA ST

NSFR

LeverageRatio

New securitizationframework

FRTB

CVAreview

TLAC

IRRBB review

Revised SAapproach SR

ConcentrationandLargeExposures

G-SIBSurcharge

CCAR /DFAST LCRLCR

LCRNew securitizationFramework

Global systemicrisk report

Liquidity STBHC andFBO

Adv.Approach RuleCapital Planning

FBOST

CCAR /DFAST

CCAR /DFAST

CCAR /DFAST CCAR /DFAST

SupplementaryLeverageRatio

Capital rules tolarge foreignbanks

FSBDataGapInitiative5

ConcentrationLargeExposures

BCBS 239

SA-CCR

CVAreview

G-SIBSurcharge

IFRS9/CELC (US)FSBDataGap Initiative

Revised SAapproach CR

IRRBB review

Reg capCCPexposures

LeverageRatio

NSFR

FRTB

TLAC

FSBDataGapInitiative LCR

Global regulation European regulationJapan

CanadaHongKong

Australia

New Zealand

VietnamSingapore South KoreaRussia Turkey USAUK

Increaseofregulatorypressure

4

RegulatorstimelineforBusinessModelAssessment

• ICAAP&ILAAPsubmissiontotheJST

• Supervisorycollegemeeting’sdate

• FirstdraftofJST’sSREPdecisionssubmissionto theECBsupervisoryheads

• LegalservicesreviewofSREPdecisionwithinECB

• SupervisoryboardapprovalofSREP decisions• DraftSREPlettersdeliveredtobanks

• Supervisorydialogueandhearingperiod

• ApprovalofthedecisionbythesupervisoryBoardandGoverningCouncil

Avril

June

July

August

September

September/October

November

55

RegulatoryContext

SREPProcessOverview



KeyTakeaways

Agenda

6

RiskControl

RiskLevel

Businessmodelassessment

GovernanceandRiskcontrol

Riskbyriskcapitalassessment Liquidityassessment

ViabilityandsustainabilityofBusinessModel

Adequacyofgovernanceandrisk

control

Block1

Score

Block2

ICAAP

benchmarking

Block3

StressedICAAP

benchmarking

Block1

Score

Block2

ILAAP/internaltargets

PillarIIcapitalrequirement(s)

PillarIIliquidityrequirement(s)

SREPASSESSMENT

A1 A2 A3 B1 B2 A4 B3

C

QuantitativeSREPscore

SREPInternalQuantification

SREPAssessment

A B C

X + Y « FinalRating »=

SREPratingismadeofcombinedassessmentsofthe« quantitativeSREPScore »andthe« SREPInternalQuantification »

SREPProcessOverview

7

1

2

3

4

F

Noriskidentified

Lowlevelofrisk

Mediumlevelofrisk

Highlevelofrisk

Failingorlikelytofail

SCORINGSYSTEM

RiskLevel RiskControls

RISKASSESEMENTQUANT.SCORE

• Quantitativeand qualitative• Strategic&financial plans• Identification of theareasof

focus for theBMA• Business env.assessment• Sustainabilityanalysis• Vulnerabilitiesidentification

Businessmodelanalysis

A1

Assessmentofinternal

governance&controls

A2 • Internalgovernance,remuneration policies

• Corporate and riskculture• ICAAP• ILAAP• Internalcontrol frameworks/

Information systems• Recovery plans

• Risktocapitalmeasuring:CreditRisk,Marketrisk,IRRBB, Operational risk

• Own funds sufficiencyanalysis

Assessmentofriskstocapital

A3

• Riskmanagement and internalcontrols assessment

• Liquidity needs analysis• Liquidity sufficiency analysis

Assessmentofrisksto

liquidity andfunding

A4

• Liquidity stresstestsresults• Funding Planss stability

There isnodiscernibleriskofsignificantprudentialimpactontheinstitutionconsideringthelevel ofinherentriskandthemanagementandcontrols.

There isalowriskofsignificantprudentialimpactontheinstitutionconsideringthelevelofinherent riskandthemanagementandcontrols

There isamediumriskofsignificantprudentialimpactontheinstitutionconsideringthelevelofinherent riskandthemanagementandcontrols.

There isahighriskofsignificantprudentialimpactontheinstitutionconsideringthelevelofinherent riskandthemanagementandcontrols.

Source:EBAGuidelinesonSREP(EBA/GL/2014/13)

SREPProcessRiskLevel&RiskControl

8

Indicators Identification

EBARiskDashboard

EBASREPgdl

CRRCRDIV

AQRCA2013

NPL

CET1

IRRBB

….

LE

X X X X

X X X

X X

X X

• Identification of regulatory sources linked tothe SREP process

• EBA SREP Guidelines & RiskDashboard

• CRR / CRD IV

• AQR / Comprehensive assessment

• Documentation analysis and identification ofkey indicators mentioned in the documents

• Harmonisation of indicators definitionbetween different regulatory sources

1

2

1

2

Indicators benchmark

• Constitution of benchmark for each indicator(distribution of indicator for banks under EBAregulation)

• Definition of ratings buckets based onpercentiles

• Rating 1 for indicator < percentile 25%



• Rating 4 for indicator > percentile 75%

5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%

A10Non-performingexposuresratio 0.00 0.00 0.01 0.02 0.02 0.02 0.03 0.03 0.03 0.04 0.04 0.05 0.07 0.08 0.10 0.11 0.15 0.18 0.29

A11Coverageratiofornon-performingexposure 0.00 0.22 0.25 0.30 0.34 0.36 0.37 0.39 0.40 0.42 0.43 0.45 0.47 0.48 0.52 0.56 0.60 0.64 0.68

25% 50% 75%

A10Non-performingexposuresratio 0.02 0.04 0.10

1 2 3 4

3

4

3

value

Score 3

4

Scoring

• Use of simple average for « independentindicators »

Projection of « dependent » indicatorsthrough non-linear functions (min/max, baseindicator)

• Assessment of overall score through anaverage weighted by pillar 1 capitalrequirement charge

ind1

ind2

ind2

ind3

Credit3

2

3

1

2.3

Simpleaverage

ind1

ind2

ind2

ind3

Market3

2

3

1

2.3

Simpleaverage

…

2.7

Riskcategoryscore

Riskcategoryscore

Finalscore

5

6

5

6

DetailsoftheSREP scoringprocess

SREPProcessRiskLevel&RiskControl

9

Indicator

NonPerforming loans/Totalassets

EBAguidelines references

Competent authorities should assess thematerial ity of non-performin g loans perportfolio and the potential losses that maystem from them. P.71

Category

Credit risk

Mapping with regulatorydata

Numerator(F18.00/row070/column060)+(F18.00/row250/column060)

Denominator((F18.00/row070/column010)+(F18.00/row250/column010)

Example

EBASREPGuidelinesDiscussionswithECB

FINREP/COREP/QIS /STE/Transparency /RiskDashboard

RiskCategory

CoreIndicators Mappingwithregulatory data

Benchmarking

Scoring

RiskCategoryLevel

ExtendedIndicateurs

RiskLevelApproach

SREPProcessFocusonRiskLevel:indicatorsidentification

10

27%17%

27%

12% 16%

Questionsperriskcategory

Numberofquestionsperriskcategory

27%

14%

50%

9%

Governance Riskappetite Riskmanagement&Internalcontrols

Internalaudit

Questionspersubject

Numberofquestionsperriskcategory

~300QUESTIONS Adjustmentsonoverallscore

1

2

3

4

Adequate/Neutralsituation

Weak

Inadequate

Strong

Noimpact

downgrade

downgrade

upgrade

EBA guideli nes: Competent authorities should assess whether the institution has an appropriate organizational framework for market risk management, measurement, monitoring andcontrol functions, with sufficient (both qualitative and quantitative) human and technical resources.

CRD Article 76 : Member States shall ensure that the management body devotes sufficient time to consi deration of risk issues. The management body shall be actively involved in andensure that a dequate re sour ces are allocated to the management of all material risks addressed i n this Directive and in Regulation (EU) No 575/2013 as well as i n the valuation of assets,the use of external credit ratings and internal models relating to those risks. The institution shall establish reporting lines to the management body that cover all material risks and riskmanagement policies and changes thereof.

= Risk Control Questions (examples)• Does the management body has enough human and technical resources to consider market risk?• Does the institution ha s clearly establish the responsi bilities of both the Management Body and the Risk Committee in terms of market risk management, and does the

management body retain overall responsibility for market risk?

Exam

ple

SREPProcessFocusonRiskControl

RiskControlApproach

11

SREPProcessILAAPandICAAPcontributions

ICAAP ILAAP

AccordingtoArticle73oftheCRD«Institutionsshallhaveinplacesound,effectiveandcomprehensivestrategiesandprocessestoassessandmaintainonanon-goingbasistheamounts,typesofdistributionofinternalcapitalthattheyconsideradequatetocoverthenatureandlevelofthe

riskstowhichtheyareormightbeexposed.»

• Banksshouldassessandquantifyallrisksthatmaymateriallyimpacttheircapitalrequirementsonashortterm(1y)andlongertermperspective (3y)andtakeasoundeconomicperspectiveasabasisfortheirinternalview.

Deadline->April2016

• Banksshoulddescribethewholeliquidityprocessestheyareimplementingandmonitoring.

ALM Models Fundingstrategy

Liquidity Stresstesting

Collateral Mgt

Rates, flows, …internal transferrate, fundingrate, …

LCR, NSFRcalculation &Monitoring, …

Simulations,,Impactanalysis,…

Gathering &Optimisation

Governance

Riskappetitedetermination

Liquidityand fundingcostallocationtoentitiesandsubsidiaries

Management &monitoring

Operational activities

Repo

rting

supe

rvision

ALM department

Aspects relateddirectly tobanksbusinessmodel

StrategicplandefinitionRiskappetitedefinition

Financial&Strategicplans(Capitalratios,external

acquisitions,organicgrowth,…)Strategicreviews

Keyrisksidentification&measurement(PillarI,PillarII,..)CapitalratiostargetdefinitionRiskslimitsframeworkdefinition

Capitalplanningthroughbudgetingprocess

Ownfundsprofitabilitymeasurementandanalysis

Risklimitsdefinition&managementbybusiness/

activity/country/…Budgetingprocess

Riskmanagement CapitalPlanning

Adjustment

Strategic

level

Tactica

llevel

Operational

level

1212

RegulatoryContext

SREPProcessOverview



KeyTakeaways

AGENDA

13

ProspectiveRegulatoryReportingFundingPlans

Sections Description Goals

Section1

Section2

• Projection of the stock position of high-level balance-sheet asset and liability items forward 3 years

• Projection of the liquidity coverage ratio (LCR) over a 1-year horizon and net stable funding ratio (NSFR) over a 3-year time horizon

§ Table 2A : Specific funding• Projection of deposits covered by a deposit guarantee scheme as under Directive No 94/19/EC• Projection of other deposit-like financial instruments that are sold to retail customers• Projection of sources of fundi ng that are directly or indirectly provided by the public sector. This includes

medium and long-term repo financing programmes, Credit guarantee funding programmes and Creditguarantee real economy support programmes.

• Projection of debt or debt-like innovative funding structures, including innovative deposit-like instruments

§ Table 2B: Pricing• Projection of high-level yields on assets, with a 1-year horizon. Firms should report the all-yield

received/paid and should not report a spread.• Projection of high level costs of funding with a 1-year horizon

§ Table 2C: Structural currency mismatches• Projection of specific elements of Balance-sheet split into largest, second-largest and third-largest

currencies

§ Asset and liabilities restructuring plans• Projection of assets a firm intends to either acquire/dispose of and/or that have been identified for run-

off• Projection of liabilities a firm intends to either acquire/dispose of and/or that have been identified for

run-off

• To obtain a general overview of plannedbalance-sheet developments in a 3-yeartime horizon

• To identify and assess changes in specificfunding reliance

• To assess the feasibility of the plannedfunding from a price perspective

• To identify and assess (changes in) fundingmismatches in specific currencies

• To assess the feasibility of the Funding Planswhen a firm is faced with significantrestructuring of its balance-sheet

CONTEXT• FundingPlansreporting demandfollowstherecommendation oftheESRBA4/2012/2(EuropeanSystemicRiskBoard).

OBJECTIVES• EnsurethefeasibilityoftheFundingPlansandmeasuretheirimpact ontheflowsofcredit totherealeconomy;• Analysethestrategyofcredit institutions tomeettheirneedsin3ytimehorizon.

• FREQUENCY:Annually• PERIMETRE:Grouplevel

FundingPlans

14

ProspectiveRegulatoryReportingSTE- Profitability

CONTEXT• STE-Profitability reporting demandfollowstheEuropeanregulation 1024/2013Article 10.

OBJECTIVES• Assesstheviabilityofthebusinessmodelofthebank;• Backtestingoftheprojection qualityofthebankbycomparing theprojections totheresults.

STE– Profitability

NIM

Commissions

FinancialportfolioP&L

Otherrevenues

- Distinctionbetweenincome andexpensesgeneratedbythenewbusinessandthosegeneratedbythestock

- Distinctionbetweenbusinessinforceandnewbusinessisnotanymoredemandedinthenewtemplates

PROFITABILITYASSESSMENT(INCOMEANDEXPENSES)

Actualfigureforcurrentperiod

(T)-columnA-

Budgetvalue(T-1,T)

-columnB-

Budgetvalue(T+1)

-columnC-

Budgetvalue(T+2)

-columnD-

Budgetvalue(T+3)

-columnE-

(Budget)Interestincomeattributedtobusinessinforce(Budget)Interestincomeattributedtonewbusiness(Budget)Interestexpensesattributedtobusinessinforce(Budget)Interestexpensesattributedtonewbusiness(Budget)netinterestincomeattributedtobusinessinforce(=r10-r30)(Budget)netinterestincomeattributedtonewbusiness(=r20-r40)(Budget)interestincome(=r10+r20)(Budget)interestexpenses(=r30+r40)(Budget)netinterestincome(=r41+r42)aswellas(=r43-r44)BudgetexpensesonsharecapitalrepayableondemandBudgetdividendincomeBudgetfeeandcommissionincomeBudgetfeeandcommissionexpensesBudgetnetandcommissionincome(=r70-r80)Budgetgainsorlossesonfinancialassetsandliabilitiesnotmeasuredatfairvaluethroughprofitorloss,netBudgetgainsorlossesonfinancialassetsandliabilitiesheldfortrading,netBudgetgainsorlossesonfinancialassetsandliabilitiesdesignatedatfairvaluethroughprofitorloss,netBudgetgainsorlossesfromhedgeaccounting,netBudgetExchangedifferences(gainorloss),netBudgetgainsorlossesonderecognitionofnonfinancialassets,netBudgetotheroperatingincomeBudgetotheroperatingexpensesBudgetnetotheroperatingincome(=r150-r160)BudgettotaloperatingincomeBudgetadministrationcostsBudgetadministrationcosts:StaffexpensesBudgetoverheadcostsBudgettotalprofitorlossbeforetaxfromcontinuingoperationsBudgettotalprofitorlossbeforetaxfromdiscontinuedoperationsBudgetprofitorlossaftertaxfromcontinuingoperationsBudgetprofitorlossaftertaxfromdiscontinuedoperationsBudgetprofitorloss(aftertax)attributabletoownersoftheparent(Budget)non-recurringitems

budget 3yprojection

• FREQUENCY:bi-annual• PERIMETRE:Grouplevel,relevantsubsidiaries.

15

ProspectiveRegulatoryReportingOperationalConstraints

Enhancing thebudgeting processtobeabletoproducecoherentprospectivereporting inaFINREPtaxonomybecomesanecessitytomonitoreffectivelybankingactivity.

Organisation

Perimeter

Dataquality

TargetAs-issituation1

2

3

ManagementControlDepartment

Monitoring/Reporting

AccountingDepartment

Reporting

ALMDepartment

Reporting

ManagementControlDepartment

Monitoring/Reporting

AccountingDepartment

Reporting

ALMDepartment

Reporting

Bridgesbetweenprudentialandstatutoryismadethroughmappingtablesandnotdirectlyembeddedingranulardata

Banksusuallybuildtheirbudgetonaccounting/statutoryperimeter

Prudentialaxisaretotallyintegratedwithinoperationalsystemsoneachtransaction

Newprospectivereportingneedtobeinlinewithprudentialperimeter(differenttreatmentforinsurancesubsidiaries).

noorlittleinteraction

Forecasteddata

Previousyearsdata

(FINREP)

Forecasteddata

FINREP

Previousyearsdata

FINREP

Shareknowledge

Updatesystems

16

CaseStudyTier1FrenchBank

ManagementControl Accounting AssetLiabilitiesDepartmentReconciliation

Reconciliation

Reconciliation

• +3000subsidiarieswithadifferentlevelofintermediateconsolidation:

• Needtohavecoherentandrefinedconsolidationprocess

• Needforarelevantmaterialitythreshold

Organisationalconstraints

Consolidation

Indicatorsnature

Treatment

Perimeter • Statutory

• Financialstatementsanalysis&prospectivebudget

• IFRS

• Prudential

• FinancialStatements

• IFRS

• ALMProducts referential

• B&Sprojection andNIMsensitivityanalysis

• Management

1717

RegulatoryContext

SREPProcessOverview



KeyTakeaways

AGENDA

18

BusinessModelAssessment&FundingPlansP&LForecast&FundingPlans

NetinterestMargin

CommissionsFees&otherrevenues

Financialportfolio

Administrativefees

Costofrisk

Balance-sheet Fundingreliance

ForecastednetinterestMarginvs.evolutionofcredits&deposits

ForecastednetinterestMarginvs.fundingneedsandstrategy

Evolutionofthecommissionsinarelationwiththeevolutionofassetsormarketshare

Evolutionoftheprofit(orloss)onthefinancialportfoliovs.Evolutionofderivatives&otherfinancialinstruments

Evolutionoftheprofit(orloss)onthefinancialportfoliovs.Evolutionoftheplannedfundingprices

Evolutionofadministrativefeesvs.plannedrestructuringofthebalancesheet

Evolutionofthecostofriskregardingthebalance-sheetforecastedsize

STE-P

ROFITABILITY

FundingPlans

• Howdoesitplantomakeprofitstomorrow?• Howwillthekeydriversofprofitabilitychange?Andwhatis

drivingthischange?

• Howistheinstitutionmakingprofitstoday?• Whatarethekeydriversofitsprofitability?

19

STE - PROFITABILITY FundingPlans

Definition

LinksW

ithTh

eSREPProcess

QuantitativeSREPScore

InternalQuantification:ILAAP&ICAAP

• 3Y forecasted P&L

(basedonFINREPtaxonomyF02.00)

• 3Y forecasted B&S, funding strategies andliquidity ratios(basedonFINREPtaxonomyF01.01,F01.02,…)

• Risk level: Forecasted Risk level SREP ratios relatedto profitability and businessmodel assessment

• Risk control: Improve governance and monitoringof profitability

• Risk level : forecasted risk level SREP ratios relatedto liquidity risks

• Risk control: Improve governance and monitoringof liquidity

• ICAAP: Improve capital trajectory planning inadequacy with the forecasted P&L on a FINREPtaxonomy

• ICAAP: Improve capital trajectory planning inadequacy with the forecasted B&S size

• ILAAP: Forecasted vision on the funding needs,funding strategy and liquidity ratios

BusinessModelAssessment&FundingPlansRegulator’sassessment

20

BUSINESSMODELASSESSMENTPROCESS

Preliminaryidentificationofmaterialbusinessareas

(mainlybasedoninformationprovidedbyentityitself)

1

Automatedratingfocusingon:

• Profitability• Efficiency• Sustainability

2

Supervisoryassessment:

• Shortterm(12months)• Mediumterm(3years)• Longterm

3

BUSINESSMODELASSESSMENT

Business model viability:

The institution’s ability to generate an acceptable return overthenext 12 months.

Business model sustainability:

Ability to generate an acceptable return over 3 years and over afull business/ economic cycle.

STEPROFITABILITY

MainlyusedtoassesstheProfitability FUNDINGPLANS

Mainlyusedtoassesstheefficiencyandsustainabilityofthebusiness

model

BusinessModelAssessment&FundingPlansRegulator’sassessment

21

ShortTermWholesaleFunding

IntradayRisk

CapacityandQualityofLiquiditybuffers

• Shortterminterbankpositiontoliquidassets

• Publicentitiesandintragroupshorttermfundsratios

• Centralbankfundingratio

• O/Nunsecureddepositsfundingspread• O/NinterbankliquiditypositiontoLA

• Liquiditybufferqualityratio• Liquiditybufferconcentrationratio

ShortTermFundingRatio

FundingCounterpartyConcentrationRatio

LCR

LiquidAssetstoShort-TermLiabilities

Short termliquidityadequacysubcategories Short termliquidityadequacy indicators

UnencumberedEligibleAssetsRatio

FundingGeographicalConcentrationRatio

ShortTerm

Funding

BusinessModelAssessment&FundingPlansLinkswithILAAP:onshortterm




1



2Supervisoryassessment:


3






STEPROFITABILITY



model

22

StructuralFundingMismatch

LongTermWholesaleFunding

RetailFundingStrength

• Cumulatednetfundinggapratio(5Y)• Cumulatednetfundinggapratio(10Y)

• Seniorunsecuredfundingspread(5Y)• Seniorunsecuredfundingspread(10Y)• Securedfundingspread(5Y)• Securedfundingspread(10Y)

• Retaildepositratio• Guaranteeschemecovereddepositratio

LTD

CumulatedNetFundingGaptoLiquidAssets

AssetEncumbranceRatio

NSFR

CoreFundingRatio

FundingSustainability subcategories FundingSustainabilityindicators

GlobalFundingReliance

BusinessModelAssessment&FundingPlansLinkswithILAAP:onglobalfunding




1



2Supervisoryassessment:


3






STEPROFITABILITY



model

2323

RegulatoryContext

SREPProcessOverview



KeyTakeaways

AGENDA

24

KeyTakeaways

ProspectivereportinghavebecomeanimportantissuefortheRegulatortoassessthebusinessmodelofbanks

AbilitytoproduceconsolidatedprospectivereportingonaFINREPtaxonomyhasbecomeamusthaveforthebanks

Banksneed toenhancetheirbudgetingcapabilitiesonaprudentialperimeter

ALMdepartment,ManagementControldepartmentandAccountingdepartmentshouldimprovetheircollaborationonprudentialissues

Masteringtheproductionoftheprospective regulatoryreportingenhance thebankscapacitytomonitoreffectivelytheiractivitiesandtheirSREPscore

ThroughILAAP,fundingstrategyhasbecomeakeycomponentoftheBusinessModelAssessment

funding plan & business model assessment

Economy & Finance