professional workshop kruszka m. irmc 2014(1).pdf · professional workshop : macroprudential...

Professional Workshop :Professional Workshop :

Macroprudential supervision and systemicallyMacroprudential supervision and systemicallyimportant institutions

IRMC 2014 Conference23–24 June 2014Warsaw , Poland

Michał Kruszka Deputy Director, Analyses and International

Cooperation Department

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Cooperation Department

Systemically important institutions and Systemically important institutions and sytemic risk – introductory remarks

Questions to be answered when dealing with SIFIs issue

What is systemic risk ?y

How to identify Systemically Important Financial Institutions?

How to measure systemic importance in terms of the impacty p pon the global financial system?

Which criterions are to be used for SIFI identification ?

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Systemically Important Institutions and systemic risk – introductory remarks

Financial crisis in 2007 showed some major issues linkedwith Too Big to Fail financial institutions

Lack of proper prudential regulations

Deep cross border interconnectedness between big financialinstitutionsinstitutions

Impact of moral hazard (broad expecations that in case oftroubles goverment will rescue troubleshooted bank)

Lack of proper resolution procedures. Need to prevent bigbanks from disorderly collapse by government’s bail out

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After crisis some initiatives were put in to place toprevent form such situation in the future. They wereaimed at identificication and stenghtening SIIaimed at identificication and stenghtening SII

BCBS introduced Basel III a new regulatory framework forcapital and liquidity for banks. „Basel III: A global regulatoryframework for more resilient banks and banking systems”(BCBS 2009)

FSB made an attempt to identify SIFI the issuing the FSB made an attempt to identify SIFI the issuing the„Guidance to Assess the Systemic Importance of FinancialInstitutions, Markets and Instruments: Initial Considerations—Background Paper” (FSB, 2010). FSB also delegated IOSCOBackground Paper (FSB, 2010). FSB also delegated IOSCOand IAIS to develop similar framework for capital marketinstitutions and insures respectably

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One has to remember that neither FSB nor BCBS framework islegally binding. In the EU solutions aimed at the resilience ofbanking sector has been implemented through two major legalbanking sector has been implemented through two major legaldocuments REGULATION (EU) No 575/2013 OF THE EUROPEAN PARLIAMENT AND

OF THE COUNCIL of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, (commonly called Capital Requirements Regulation -CRR)

DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing , g / / p gDirectives 2006/48/EC and 2006/49/EC, (commonly known as Capital Requirements Directive - CRDIV)

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CAPITAL RATIOS – CRDIV/CRR

2014 2015 2016 2017 2018 2019CET 1 4% 4,5% 4,5% 4,5% 4,5% 4,5%

Additional Tier 1 1,5% 1,5% 1,5% 1,5% 1,5% 1,5%

Tier 2 2,5% 2% 2% 2% 2% 2%

Capital Conservation Buffer

0,625% 1,25% 1,875% 2,5%

Countercyclical Capital Buffer (if required )

<=2,5% <=2,5% <=2,5% <=2,5% Buffer (if required ) %

Systemic risk buffer (ifrequired )

<=5% <=5% <=5% <=5%

G-SIIs Additionally up to 3 5%G SIIs Additionally up to 3,5%

O-SIIs Additionally up to 2%

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G SIBs and D SIBs G-SIBs and D-SIBs BASEL FRAMEWORK

Global Systemically Important Banks (G-SIBs)

The additional requirement above the Basel III requirementsq q

Limiting negative cross-border externalities on the globaleconomy (resulting from failure of the most globally systemicbanks)banks)

Systemic importance measured in terms of the impact on theglobal financial system

Domestic Systemically Important Banks (D-SIBs)

D-SIB framework is complementary to the G-SIBs frameworkand addresses the impact of the failure of banks on thedomestic economies

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IAIS and IOSCO adaptations of BASEL FRAMEWORK

Global Systemically Important NoN Banks Non Insurer(NBNI)-IOSCO proposal for capital market and GlobalSystematically Important Insurer (G SII) IAIS proposalSystematically Important Insurer (G-SII)-IAIS proposalfor insurance sector

NBNI identification proposal came from joint paper of IOSCOand FSB, on framework for

Works started in 2014 and are ongoing now

Main solutions are adopted from Basel framework

A several indicators for NBNI identification are to be discussed

IAIS proposed to develop methodology for G-SII identificationand additional requirements. Works are ongoing now.

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IAIS and IOSCO adaptations of BASEL FRAMEWORK

Global Systemically Important Non-Banks Non-Insurer(NBNI)-IOSCO propsal of identification criterions

Interconnectedness

Leverage ratio

Substitutability

Complexity

Cross jurisdictional activities

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IAIS G-SII FRAMEWORK

Global Systemically Important Non-Banks Non-Insurer(NBNI)-IOSCO propsal of identification criterions

• Size

• Global activity

• Interconnectedness

• Non traditional and non Insurance activities

• Substitutability

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Implementation challenges for SIBs regulatory frameworkregulatory framework

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Global Systemically Important Banks (G-SIBs) – BASEL FRAMEWORK

Identification of G-SIBs - indicator-based measurementapproach

Cross-jurisdictional activity, size, interconnectedness,substitutability, complexity

Cutoff score for G SIBsCutoff score for G-SIBs

The list of G-SIBs may be supplemented with banks scoredbelow the cutoff (supervisory judgment)

Buckets for higher loss absorbency depend on the scorebased on indicators

1%, 1,5%, 2%, 2,5%, 3,5%

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Global Systemically Important Banks (G-SIBs) – BASEL FRAMEWORK

Disclosure requirements

Banks with a leverage ratio exposure exceeding EUR 200g p gbillion and banks added to the sample by supervisoryjudgment or classified as a G-SIB

As a minimum 12 indicators used in the assessment As a minimum 12 indicators used in the assessmentmethodology are disclosed

Interaction between solo and consolidated level

The higher loss absorbency requirement for G-SIBs is appliedat the consolidated level

The application of the buffers at the solo level by hostsupervisors is not ruled out

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Domestic Systemically Important Banks (D-SIBs) – BASEL FRAMEWORK

Identification of D-SIBs

The assessment methodology including criteria:The assessment methodology including criteria:

Size

Interconnectedness Interconnectedness

Substitutability/financial institution infrastructure

Complexity Complexity

National authorities can consider other measures/dataNational authorities can consider other measures/data

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Higher loss absorbency

Buffer should be commensurate with the degree of systemic Buffer should be commensurate with the degree of systemicimportance

Cooperation between home and host authorities in caseswhere the subsidiary of a bank is considered to be a D-SIB

The HLA requirement should be covered fully by CET1

European framework (CRD) introduced buffer of up to 2 %subject to decision of national authorities

Additional requirements and other policy measures to address Additional requirements and other policy measures to addressthe risks posed by a D-SIB are at discretion of nationalauthorities

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Examples of additional requirements and policy measures:

Recovery plans and resolution plans required earlier than from Recovery plans and resolution plans required earlier than from rest of institutions

Stricter requirement in terms of LCR (100% from 2015)q ( )

Imposed requirements regarding stable funding

More focused supervision in other areas (e.g. corporate p ( g pgovernance, risk appetite)

More frequent on-site examinations

More frequent reporting concerning liquidity

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CAPITAL RATIOS – POLISH PERSPECTIVE

Commercial banks – data as of September 2013

All banks comply with the required levels of CET1 Tier1 and All banks comply with the required levels of CET1, Tier1 andoverall capital adequacy ratio

As a result of gradual introduction of capital buffers,maximum possible level of the required capital ratio is 13% in2019

32 out of 42 banks have their capital ratio calculated 32 out of 42 banks have their capital ratio calculatedaccording to the new rules above 13%

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Domestic Systemically Important Banks (D-SIBs) – POLISH PERSPECTIVE

Criteria currently used to assess the systemic importance of banks on the Polish market

Size of the bank

Significance of the interrelations on the financial market/ Interconnectedness

Substitutability

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Domestic Systemically Important Banks (D-SIBs) – POLISH PERSPECTIVE

Polish systemically important banks – data as ofSeptember 2013p

Analyses under assumption that capital buffer would beintroduced in its maximum amount (2%):introduced in its maximum amount (2%):

6 systemically important banks have overall capital ratioabove 15%

4 systemically important banks need more capital (equivalentof no more than 1p.p.)

5 t i ll i t t b k d it l th 5 systemically important banks need more capital thanequivalent of 1 p.p.

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Implementation challenges for Liquidity requirementsrequirements

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History of liquidity regulations in PolandHistory of liquidity regulations in Poland

Liquidity risk always is one of the most important areas for bankingLiquidity risk always is one of the most important areas for bankingsupervision closely monitored during on-site examinations

M i l t i t tMain regulatory instruments:

– The Banking Act „Banks shall be required to maintain adequate pa ment liq idit co esponding to the scale and t pes of acti it payment liquidity, corresponding to the scale and types of activity conducted, in a manner which ensures that all cash obligations are fulfilled according to their maturity dates.”

– Recommendation P concerning liquidity management (1996)

– Resolution (2007) establishing quantitative liquidity limitsResolution (2007) establishing quantitative liquidity limits

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Liquidity quantitative standards in Polandq y q

Banks (assets over 200 million PLN):– Short-term measures:

• M1 – short-term liquidity gap (minimal value 0)• M2 – short-term liquidity ratio (minimal value 1)

– Long-term measures:• M3 ratio of illiquid assets to own funds (minimal value 1)• M3 – ratio of illiquid assets to own funds (minimal value 1)• M4 – ratio of illiquid and partially liquid assets to own and stable external funds

(minimal value 1)

Banks (assets under 200 million PLN):• M1 – ratio of core and supplementary liquidity reserve to total assets (minimal value 0,2)• M2 – ratio of illiquid assets to own funds (minimal value 1)

Branches of foreign credit institutions (assets over 200 million PLN):• M1 – short-term liquidity gap (minimal value 0)

M2 h li idi i ( i i l l 1)• M2 – short-term liquidity ratio (minimal value 1)

Branches of foreign credit institutions (assets under 200 million PLN):• M1 ratio of core and supplementary liquidity reserve to total assets (minimal value 0 2)

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• M1 – ratio of core and supplementary liquidity reserve to total assets (minimal value 0,2)

Liquidity quantitative standards - Basel 3Liquidity quantitative standards - Basel 3

LCR – short term liquidity ratio (period of thirty days stress scenario)(period of thirty days, stress scenario)

phasing-in

2015 60%2016 70%2017 80%

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2018 90%2019 100%

KL1

Diapositiva 23

KL1 Czy to co jest poniżej jest tożsame w Basel III i CRD IV?

jest różnica w phase in:w Basel 2018 - 90%2019 - 100%

w CRD2018 - 100%Kryszkiewicz Leszek; 04/06/2014


Compliance with LCR in Poland

Commercial banks – data as of September 2013

24 banks have LCR between 100% and 500%

9 banks have LCR exceeding 500%

7 banks do not meet the obligatory level of LCR

4 banks have LCR below 20%

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NSFR–The Net Stable Funding Ratio ( i id li h t t f di )(aim: avoid reliance on short term funding)

Intention to introduce NSFR as a minimum standard by 1 January 2018

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KL2

Diapositiva 26

KL2 Pytanie j.w.

CRR nie definiuje NSFR tylko zbiera dane na temat szerokiego zakresu pozycji do jego kalibracjiKryszkiewicz Leszek; 04/06/2014

Liquidity quantitative standards - Basel 3Liquidity quantitative standards Basel 3

Issues to be consideredIssues to be considered

Strengthening long-term sources of funding (long term bonds, cover bonds, securitization)

Matching level of liquid assets to bank’s operating scale

M t hi th li idit d d i ti i Matching the liquidity needs and sources in respective currencies

Parent banks’ position and commitment to support their subsidiaries in host countries in a case of liquidity or solvency problems

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Concluding RemarksConcluding Remarks

Activity of supervision should be aimed at finding interconnectednessod SII. This is a crucial role for development of contingency plans.

Activities of supervisory authorities should be more aimed atassessing possible loss in case of SIFI default rather than pureprobability of default.

In case of SII collapse supervisory authorities should provide orderlyresolution of such institution

I th E U i FSB d BCBS d ti In the European Union FSB and BCBS recommendations aretransformed into binding law by CRDIV/CR. One has to rememberthat quality of level one regulations is highly dependent on the RTSand ITS (level II regulations) Thus a big responsibility of relevantand ITS (level II regulations). Thus a big responsibility of relevantauthorities to develop proper legal framework.

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professional workshop kruszka m. irmc 2014(1).pdf · professional workshop : macroprudential...

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