Pan-CIS Regulator Creation: Benefits and Challenges from a Basel II and III Perspective

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Henry Penikas, SME Basel II & III, Alfa-Bank, Russia

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Pan-CIS Regulator Creation: Benefits and Challenges from a Basel II and III Perspective

  1. 1. June 6, 2013Pan-CIS regulator creation| Benefits from Basel II and III perspectivesHenry PenikasProject Manager, Alfa-Bank (Russia)Research Fellow, Higher School of Economics (Russia)
  2. 2. Motivation and Presentation Plano  On October 29, 2012 Alfa-Bank received a request from Bank of Russia stating:n  By Jan. 01, 2020 regulation harmonisation over CIS to be accomplished;n  Pan-CIS regulator is expected to appear by the moment;o  To harmonize banking regulation:n  It is necessary to briefly describe current state of regulation (simplified/standardized Basel II);n  Discuss the expected consequences from Basel III implementation;n  Evaluate overall regulatory impact over the economy (hints for Basel IV regulation);2
  3. 3. CIS Environment | Basel Regulationo  CIS countries are comparable in terms of banking assets;o  Current banking regulation though similar differs much in details;3Macro Indicators, USD bn RUS KAZ BEL UKRGDP 1  968,0 200,5 63,0 175,2Banking  Assets 1  574,4 92,2 39,7 141,9Share  of  banking  assets  to  GDP 80% 46% 63% 81%Asset Category RUS KAZ BEL UKRForeign currency sovereign debt 50% 0% 20% 0%Equity investments 150% 100% 150% 100%Loans to state owned entities 100% 20% 50% 30%Large loans to natural persons (over 2 bn) 150% 100% 75% 0%Collatarelized guarantees 20% 0% 20% 0%Mortgage 70% 25% 35% 50%Non-disclosable borrowers 110% 150% 100% 100%D and C category sovereigns 150% 100% 100% 100%Market risk, RW 12,5 10,0 12,5 10,0Operational risk, RW 10,0 10,0 12,5 0,0Minimum  CAR 10,00% 12,00% 8,00% 10,00%
  4. 4. Basel III SIFI Regulation Expected Result for the Economyo  SIFI capital buffer decreases economic growth volatility;o  Still growth potential obtains a ceiling;o  Policy objective attained;4NOregulation+ SIFIregulationECONOMIC CYCLE MODEL
  5. 5. Basel III SIFI Impact on Capitalo  Capital buffer add-on value impacts non-linearity the amount of banking system capital;o  Too elevated buffer leads to the strategy of down-sizing, i.e. reducing the bank capital overall;52.9533.053.13.153.23.253.33.353.40 0.01 0.02 0.03 0.04 0.05 0.06K(2)вмиллиардах∆CARK(2) в зависимости от ∆CARBANKING SYSTEM IMPACT
  6. 6. Overall Banking Regulation Impacto  Statistically significant correlation is observed of regulations volumes and stock index;o  Regulation is enough to limit only 2-year forward period;o  Complexity is inefficient;6800      900      1  000      1  100      1  200      1  300      1  400      1  500      1  600      0200400600800100012001999  2000  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011  2012  2013  SP500  Year  Avg  Value#  of  Pages  published  by  BCBS  per  annum#  of  BCBS  pages  (Left  axis) SP500  Avg  Close  (Right  Axis),  t+2 SP500_Forecast
  7. 7. Concluding Remarkso  Current regulation needs a lot to harmonize from CAR to RW;o  Basel II standards for IRB models need unification;o  Operational risk database for Basel II may be created CIS-wide;o  Basel III should be carefully approached:n  Capital buffer regulation might add to financial soundness and decrease volatility;n  Reduction in overall banking system capital is the price to pay;o  Basel IV should be avoided as complexity does not capture the business environment;7
  8. 8. Thank you for attention!8

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