Funding Plan & Business Model Assessment
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Chappuis Halder presentation of Funding Plan and Business Model Assessment within the SREP process
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Funding Plan & Business Model Assessment
- 1. Banks Business Models under review Impacts on Funding Plan March 14th 2016 | Marcus Evans 15th Annual Liquidity Event | Royal Horseguard Hotel, London
- 3. 3 Source : Moody’s EMEA 2019 2018 2017 2016 2015 2016 2017 2018 2019 G-SIB Surcharge FSB Data Gap Initiative Basel 3 buffers Basel 2 B3 ratios CA res. mortgage LCR LCR Reporting fin. conglomerate s D-SIB framework SA-CCR BCBS 239 Reg. cap CCP exposuresIFRS 9 NSFR CVA review FRTB Leverage Ratio IRRBB review Revised SA approach CR Concentration Large Exposures TLAC New securitization framework UK FDSF CRD IV / CRR COREP / FINREP PRA / IMF ST B3 (IRB) Vickers Reform LCR CRD IV G-SIB Surcharge EBA SREP ECB CA ST PRA Int’l banks PRA CAD / Piillar 2 BoE/PRA ST BoE/PRA ST EU-wide ST EBA Liquidity monitoring Financial conglomerates LCR LCR FSB Data Gap Initiative BCBS 239 Reg cap CCP exposures SA-CCR IFRS 9 FSB Data Gap Initiative ECB Anacredit LCR BoE / PRA ST BoE / PRA ST NSFR Leverage Ratio New securitization framework FRTB CVA review TLAC IRRBB review Revised SA approach SR Concentration and Large Exposures G-SIB Surcharge CCAR / DFA ST LCRLCR LCR New securitization Framework Global systemic risk report Liquidity ST BHC and FBO Adv. Approach Rule Capital Planning FBO ST CCAR / DFA ST CCAR / DFA ST CCAR / DFA ST CCAR / DFA ST Supplementary Leverage Ratio Capital rules to large foreign banks FSB Data Gap Initiative5 Concentration Large Exposures BCBS 239 SA-CCR CVA review G-SIB Surcharge IFRS 9 / CELC (US) FSB Data Gap Initiative Revised SA approach CR IRRBB review Reg cap CCP exposures Leverage Ratio NSFR FRTB TLAC FSB Data Gap Initiative LCR Global regulation European regulation Japa n Canada Hong Kong Australi a New Zealand VietnamSingapore South KoreaRussia Turkey USAUK Increase of regulatory pressure
- 4. 4 Regulators timeline for Business Model Assessment • ICAAP & ILAAP submission to the JST • Supervisory college meeting’s date • First draft of JST’s SREP decisions submission to the ECB supervisory heads • Legal services review of SREP decision within ECB • Supervisory board approval of SREP decisions • Draft SREP letters delivered to banks • Supervisory dialogue and hearing period • Approval of the decision by the supervisory Board and Governing Council Avril June July August September September / October November
- 6. 6 Risk Control Risk Level Business model assessment Governance and Risk control Risk by risk capital assessment Liquidity assessment Viability and sustainability of Business Model Adequacy of governance and risk control Block 1 Score Block 2 ICAAP benchmarking Block 3 Stressed ICAAP benchmarking Block 1 Score Block 2 ILAAP / internal targets Pillar II capital requirement(s) Pillar II liquidity requirement(s) SREP ASSESSMENT A1 A2 A3 B1 B2 A4 B3 C Quantitative SREP score SREP Internal Quantification SREP Assessment A B C X + Y « Final Rating »= SREP rating is made of combined assessments of the « quantitative SREP Score » and the « SREP Internal Quantification » SREP Process Overview
- 7. 7 1 2 3 4 F No risk identified Low level of risk Medium level of risk High level of risk Failing or likely to fail SCORING SYSTEM Risk Level Risk Controls RISK ASSESEMENTQUANT. SCORE • Quantitative and qualitative • Strategic & financial plans • Identification of the areas of focus for the BMA • Business env. assessment • Sustainability analysis • Vulnerabilities identification Business model analysis A1 Assessment of internal governance & controls A2 • Internal governance, remuneration policies • Corporate and risk culture • ICAAP • ILAAP • Internal control frameworks/ Information systems • Recovery plans • Risk to capital measuring: Credit Risk, Market risk, IRRBB, Operational risk • Own funds sufficiency analysis Assessment of risks to capital A3 • Risk management and internal controls assessment • Liquidity needs analysis • Liquidity sufficiency analysis Assessment of risks to liquidity and funding A4 • Liquidity stress tests results • Funding Planss stability There is no discernible risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. There is a low risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls There is a medium risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. There is a high risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. Source: EBA Guidelines on SREP (EBA/GL/2014/13) SREP Process Risk Level & Risk Control
- 8. 8 Indicators Identification EBA Risk Dashboard EBA SREP gdl CRR CRD IV AQR CA 2013 NPL CET1 IRRBB …. LE X X X X X X X X X X X • Identification of regulatory sources linked to the SREP process • EBA SREP Guidelines & Risk Dashboard • CRR / CRD IV • AQR / Comprehensive assessment • Documentation analysis and identification of key indicators mentioned in the documents • Harmonisation of indicators definition between different regulatory sources 1 2 1 2 Indicators benchmark • Constitution of benchmark for each indicator (distribution of indicator for banks under EBA regulation) • Definition of ratings buckets based on percentiles • Rating 1 for indicator < percentile 25% • Rating 2 for indicator < percentile 50% • Rating 3 for indicator < percentile 75% • Rating 4 for indicator > percentile 75% 5% 60% 65% 70% 75% 80% 85% 90% 95% 04 0.05 0.07 0.08 0.10 0.11 0.15 0.18 0.29 43 0.45 0.47 0.48 0.52 0.56 0.60 0.64 0.68 25% 50% 75% A10 Non-performing exposures ratio 0.02 0.04 0.10 1 2 3 4 3 4 3 value Score 3 4 Scoring • Use of simple average for « independent indicators » Projection of « dependent » indicators through non-linear functions (min/max, base indicator) • Assessment of overall score through an average weighted by pillar 1 capital requirement charge ind1 ind2 ind2 ind3 Credit 3 2 3 1 2.3 Simple average ind1 ind2 ind2 ind3 Market 3 2 3 1 2.3 Simple average … 2.7 Risk category score Risk category score Final score 5 6 5 6 Details of the SREP scoring process SREP Process Risk Level & Risk Control
- 9. 9 Indicator Non Performing loans/ Total assets EBA guidelines references Competent authorities should assess the materiality of non-performing loans per portfolio and the potential losses that may stem from them. P.71 Category Credit risk Mapping with regulatory data Numerator (F 18.00 / row 070 / column 060) + (F 18.00 / row 250 / column 060) Denominator ((F 18.00 / row 070 / column 010) + (F 18.00 / row 250 / column 010) Example EBA SREP Guidelines Discussions with ECB FINREP / COREP / QIS / STE / Transparency / Risk Dashboard Risk Category Core Indicators Mapping with regulatory data Benchmarking Scoring Risk Category Level Extended Indicateurs Risk Level Approach SREP Process Focus on Risk Level: indicators identification
- 10. 10 27% 17% 27% 12% 16% Questions per risk category Number of questions per risk category 27% 14% 50% 9% Governance Risk appetite Risk management & Internal controls Internal audit Questions per subject Number of questions per risk category ~ 300 QUESTIONS Adjustments on overall score 1 2 3 4 Adequate / Neutral situation Weak Inadequate Strong No impact downgrade downgrade upgrade EBA guidelines: Competent authorities should assess whether the institution has an appropriate organizational framew ork for market risk management, measurement, monitoring and control 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 consideration of risk issues. The management body shall be actively involved in and ensure that adequate resour ces are allocated to the management of all material risks addressed in this Directive and in Regulation (EU) No 575/2013 as well as in 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 risk management 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 has clearly establish the responsibilities 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? Example SREP Process Focus on Risk Control Risk Control Approach
- 11. 11 SREP Process ILAAP and ICAAP contributions ICAAP ILAAP According to Article 73 of the CRD « Institutions shall have in place sound, effective and comprehensive strategies and processes to assess and maintain on an on-going basis the amounts, types of distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they are or might be exposed. » • Banks should assess and quantify all risks that may materially impact their capital requirements on a short term (1y) and longer term perspective (3y) and take a sound economic perspective as a basis for their internal view. Deadline -> April 2016 • Banks should describe the whole liquidity processes they are implementing and monitoring. ALM Models Funding strategy Liquidity Stress testing Collateral Mgt Rates, flows, … internal transfer rate, funding rate, … LCR, NSFR calculation & Monitoring, … Simulations,, Impact analysis,… Gathering & Optimisation Governance Risk appetite determination Liquidity and funding cost allocation to entities and subsidiaries Management & monitoring Operational activities Reporting supervision ALM department Aspects related directly to banks business model Strategic plan definition Risk appetite definition Financial & Strategic plans ( Capital ratios, external acquisitions, organic growth, …) Strategic reviews Key risks identification & measurement (Pillar I, Pillar II,..) Capital ratios target definition Risks limits framework definition Capital planning through budgeting process Own funds profitability measurement and analysis Risk limits definition & management by business / activity / country / … Budgeting process Risk management Capital Planning Adjustment Strategic level Tactical level Operational level
- 13. 13 Prospective Regulatory Reporting Funding Plans Sections Description Goals Section 1 Section 2 • 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 funding that are directly or indirectly provided by the public sector. This includes medium and long-term repo financing programmes, Credit guarantee funding programmes and Credit guarantee 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 planned balance-sheet developments in a 3-year time horizon • To identify and assess changes in specific funding reliance • To assess the feasibility of the planned funding from a price perspective • To identify and assess (changes in) funding mismatches in specific currencies • To assess the feasibility of the Funding Plans when a firm is faced with significant restructuring of its balance-sheet CONTEXT • Funding Plans reporting demand follows the recommendation of the ESRB A4 / 2012 /2 ( European Systemic Risk Board). OBJECTIVES • Ensure the feasibility of the Funding Plans and measure their impact on the flows of credit to the real economy ; • Analyse the strategy of credit institutions to meet their needs in 3y time horizon. • FREQUENCY: Annually • PERIMETRE : Group level Funding Plans
- 14. 14 Prospective Regulatory Reporting STE - Profitability CONTEXT • STE-Profitability reporting demand follows the European regulation 1024/2013 Article 10. OBJECTIVES • Assess the viability of the business model of the bank ; • Back testing of the projection quality of the bank by comparing the projections to the results. STE – Profitability NIM Commissions Financial portfolio P&L Other revenues - Distinction between income and expenses generated by the new business and those generated by the stock - Distinction between business in force and new business is not anymore demanded in the new templates PROFITABILITY ASSESSMENT (INCOME AND EXPENSES) Actual figure for current period (T) -column A- Budget value (T- 1, T) -column B- Budget value (T+1) -column C- Budget value (T+2) -column D- Budget value (T+3) -column E- (Budget) Interest income attributed to business in force (Budget) Interest income attributed to new business (Budget) Interest expenses attributed to business in force (Budget) Interest expenses attributed to new business (Budget) net interest income attributed to business in force (=r10-r30) (Budget) net interest income attributed to new business (=r20-r40) (Budget) interest income (=r10+r20) (Budget) interest expenses (=r30+r40) (Budget) net interest income (=r41+r42) as well as (=r43-r44) Budget expenses on share capital repayable on demand Budget dividend income Budget fee and commission income Budget fee and commission expenses Budget net and commission income (=r70-r80) Budget gains or losses on financial assets and liabilities not measured at fair value through profit or loss, net Budget gains or losses on financial assets and liabilities held for trading, net Budget gains or losses on financial assets and liabilities designated at fair value through profit or loss, net Budget gains or losses from hedge accounting, net Budget Exchange differences (gain or loss), net Budget gains or losses on derecognition of non financial assets, net Budget other operating income Budget other operating expenses Budget net other operating income (=r150-r160) Budget total operating income Budget administration costs Budget administration costs: Staff expenses Budget overhead costs Budget total profit or loss before tax from continuing operations Budget total profit or loss before tax from discontinued operations Budget profit or loss after tax from continuing operations Budget profit or loss after tax from discontinued operations Budget profit or loss (after tax) attributable to owners of the parent (Budget) non-recurring items budget 3y projection • FREQUENCY : bi-annual • PERIMETRE : Group level, relevant subsidiaries.
- 15. 15 Prospective Regulatory Reporting Operational Constraints Enhancing the budgeting process to be able to produce coherent prospective reporting in a FINREP taxonomy becomes a necessity to monitor effectively banking activity. Organisation Perimeter Data quality TargetAs-is situation 1 2 3 Management Control Department Monitoring / Reporting Accounting Department Reporting ALM Department Reporting Management Control Department Monitoring / Reporting Accounting Department Reporting ALM Department Reporting Bridges between prudential and statutory is made through mapping tables and not directly embedded in granular data Banks usually build their budget on accounting / statutory perimeter Prudential axis are totally integrated within operational systems on each transaction New prospective reporting need to be in line with prudential perimeter (different treatment for insurance subsidiaries). no or little interaction Forecasted data Previous years data (FINREP) Forecasted data FINREP Previous years data FINREP Share knowledge Update systems
- 16. 16 Case Study Tier 1 French Bank Management Control Accounting Asset Liabilities DepartmentReconciliation Reconciliation Reconciliation • +3000 subsidiaries with a different level of intermediate consolidation: • Need to have coherent and refined consolidation process • Need for a relevant materiality threshold Organisational constraints Consolidation Indicators nature Treatment Perimeter • Statutory • Financial statements analysis & prospective budget • IFRS • Prudential • Financial Statements • IFRS • ALM Products referential • B&S projection and NIM sensitivity analysis • Management
- 18. 18 Business Model Assessment & Funding Plans P&L Forecast & Funding Plans Net interest Margin Commissions Fees & other revenues Financial portfolio Administrative fees Cost of risk Balance-sheet Funding reliance Forecasted net interest Margin vs. evolution of credits & deposits Forecasted net interest Margin vs. funding needs and strategy Evolution of the commissions in a relation with the evolution of assets or market share Evolution of the profit (or loss) on the financial portfolio vs. Evolution of derivatives & other financial instruments Evolution of the profit (or loss) on the financial portfolio vs. Evolution of the planned funding prices Evolution of administrative fees vs. planned restructuring of the balance sheet Evolution of the cost of risk regarding the balance-sheet forecasted size STE -PROFITABILITY Funding Plans • How does it plan to make profits tomorrow? • How will the key drivers of profitability change? And what is driving this change? • How is the institution making profits today? • What are the key drivers of its profitability?
- 19. 19 STE - PROFITABILITY Funding Plans Definition Links With The SREP Process Quantitative SREP Score Internal Quantification : ILAAP & ICAAP • 3Y forecasted P&L (based on FINREP taxonomy F02.00) • 3Y forecasted B&S, funding strategies and liquidity ratios (based on FINREP taxonomy F01.01, F01.02, …) • Risk level: Forecasted Risk level SREP ratios related to profitability and business model assessment • Risk control: Improve governance and monitoring of profitability • Risk level : forecasted risk level SREP ratios related to liquidity risks • Risk control: Improve governance and monitoring of liquidity • ICAAP: Improve capital trajectory planning in adequacy with the forecasted P&L on a FINREP taxonomy • ICAAP: Improve capital trajectory planning in adequacy with theforecasted B&S size • ILAAP: Forecasted vision on the funding needs, funding strategy and liquidity ratios Business Model Assessment & Funding Plans Regulator’s assessment
- 20. 20 BUSINESS MODEL ASSESSMENT PROCESS Preliminary identification of material business areas (mainly based on information provided by entity itself) 1 Automated rating focusing on: • Profitability • Efficiency • Sustainability 2 Supervisory assessment: • Short term (12 months) • Medium term (3 years) • Long term 3 BUSINESS MODEL ASSESSMENT Business model viability: The institution’s ability to generate an acceptable return over thenext 12 months. Business model sustainability: Ability to generate an acceptablereturn over 3 years and over a full business/ economic cycle. STE PROFITABILITY Mainly used to assess the Profitability FUNDING PLANS Mainly used to assess the efficiency and sustainability of the business model Business Model Assessment & Funding Plans Regulator’s assessment
- 21. 21 Short Term Wholesale Funding Intraday Risk Capacity and Quality of Liquidity buffers • Short term interbank position to liquid assets • Public entities and intragroup short term funds ratios • Central bank funding ratio • O/N unsecured deposits funding spread • O/N interbank liquidity position to LA • Liquidity buffer quality ratio • Liquidity buffer concentration ratio Short Term Funding Ratio Funding Counterparty Concentration Ratio LCR Liquid Assets to Short- Term Liabilities Short term liquidity adequacy subcategories Short term liquidity adequacy indicators Unencumbered Eligible Assets Ratio Funding Geographical Concentration Ratio Short Term Funding Business Model Assessment & Funding Plans Links with ILAAP: on short term BUSINESS MODEL ASSESSMENT PROCESS Preliminary identification of material business areas (mainly based on information provided by entity itself) 1 Automated rating focusing on: • Profitability • Efficiency • Sustainability 2 Supervisory assessment: • Short term (12 months) • Medium term (3 years) • Long term 3 BUSINESS MODEL ASSESSMENT Business model viability: The institution’s ability to generate an acceptable return over thenext 12 months. Business model sustainability: Ability to generate an acceptablereturn over 3 years and over a full business/ economic cycle. STE PROFITABILITY Mainly used to assess the Profitability FUNDING PLANS Mainly used to assess the efficiency and sustainability of the business model
- 22. 22 Structural Funding Mismatch Long Term Wholesale Funding Retail Funding Strength • Cumulated net funding gap ratio (5Y) • Cumulated net funding gap ratio (10Y) • Senior unsecured funding spread (5Y) • Senior unsecured funding spread (10Y) • Secured funding spread (5Y) • Secured funding spread (10Y) • Retail deposit ratio • Guarantee scheme covered deposit ratio LTD Cumulated Net Funding Gap to Liquid Assets Asset Encumbrance Ratio NSFR Core Funding Ratio Funding Sustainability subcategories Funding Sustainability indicators Global Funding Reliance Business Model Assessment & Funding Plans Links with ILAAP: on global funding BUSINESS MODEL ASSESSMENT PROCESS Preliminary identification of material business areas (mainly based on information provided by entity itself) 1 Automated rating focusing on: • Profitability • Efficiency • Sustainability 2 Supervisory assessment: • Short term (12 months) • Medium term (3 years) • Long term 3 BUSINESS MODEL ASSESSMENT Business model viability: The institution’s ability to generate an acceptable return over thenext 12 months. Business model sustainability: Ability to generate an acceptablereturn over 3 years and over a full business/ economic cycle. STE PROFITABILITY Mainly used to assess the Profitability FUNDING PLANS Mainly used to assess the efficiency and sustainability of the business model