CH&Cie Regulatory hot topics & perspectives in 2015

CH&Cie Regulatory Market Watch
Hot topics & Perspectives for Banks in 2015
September 2014
Overview
Stephane Eyraud seyraud@chappuishalder.com
Benoit Genest bgenest@chappuishalder.com

Introduction & Overview
A different evolution of banking regulation
Functioning of
College of
supervisors
RWA
Benchmarking
Remuneration
benchmarking
exercise
Basel IV ?
Op Risk &
AMA
Pilar 3 |
Countercyclical
capital buffer
Model Quality
Review
IHC
Securitization
True Sale
IFRS 9 | IFRS
13
BCBS 239
IRRBB
Disclosure for
Own Funds
SREP | ICAAP |
ILAAP
Post AQR CVA | LVA | XVA
1. The early 2000s
A more technical regulation is being set up.
Financial institutions must meet minimum
efficiency criteria and be compliant with
standardized accounting format. (Bâle II for
risks, IFRS pour accounting )
2. Late 2000s
The financial crisis had a huge impact on
regulatory change. While existing regulation
has been strengthen, new rules have been
set up to cover risks that had been
neglected by the regulatory body (CVA,
Stress effects, etc.)
3. Today
We are taking a major step toward achieving
a new kind of regulation. Now the entire
market is being assessed and taken into
account ; before the risk was only assessed
at an institution level.
(benchmarking, standardization and
comparability …)
Regulatory change is a winding road that have been marked by several key milestones

From a bottom up to a top down regulation
1. Comparability
New legal texts take into account the possibility of a retrospective action based on benchmarking. This is a founding
principle as other steps are required as a consequence of this point (see below).
2. Standardization
Corep, Finrep, SREP … From regulator’s perspective, Banking risk management should be evaluated automatically and
uniformly. This also allows better comparability between banks.
3. Transparency
Publication of internal methods used - not only solvency ratios but also the entire information channel - must allow to
understand how auditing is performed and eliminate grey areas.
4. Periodicity
Having a stable legislative control model is critical. AQR exercises and stress testing will become periodic. In the same way
we may experiment rotations (a portfolio that use IRBA could temporary use STD method under certain conditions)
5. Centralized regulation body with extended capacity of action
The role of national supervisory authorities has also been framed. Local leeway have been reduced and bank lobbying will
be all the more so great (defense of national specificities like in France with Crédit Logement)
6. Sanctions
There is a new kind of possible sanctions like obligation to increase provisions, equity or auditing staff. Sanctions are not
only due to breaking the rules like before but can also be impose for deviating from market average standards.
The supervisory
authorities’ power is
increasing and taking
a new direction.
This can be defined by
six main principles

Perspectives
Beyond a strengthening regulation, it’s an effective control by the regulatory body that seems to be
appearing.
• Supervisory authorities are now working together and try to establish an automatic control at a more high level (all
banks together) instead of the current individual level of control (bank by bank)
• Banks will have to make sure that they respect laws and regulations. They must also follow market best practices.
Deviation from market average will become a new instrument of control for supervisory authorities. This can be on
a quantitative (e.g., change in RWA) or a qualitative perspective (type of internal model used, size of internal control
functions, etc.)
Illustration
European real estate market study by the EBA
Analysis of individual RW (Risk
Weighted) deviation and comparison
of ELR (Experience Loss Rate) levels
Source : EBA data collection (reference date : December 2012), EBA calculation

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
Among all the topics that might affect regulatory work for financial institutions during the next
months, six of them caught our attention
For each of them we have decided to proceed as follow:
1. Context and targets
2. Potential impacts and effects
3. Challenges and different options
1 32
54
6

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRBB
1
Partie 1
Benchmarking Portfolios
Article 78 of Directive
2013/36/EU EBA/CP/2014/07

7
Context & objectives
Reduce discrepancies between internal models used for the calculation of funds requirements
EBA aims to reduce inconsistent calculations of risk weighted assets
 Following the crisis, multiple capital assessments have shown substantial
differences between banks in the calculation of their fund requirements.
 Even though differences in risk parameters (PD, LGD, VaR,…) may come
from differences in the underlying risks, EBA has come up with a
regulatory framework in order to monitor and reduce differences in the
calculation of capital needs.
 Aiming an implementation by April 2015, the EBA has published two drafts:
 The regulatory technical standards, defining the workflow of sharing
the yearly assessment with the relevant authorities, and the types of
benchmarks used (extreme values, standard deviation of the output
modelling values, …)
 The implementation technical standards, specifying the reporting
templates, the IT solutions and portfolios that will be assessed for each
type of risk
Workflow under art. 78
Source : Public Hearing on draft RTS/ITS on Benchmarking under Article 78 CRD
EBA designs the supervisory
benchmarking portfolios
1
Banks calculate own funds
requirements for the supervisory
benchmarking portfolios
2
EBA produces a report containing
benchmarks in order
to assist competent authorities
4 Banks report the results to the
competent authorities and EBA together
with an explanation of the methodologies
used
3
Competent authorities assess the
quality of the internal approaches
making use of EBA report
5 Competent authorities investigate the
reasons for significant difference of the
institutions from peers results and
approaches
6
Competent authorities take
corrective actions if there is a clear
underestimation of own funds
7
Competent authorities share the results
of the assessment with the EBA
8
EBA may issue guidelines and recommendations to improve supervisory and
banks’ practices
9
• Publication of the CRD
including art 78 on the
annual supervisory
benchmarking of internal
approaches for calculating
own funds requirements for
credit and market risk
exposures
June, 26 2013
• Publication of the RTS and
ITS drafts, consultation
running until August, 19
2014
May, 28 2014
• Benchmarking exercise
conducted by the EBA
Ongoing
• Final report on the functioning of the
benchmarking of internal models,
incl. the scope of the model
April, 2015
 Why ? [Origin] : There were significant differences in the denominator of the
capital ratios (the capital requirements) stemming from material differences in
banks' regulatory parameters
 What ? [Perimeter] : Internal Ratings-Based Approach (IRBA) and the Internal
Market Risk Model (Op Risk excluded)
 How ? [Methodology] : Portfolio replication. Benchmarking of Portfolios
Timeline

8
Art. 78| What kind of impact and challenge expects Banks
Direct or indirect effects?
Most of the actions to be carried out by the banks should be issued by the EBA from its benchmark analysis. Although the
results of the application of Article 78 could cause changes in methodologies of risk management and generate model
replications.
Governance,
processes & IT
Impacts Description Severity
Internal Model
Strengthening of
prudential controls
Action
Optimisation of risk
management
 EBA draft ITS specify the benchmarking portfolios as well as the templates,
definitions and IT solutions that should be applied.
 Evolution of Information Systems and Database in order to collect data for the
different portfolios
 Implementation
of a reporting
tool
 Development of
IT solutions
 Development of Risk model adapted to the benchmarking portfolio
 Update of the documentation of internal models
 Depending of the results of the exercise EBA may issue guidelines and
recommendations
 Implementation
of guidelines
 Annual assessment by competent authorities of regulatory own fund
requirements
 Comparison of own fund requirements between standardized approach and
internal model and between institutions
 Monitoring of the evolution of own funds requirements between two exercise
 Having a global vision of all internal models used by European institutions could
help them to optimize their risk management
 This will give new means to European institutions to compare their risk level
 Review of
internal model
 Underestimation
of own fund
could lead to an
external audit

9
Approach & challenges for the FI
Everything becomes comparable and may tend toward uniformity
Indirect Control on the
EU Core Tier 1
Direct control (and
potential sanctions) on
banks at risk
Regulation underlying objectives Implications for the financial institutions
Indirect control on
Bank internal Risk
methodologies
 Behind the EBA/CP/2014/07, it seems that the regulator
wants to avoid volatility of the RW and any deviation from
the mean / Benchmark. This should lead banks to
harmonize their methods and limits their room for
negotiations (standardizations of their internal models).
 Impact on the contra cyclic buffer and Pillar 2 (macro
management of Total EU Core Tier 1 by the EBA with
indirect impact on some banks)
 Reputational risk
 Potential regulatory add-on if the bank is not aligned
with the benhmark
 Lobying to strenghten (potential difficulties in
defending local particularities)
 Potential re-design of some internal models
 Alignment of internal methodologies with the
benchmatk
 Anticipation for more conventional risk models (cone
 Detection of atypical risk profile areas: /portfolios and justification to be provided
 Anticipate prudential add on piecemeal
 Anticipate an emphasis on-site audits especially on Basel 2 models already approved
 Better reading of risk profile of other European banks
 Negotiations with the regulators to be toughest (strengthening lobbying to predict)
Pragmatic approach to
adopt
1
2
3
Illustration :
Correlation
between RW
level and RW
sensitivity in the
EU sample
Source : EBA | FOURTH REPORT ON THE CONSISTENCY
OF RISK WEIGHTED ASSETS | 11 june 2014

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
2
Partie 2
SREP
Draft Guidelines for common
procedures and methodologies

11
Scoring financial institutions by confronting risk processes and methodologies with business models
SREP’s purpose is to enhance transparency in the banking system by
scoring the financial institutions on various criteria
Financial institution scoring framework
 On 7 July 2014, EBA published a new consultation paper on Guidelines for
common procedures and methodologies for the SREP under Article 107 of
CRD IV. The consultation closes on 7 October 2014
 Guidelines are expected to be applied by 1 January 2016
 This regulation proposes a common methodology to assess the viability of
financial institutions and the compliance between processes, governance,
methodologies, measures, the business models and the environment in
which the financial institutions evolve
 It aims at enhancing the transparency across the financial system by
assessing four major components:
 Governance | Analysing consistency in internal governance and controls,
procedures and processes, etc…
 Business models | Studying the business environment as well as the
sustainability of the strategy, financial plans, etc…
 Capital adequacy | Assessing risk contributions to capital (Pillar I as well
as Pillar II risks) and the consistency of risk measures, etc…
 Liquidity and funding| Identifying risks to liquidity, as well as liquidity
sources and resources and their capacity to cover liquidity and funding
needs in terms of financial and economic distress
1 2 3 4
1. Size of banks, Systemic
Banks
2. Business model &
Strategy
3. Internal governance &
control
4. Individual Risks (credit,
market,…)
5. Capital adequacy
(ICAAP,..)
6. Individual risk to liq. &
funding
7. Liquidity adequacy
Level of risk- +
1
2
2
3
3
2
2
1
2
2
3
3
2
2
1
2
3
4
F
Overall
score
 What will the categorisation of financial institutions lead to?
 All categories of financial institutions will be monitored on a quarterly basis based on the key indicators (RWA, LCR, etc…)
 Systemic / very large institutions will have to submit to the SREP on a yearly basis whereas for smaller institutions, the assessment will be done each 2 / 3
years
 What the overall score will lead to ?
 The overall score will allow comparing the viability of institutions. In other words, knowing the business model and the business environment, are the
governance as well as risk metrics and capital resources sufficient to withhold the activity

12
Impacts on the financial institutions
More qualitative than quantitative ?
Even though the quantitative side (respecting the regulatory thresholds and ratios) is still a major topic, the qualitative side
might be more challenging while assessing the SREP
Governance and
organisation
Models &
methodologies
Data quality and
management
Action
Processes &
documentation
 Once more risks governance will be most challenging. Internal reportings as
well as processes must be clearly defined and controls addressed accurately
 Finally, senior management involvement and understanding of risks in
accordance with the strategy plan will be challenged
 Adjust internal
governance
 Current methodologies and models will be challenged by the regulator which
will seek for a EU-harmonization and therefore lead to get rid of specific
methodologies / models used so far by the financial institutions
 Design new
models
 The AQR revealed the difficulties for financial institutions to provide accurate
data on a granular and detailed level
 Data quality and management is definitely a pain point for banks, and within
the SREP, we believe that a focus on data quality and lineage is key
 Improve Data
quality
 Documentation is a major point since regulators seek transparency  Define new
documented
processes

13
SREP induces 3 major challenges for the FI
Governance / capital &
liquidity allocation
Methodologies &
models
EBA underlying objectives Implications for the financial institutions
Control & processes
 New expectations from the local regulator 
harmonisation of ICAAP / ILAAP framework
 Get rid of local specificities of ICAAP / ILAAP framework
implementation
 Homogenise capital & liquidity measures
 Identify methodologies & models
 Get rid of specific methodologies and models by comparing
the institution’s models with a EU-wide benchmark
 Simplification, strengthening and harmonisation of control
& monitoring framework
 Review of ICAAP & ILAAP framework
 Adjustment of risks to capital profile & liquidity and
funding risk profile
 Less flexibility in terms of capital & liquidity
allocation
 Challenge of all deviations, exceptions, exemptions
validated by the local regulator so far
 Potential P & L / Balance Sheet impacts
 Less flexibility in terms of methodology / model
design
 Establish new control processes & monitoring /
reporting tools
 Improve IS / IT
 Launch a gap analysis based on the SREP scoring methodology in order to identify the weaknesses of the financial
institution in its capacity to cope with these new requirements
 Based in findings & conclusions of the gap analysis, score the institution
 Establish a clear work plan with all the stakeholders (top management, risk, finance, compliance) prioritising quick
wins while planning medium and long term projects
 Launch top priority projects
adopt
1
2
3

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
3
Partie 3
IRRBB measurement &
management
EBA Consultation Paper on
amendments to Guidelines on
IRRBB (EBA/CP/2013/23)

IRRBB is a complex and often not very well understood risk with divergent practices
prevailing among different institutions and regulators across the EU
 It is well documented that unexpected changes to IRRBB different components (repricing risk, yield curve risk,
basis risk, optionality) can have dramatic consequences on a bank’s profitability and solvency. This is especially
true in the current exit phase from monetary easing policies which is an uncharted territory for IRRBB
 Currently, institutions are required to manage IRRBB as part of ICAAP / SREP and to report to their supervisors if
their economic value declines by more than 20% as a result of standard supervisory shocks
 However, the existing divergent approaches among regulators/supervisors and institutions produce
inconsistent outcomes – both in terms of the management of IRRBB by institutions, and in terms of supervisory
responses
Context
Objectives
As a consequence, new guidelines proposed by the EBA establish the +/- 200 bp shock as the
standard outlier test & require institutions to overhaul their IRRBB management framework
 The new guidelines will make compulsory the calculation of a harmonized IRRB +/- 200 bp outlier test by
2015-2016
 In addition, the new guidelines are focused on five main areas of interest risk assessment/control :
a. the setting up and use of a range of alternative scenarios for stress-testing IRRBB (historical scenarios, simulations)
b. Review of key behavioral assumptions used in IRRBB measurement (accounts with optionality, Non determined
maturity products, equity duration)
c. methods of measuring aggregated interest rate risk and IR sub-types / components (repricing, yield curve, basis
risk, optionality)
d. the governance of interest rate risk including independent model validation and periodic reporting obligations
e. the identification, calculation and allocation of capital to IRRBB within internal / economic capital models
IRRBB | Institutions must be prepared to comply with upcoming new regulations on IRRBB
Piecemeal approaches will have to be replaced by a comprehensive IRRBB management framework

16
The new regulations on IRRBB are not finalized yet due to the complexity of the different subjects
The framework for the management of IRRBB should be proportionate to the nature, scale and
complexity of an institution
 Institutions & supervisors will need to be confident that the scenarios used for measurement and
stress testing identify all material interest rate risks (yield curve risk, basis risk etc.)
 Stress testing for IRRBB will have to be more closely integrated in the institution’s overall stress-
testing structures and programmes
IRRBB Scenario and
Stress-testing
Area Description Regulation maturity
 Key behavioural assumptions made by banks in order to assess their IR risk must be verified :
accounts with embedded optionality (prepayment options, options to extend duration, options to
change the interest rate basis – from fixed rates to variables), accounts without repricing dates,
investment term of equity capital.
IRRBB Measurement
assumptions
 Institutions should use a variety of quantitative tools and models to measure the various aspects
of interest rate risk, taking into account the limitations of each tool
 An institution should be aware of the risks arising as a consequence of the accounting treatment of
transactions in the banking book (i.e. rules on hedge accounting)
IRRBB Measurement
methods
 Institutions should define their overall risk tolerance limits to IRRBB and to each of its sub-types
and components. The management body is responsible for setting and reviewing these limits
 Institutions should validate their IRRBB models and related IT systems by a suitably qualified and
independent function
IRRBB Governance
 Internal capital should be allocated to reflect any open IR positions within the banking book, taking
into account an institution’s risk appetite and the governance/control structure
 Internal capital should be calculated based of stated risk limits (not actually used risk limits)
IRRBB Capital
allocation

17
Compliance with the new regulations will require extensive adaptation work and dedicated resources
EBA underlying objectives Implications for the financial institutions
 Revise and overhaul their IRRBB measurement and management process by addressing currently identified
loopholes
 Establish a clear work plan with all the stakeholders (top management, risk, finance, compliance) prioritising quick
wins while planning medium and long term projects
 Anticipate for new regulation standards in term of harmonized risk calculation
adopt
IRRBB Scenario and
Stress-testing
 Adaption of IT systems and procedures for stress-testing IR
scenarios for the standardized outlier test and other scenarios :
non parallel shifts/tilts/changes in the shape of the yield curve,
historical scenarios, simulation of interest rate paths
 Review of the general stress-testing frameworks to
integrate IRRBB with other risks with proper estimation
of correlations & dependencies across multiple risk types
1
IRRBB Measurement
assumptions
 Adaptation of IR models and measurement procedures to
accommodate for changing behavioural assumptions (including
sensitivity analysis, back-testing of model results and conservation
margins)
 Development of appropriate pricing and risk mitigation
strategies
2
IRRBB Measurement
methods
 Adaptation of risk management systems to include different
measures of IRRB and its different components with both an
earnings perspective and an economic value perspective
 Compliance of banks’ accounting practices to the new
rules on IR hedge accounting contained in IFRS 9
following their expected transposition by the European
Commission in 2015 or 2016
3
IRRBB Governance
 Validation of IRRBB models should be included in the general
model validation framework and planning of the institutions
 Internal reporting procedures on IRRBB should be
formalized and management should be responsible of the
overall IRRBB governance process
4
IRRBB Capital
allocation
 Potential move of IRRBB from Pillar 2 to Pillar 1 (on-going
discussion between the industry and different regulators)
 Economic capital models should include capital charges
for IRRBB
5

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
4
Partie 4
Provisions & Reserves
IFRS 9

19
Improve accounting for financial instruments by amending the classification and measurement requirements and
adding a new expected credit losses model
The major change for the banking industry will be driven by the
impact the new EL impairment model
IFRS9 new forward looking expected loss impairment model
philosophy
 The IASB published the final version of IFRS 9 Financial Instruments in July
2014
 The new standard will come into effect on 1 January 2018 with early
application permitted
 The improvement introduced by IFRS9 includes:
1. A logical model of classification and measurement driven by cash flow
characteristics and the business model in which an asset is held. This
single, principle-based approach replaces existing rule-based
requirements that are complex and difficult to apply
2. A forward looking expected loss impairment model: During the
financial crisis, the delayed recognition of credit losses on loans was
identified as a weakness in existing accounting standards. IFRS 9
introduces a new, expected loss impairment model that will require
more timely recognition of expected credit losses
3. A substantially-reformed model for hedge accounting with enhanced
disclosures about risk management activity. The new model represents
a substantial overhaul of hedge accounting that aligns the accounting
treatment with risk management activities, enabling entities to better
reflect these activities in their financial statements
 What will the adjusted classification and measurement of asset lead to?
 Adjusted valuation methodologies
 Potential impacts on Balance Sheet and P&L
 What will the new expected loss impairment model lead to?
 New provisioning principles
 New models & provisioning methodologies
 Impact on provision stock and therefore the P&L
Objective :
smooth
effects of the
credit cycle
Objective :
Coverage of
know risk
Coverage of risks
Credit cycle(7 to 10 years)
Specific
provisionning
Collective
provisionning
Bottom of
provision
cycle
Peak of the
provision
cycle
Pro-cyclicity
Pro-cyclicity effect
mitigation
Floor (12-
months EL)
x
0 Time

20
Impacts on the financial institutions
Whether in terms of risk management or in terms of models & methodologies, the IFRS 9 impacts are significant
IFRS 9 will have 2 major impacts :
 A potentially negative impact on the stock of provision
 Reshape all current provisioning methodologies and models through new expected loss impairment models
Governance &
organisation
Risk management
Models &
methodologies
Action
Data & IT
 Impact on the current governance in terms of provisions management
• Will lead to a new governance at a group level aiming to manage more closely provisions at a
consolidated level and the potential links / impact on the capital allocation & management
 Impact on decision making process from the risk manager to the top
management for release / charge for impairment
 New
provisioning
principles and
associated
governance
 Increase of the stock of provisions, especially the new stock of provision for
the good book
 Impact of new asset valuation model on the balance-sheet
 Financial
planning
 Arbitrage
 Need of homogenisation of valuation & provisioning models
 Need of new expected loss impairment models
 Need of new valuations models
 New
methodologies
& model design
 “Historical information is always considered to be an important anchor or base
from which to measure expected credit losses”
 Provide accurate data for the process of valuation of assets and the expected
loss impairment models
 Reinforce data quality and management
 Data gathering
& cleaning
 Align IT
strategy

21
3 years to close the gap…
Risk management
Methodologies &
model design
IFRS9 underlying objectives Implications for the financial institutions
 Harmonisation of specific & collective
provisions variation
 The compensation of the fluctuations inherent
in specific provisioning
 Smooth the Cost of Risk over time
 Provision coverage rate optimization
 Better anticipation of crisis & economic trends
 Consistency with Basel II / III methodologies
 Design of models based on market best
practices and homogenisation within a group
 P&L Impact on Cost of Risk of the financial institution and
therefore the RoE, RoRWA
 Balance sheet adjustment (impact of asset valuation)
 Impact on prudential requirement including the solvency ratio (EL-
provision gap)
 Manage the increase of the stock of provision through financial
planning
 Arbitrage of provisions-consuming portfolios / counterparties
 Design of a dynamic provisioning model
• Consistency between collective / specific provisioning
• “independency vis-à-vis the economic cycle” = Through the cycle
provisioning
• Transparency / manageability
 Based on common principles, align all the methodologies & models
 Launch fist IRFS 9 impact analysis on provisioning level
 Establish a first estimate of the gap between current level and target level of provision
 Define provisioning principles at a Group level
 Map & segment the provisions
 Define the target modelling scope and the number / type of new models to design
adopt
1
2

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
5
Partie 5
True Sale Securitization
A leveraged approach for long-
term balance sheet performance

23
True Sale Securitization | A renewed hot topic for financial institutions
After some less appealing time, securitization is coming back
1
• The Originate-to-Distribute (OTD) model was deployed after 2008 across banks as
regulatory requirements pressured senior management to act on their (off) balance
sheet exposures. The expected benefits were initially:
• Deleveraging| For the originator, lighten the balance sheet and associated capital usage
• Diversification benefits| For the investor, access specific layers of risk and yields
• Regulatory pressure | For the regulator, less leveraged financial institutions under control
 Chappuis Halder & Cie Can help identify opportunities?
 We think the context of 2014/2015 should see the resurgence of TS securitization, as rating agencies are scrutinizing and investors are looking for yield across the curve.
 We can leverage our state-of-the-art Regulatory Watch and our first class accounting and CIB experience to identify efficient and bespoke TS Securitization opportunities
TS Securitization
backed by strong
rationale…
superseded as
rates
environment
subsided…
but is gaining
some momentum
with regional
specificities
• As market rates subsided and investors hesitated further on investing in ABS, other
vehicles were preferred to OTD, soon redefined as Originate-to-Hold:
• Covered bonds | Offered diversification opportunities for investors seeking asset recourse
in case of default
• Synthetic securitization | Namely via Total Return Swaps to relieve temporarily On and Off
balance sheet exposures. TRS offers a temporary transfer of risk to the swap counterparty,
obliging the original issuer in return to increase counterparty risk and taking back a future
asset on its balance sheet
• Market and regulatory environment favour a come back to TS Securitization
• US and Europe | European and US banks are deploying a new set of true sale
securitization, amid upcoming rate hike, accounting pressures, profit-making positions and
fast-approaching capital and liquidity metrics as well as a request for Asset Quality Review
from the ECB.
• Asia| Chinese regulators are now preparing to expand from WMP requiring no regulatory
approval to western-style securitization in the onshore market, including credit card and
auto-loan
2
1

24
True Sale Securitization | The strategic impacts of True Sale Securitization
A competitiveness vector in a cloudy market and regulatory environment
In today’s global regulatory environment (Basel III, BIS asset encumbrance, ECB’s AQR), banks are incentivized to
increase their capital buffers, be it for regulatory compliance or internal performance targets such as ROE, Liquidity
and funding cost.
• As opposed to synthetic securitization and covered bond issuances, a true sale
achieves an effective and full transfer of a bank’s (the originator) targeted pool of
selected assets from its balance sheet to a Special Purpose Entity.
• Although this technique is not new and was at the center of excessive risk
assimilation and transfer, the recent market levels, ahead of a potential US rate
hike, allow for asset sale at decent, possibly positive MtM.
• This activity allows to operate in compliance with global and local regulations, while
improving balance sheet performance and ROE.
An incentive to
deleverage
Impacts Description Key advantages
A need to improve
performance
A compelling
obligation to act
• Decreases asset encumbrance levels
 TS allows banks to decrease asset encumbrance levels and therefore the need for additional collateral.
 TS generates a virtuous funding circle as the cash generated from the true sale can be used to fund bank’s
activities and removes the need to use retained assets as collateral to source central bank funding.
• Reduces funding costs
 With less assets on balance sheet, the cost of funding is minimized as the need for collateral is lowered.
 This also removes the future risks of increased funding costs incurred in the event of a difficult access to
funding (downgrade, liquidity crisis, increased regulatory buffers…).
• Increases competitiveness
 Banks with lightened BS are more agile and can benefit from preferential funding costs as credit
worthiness is improved.
 Extra cash generated by the true sale can be reused to support other ailing businesses
• In periods of financial stress, when risk appetite falls sharply due to increased
counterparty risk and market conditions are stressed, assets are likely to be sold at
a discount (depreciated and illiquid).
• However, with a true sale, once assets have been securitized, the level of profits has
been locked in and cash is immediately available to the bank.
• Lightens bank’s balance sheet from non/low-performing assets,
long maturities, risks no more acceptable due to high capital
consumption or risk tolerance breach; an opportunity to
improve assets’ quality
• Means to source top quality and liquid equity capital, reducing
regulatory capital obligations, improving leverage, capital and
liquidity metrics
• Builds a less risky profile and reduces need for heavy
collateralization
• Reduces the total amplification of market volatility on the bank’s
balance sheet
• Reduces funding costs charge by treasury department on assets
• More agile and cost-effective businesses
• Central but also potentially regional / local, when necessary
• Positioning for the upcoming rate hike and fast-approaching
capital and liquidity constraints
• Locking in potential profits in a still low rate/vol environment
• Potential future legal constraints would hinder such risk transfer
An efficient technique for banks to turn these regulatory constraints into business opportunities is to raise
cash by selling assets held on balance sheet via TS securitization

25
True Sale Securitization |Disruptive approach for a lasting effort
“Regulators look ahead to 'Basel 4'”
 ECB aims to complete the AQR task before it takes
over direct responsibility for supervision of significant
banks from 4 November 2014
 EBA’s CRR/Basel III milestone for early 2015
• Introduction of the LCR: Initial introduction of the
Liquidity Coverage Ratio (LCR), with a requirement of
60%. This will increase by ten percentage points each year
until 2019.
• Leverage ratio, Parallel run II: The leverage ratio and its
components will be tracked and disclosed but not
mandatory.
• Minimum capital requirements: Higher minimum capital
requirements are fully implemented.
 Uncertainty about future market conditions makes it
worth implementing in the nearest future.
Change drivers Urgency
Performance
Regulatory
True Sale
Securitization

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
6
Partie 6
Asset Quality Review
A challenge still in stake

27
Model Quality Review : Consequences of the asset quality review exercise
1 2
MQR’ purpose will be to homogenise the credit risk
models … by complying the EBA’ recommendations
• This regulation will suggest a common guidelines to assess the
compliance of the Basel 2 models management
• It would aim at enhancing the transparency across the quality
of models procedure and risk management by assessing four
major components:
• Data quality | Analysing data’ pertinence in the models
design
• Guidelines| Homogenization of the models compliance
assessment (within Basel 2 regulatory requirements)
• Crisis anticipation| To have robust models which will
respond to crisis’ hypothesis
• Consistency of the European banks’ processes | To assume
a common and compliant risk management through the
different banks of the European Union
• The models compliancy will be assessed based on the review of
a set of dimensions :
1 2 3 4
1. Portfolio coverage
2. Internal governance
3. Methodology
4. Risk management
5. Internal ratings system
6. Capital equity
Cost of impact- +
 What will be the scope of banks for the models review ?
 The IRB-A compliant banks and the ongoing certification banks
 What the models compliance will lead to ?
 The overall models compliance will allow to assess the suitability of the Basel 2 models across institutions and thus, the optimal Risk Weight estimation

28
Model Quality Review
The ongoing challenge for the European banks
Even the IRB-A’ banks will have to prove the relevancy of their models and the adequacy of the risk management
Governance
Data quality and
management
Methodology
Action
Capital equity and
prudence margin
 The internal and external validation processes as well as the provided documents,
certifications reports and follow-up will be challenged
 A referential of all the validated models (and ongoing validation models) will be
monitored
• The “no compliance” of the banks’ governance should implied limits in the models
validation status
 Adjust internal
governance
 A road map of all the
Basel models
 Following the AQR, the risk management should monitored the different steps of the
modelling data feed
 The focus will also be done on the specifics treatment for the model construction and
the pertinence of the whole Basel 2 indicators calculation process
• An inadequacy data process will imply a huge work of adjustment and modifications
for banks
 Homologate the data
feed process
 Assess the suitability of
regulatory indicators
(impacting the RW)
 The models methodology will reveal the capacity of the banks to use a relevant and
Basel 2 compliant model to estimate the credit risk
 An inadequacy of the methodology (comparing to the European benchmark and
guidelines) will lead to a weak in the RW estimation
• The banks will have to update their methodology if using specific one (not
compliant with the best practice)
 Homogenise and
improve the
methodology (internal
models)
 Identify the limits
 Additionally to the re-estimation of the Basel 2 parameters (in case of inadequacy of
the models or methodologies), the challenge for the banks will also be to keep in line
with the global benchmark of prudential margin
• An underestimate prudential margin will lead to a re-estimation of the RW and
thus, the capital equity
 Adjust the RW
 Measure the impact on
the capital equity

29
Approach & challenges for the banks
How to be prepared ?
MQR| How to be
prepared ?
Methodologies &
models
EBA underlying objectives Implications for the banks
Control & processes
 The availability of a global governance framework in the
bank and its subsidiaries will provide the high level of Basel
2 compliancy and transparency
 The suitability of each validation steps will assess the
stability of the models’ robustness and reinforce the clients
confidence
 A global methodology of models deployment will be a
guarantee to the Basel compliance of the banks
 The identification of the banks exemption to the global
methodology will be measured and supervised
 An adequacy of the RW estimations (PD, LGD & CCF)
 An optimal prudence margin assessment
 A benchmark of RWA density for all the banks
 To summarize and update the relevant documents
 To prepare the suitability of the RW estimation
process
 To expose the action plan, alerts and adjustment
planned in the whole RW estimation process
 Challenge of all deviations, exceptions, exemptions
validated by the local regulator so far
 To monitor the models’ robustness and adaptability
within the economic cycle reality
 To monitor within a long cycle the credit risk level
and thus to ensure the optimal prudence margin
(adjustment…) of the RW estimation
 This review will follow the AQR’ results planned in Autumn’ 2014. The limits revealed by the AQR’ review will
highlight the focusses point for the MQR exercise
 The huge work can be done as a pre-request
 The information to provide and the tests to proceed can be listed and done as of today (for a better anticipation)
adopt
1
2
3

AGENDA
RWA
Benchmarki
ng | Art. 78
Securitizati
on True
Sale
IFRS 9 |
Provisions
Model
Quality
Review &
Post AQR
SREP |
ICAAP |
ILAAP
IRRBB
APPENDICES

31
Appendix
SREP
A. SREP Framework
B. Overall SREP Score presentation

32
SREP Framework
A – Categorisation of institutions
B – Monitoring of key indicators
C – Business model Analysis
D – Assessment of internal
governance and institution-
wide controls
F – Assessment of risks to
liquidity & funding
E – Assessment of risks to
capital
Assessment of inherent risks and
controls
Determination of own funds
requirements & stress testing
Capital adequacy assessment
Assessment of inherent risks and
controls
Determination of liquidity
requirements & stress testing
Liquidity adequacy assessment
G – Overall SREP assessment & Overall SREP score
H – Supervisory measures
Other supervisory measuresQuantitative liquidity measuresQuantitative capital measures
I – Early intervention measures

33
SREP Score presentation
Risks to liquidity and
funding scores
Credit score
Market score
Operational score
Interest rate score
Risks to capital scores
Overall SREP score
SREP liquidity
Additional own funds
Macro-prudential
requirements
TSCR and OCR
economic cycle
SREP Capital score
leverage
Liquidity risk score
Funding risk score
Funding & liquidity
adequacy
Overall assessment of
liquidity
Identification of
specific liquidity req.
Quantification of
Articulation of
Governance
framework
Corporate and risk
culture
Orga and functioning
of the Mgt body
Remuneration
policies and practices
Governance score
2
Business environment
Business model
Strategy and financial
plans
Business model
viability
Business model
score
1
Sustainability of the
strategy
Sustainability of the
strategy
Risk management
framework
Internal control
framework
IS and business
continuity planning
Recovery planning
Capital Liquidity & Funding
3 4

34
Appendix
IRRBB
A. Alternative methods for IRRBB measurement
B. Key challenges and success factors of a stress-testing exercise

35
Earningmeasures
Quantitative tools
and models
Appendix 1 | Tools for measuring different components of IRRBB
Source : EBA/CP/2013/23
Economicvaluemeasures
Earnings at risk
Modified
duration
of equity and
PV01 of equity
Partial modified
durations and
partial PV01
Effective
duration of
equity
Capital at Risk
/ Economic
Value of
Equity
Capital at Risk
/ Economic
Value of
Equity
Description Advantages and limitations
 Repricing risk
Potential risk types
 Repricing risk
 Yield curve
 Basis risk
 Option risk
 Repricing risk
 Yield curve risk
 Repricing risk
 Option risk
 Repricing risk
 Yield curve
 Basis risk
 Option risk
 Repricing risk
 Yield curve
 Basis risk
 Option risk
Gap analysis measures the arithmetic difference between the nominal amounts of
interest-sensitive assets and liabilities of the banking book in absolute terms. It
allocates all relevant interest-sensitive assets and liabilities into predefined time
bands according to their next contractual repricing date or behavioral assumptions
regarding the maturity
 Simplicity
 Static model that does not take account of the interest
sensitivity of the optionality parameters
 Yield curve and/or basis risk cannot be analyzed adequately
EaR measures the loss of net interest income over a particular time horizon (1y/5y) resulting
from interest rate movements, either gradual or as a one-off large interest rate shock. EaR is
the difference in net interest income between a base scenario and alternative scenario. With
properly designed comprehensive stress test scenarios it is a dynamic method that takes
account of all components of the interest rate sensitivity
 Analyze the interest rate risk profile of the banking book
 Good indication for the short-term effects of convexity and yield curve
risk
 Highly sensitive to assumptions about customer behavior and
management responses to different scenarios
 Changes in earnings outside the observation period are ignored
Modified duration shows the relative change in the market value of a financial instrument
corresponding to marginal parallel shifts of the yield curve.
PV01 of equity expresses the absolute change of the equity value resulting from a one basis
point (0.01%) parallel shift of the yield curve
 Analyze the economic value impact of a given change in interest rates
relating to a particular class of assets and liabilities or the balance
sheet as a whole
 Large movements in interest rates can’t be measured accurately
 Does not take account of the interest sensitivity of the optionality
parameters.
These partial measures show the sensitivity of the market value of the banking book to a
marginal parallel shift of a yield curve in particular maturity segments. To each sub-portfolio’s
partial measure a different magnitude of a parallel shift can be applied by which the effect of
the change of the shape of the yield curve can be computed for the entire portfolio.
 Analyze the impact of the changes of yield curve shapes on the
economic value of the banking book
 Only applies to marginal shifts of the yield curve within each segment
 Does not take account of the interest sensitivity of the optionality
parameters
Effective duration measures value changes due to marginal parallel shifts of the yield curve. An
example is the modified duration that additionally arises from the interest rate sensitivity of
embedded optionality.
 Analyze the economic value impact of a given change in interest rates
taking account of the option risk
 Only applies to marginal shifts of the yield curve within each segment
CaR/EVE measures the theoretical change in the net present value of the balance sheet and
therefore of its equity value resulting from an interest rate shock. Account needs to be taken
of the fact that size and timing of the cash flows may differ under the various scenarios as a
result of customer behaviour. This measure is designed to account also for basis risk and it can
estimate the long-term effect of a change of a yield curve shape if alternative scenarios are
adequately designed.
 Comprehensive measure of interest rate risk that takes account of all
components of interest rate risk.
 Heavily dependent upon assumptions made as to timing of cash flows
and the discount rate used.
 The method may underestimate the short-term effect of convexity
and yield curve risk on the solvency of the institution.
The VaR method measures the expected maximum loss of market value that can be incurred
under normal market circumstances over a given time horizon and subject to a given
confidence level. The VaR approach covers three different techniques: Historical simulation,
Variance-covariance matrix and Monte Carlo simulation.
The extent to which different interest rate risk types are measured depends on the model
design and scenarios used.
 Takes account of the historical volatility of prices, interest rates and
diversification effects in or between portfolios or balance sheet
positions
 Does not adequately cover the tail risk
 Method less appropriate for portfolios with high optionality
 Very demanding in terms of technology and computation.
Static models Dynamic models
Gap analysis

36
Successful
completion of
a stress-testing
process
Data, systems &
disclosures
Project
implementation
Resources and
capabilities
Methodology
Governance &
communication
 The limited period allowed for the
exercises, require a very efficient project
management to meet regulatory tight
deadlines
 Tasks need to be clearly defined,
streamlined and rigorously monitored
 Supervisors assess results as well as the
way they are produced
 Completeness, consistency (e.g.
finance vs. risk data) and (more
importantly) quality
 Massive data from different sources
 Compliance with stress test
requirements (e.g. AQR results used
as inputs)
 Consistency with external
definitions (e.g. EBA definitions) and
accounting principles in force
 Heavy documentation, flexibility to
answer additional data requests
from supervisors
 Stress-testing is a very burdensome process..
Recent CCAR exercises suggest that banks will
need more people dedicated to the process
 The increased complexity and scope require a mix
of quantitative, financial, IT and/or economic
skills  Excellent capacity for the analysis of
regulatory guidelines and identify which texts
apply to the bank
 Flexibility in incorporating new approaches in
ST framework is key
 Optimize internal modeling since supervisors
increasingly rely on internal models and assess
their quality
 Translate macro-scenarios into risk factors
 Leverage on benchmark
 Detailed documentation of modeling
approaches used by the bank
 More integrated approach across
all areas and business lines of the
bank (front office, finance, risk, etc.)
 Board and senior management
need to be involved in the
development and operation of the
stress-testing : close oversight and
communication throughout the
process
Failure to pass the tests, and the way to process the stress exercise, can lead to an unexpected
impact on the firm’s reputation vis–à-vis the market or investors
Appendix 2 | Key challenges and success factors of a stress-testing process

37
Project
Implementatio
n/Governance/
Resources
Scenarios
Results/
Documentation
Data
Risk modeling
• What processes? How to ensure involvement of the top management in the end-to-end
process?
• What is the optimal mix of competences?
• What coverage of risks? Which portfolios? Which entities?
• What scenarios to be used? At which level of severity? What is the planning horizon?
• What models? What parameters to be stressed? How to translate macro-scenarios into
risk factors? What level of sophistication? How to value capital impact?
• How to leverage on existing documentation? What are the new requirements?
• How to align the task of documentation with actual performance of the test? How to dot it
on time ?
• What data are necessary inputs for scenarios and stress-tests? How to respond to
additional data requests from regulators?
• What level of industrialization achieved by implementing (or not) a stress library?

38
Successful
completion of
a stress-testing
process
Data, systems &
disclosures
Project
implementation
Resources and
capabilities
Methodology
Governance &
communication
 The limited period allowed for the
exercises, require a very efficient project
management to meet regulatory tight
deadlines
 Tasks need to be clearly defined,
streamlined and rigorously monitored
 Supervisors assess results as well as the
way they are produced
 Completeness, consistency (e.g.
finance vs. risk data) and (more
importantly) quality
 Massive data from different sources
 Compliance with stress test
requirements (e.g. AQR results used
as inputs)
 Consistency with external
definitions (e.g. EBA definitions) and
accounting principles in force
 Heavy documentation, flexibility to
answer additional data requests
from supervisors
 Stress-testing is a very burdensome process..
Recent CCAR exercises suggest that banks will
need more people dedicated to the process
 The increased complexity and scope require a mix
of quantitative, financial, IT and/or economic
skills  Excellent capacity for the analysis of
regulatory guidelines and identify which texts
apply to the bank
 Flexibility in incorporating new approaches in
ST framework is key
 Optimize internal modeling since supervisors
increasingly rely on internal models and assess
their quality
 Translate macro-scenarios into risk factors
 Leverage on benchmark
 Detailed documentation of modeling
approaches used by the bank
 More integrated approach across
all areas and business lines of the
bank (front office, finance, risk, etc.)
 Board and senior management
need to be involved in the
development and operation of the
stress-testing : close oversight and
communication throughout the
process
Failure to pass the tests, and the way to process the stress exercise, can lead to an unexpected
impact on the firm’s reputation vis–à-vis the market or investors

39
Appendix
IFRS 9
A. Classification and measurement
The classification and measurement approach
B. Expected loss impairment model
Overview of the impairment requirements
C. Hedge accounting
Fundamental review of hedge accounting Aspects reconsidered

40
The classification and measurement approach
 IFRS 9 applies one classification approach for all types of financial assets, including those that contain embedded derivative features.
Financial assets are therefore classified in their entirety rather than being subject to complex bifurcation requirements
 Two criteria are used to determine how financial assets should be classified and measured:
a) the entity’s business model for managing the financial assets; and
b) the contractual cash flow characteristics of the financial asset
Process for determining the classification and measurement of financial assets
Held to collect contractual
cash fl ows only?
Instruments within the
scope of IFRS 9
Contractual cash flows are solely
principal and interest?
Fair value option?
Fair value through
profit or loss
Amortised
cost
Fair value option?
Fair value through other
comprehensive income
YES
NO
YES
YES YES
NO
YES
NO
NO
NO
Held to collect contractual
cash flows and for sale?
Classification and measurement 1

41
Overview of the impairment requirements
 As soon as a financial instrument is
originated or purchased, 12-month
expected credit losses are recognised
in profit or loss and a loss allowance
is established
 This serves as a proxy for the initial
expectations of credit losses
 For financial assets, interest revenue
is calculated on the gross carrying
amount (ie without adjustment for
expected credit losses)
Stage 1
Impairment
recognition
Interest
revenue
12-month
expected
credit losses
Effective interest
on gross carrying
amount
Stage 2
 If the credit risk increases
significantly and the resulting credit
quality is not considered to be low
credit risk, full lifetime expected
credit losses are recognised
 Lifetime expected credit losses are
only recognised if the credit risk
increases significantly from when the
entity originates or purchases the
financial instrument
 The calculation of interest revenue
on financial assets remains the same
as for Stage 1
Lifetime
expected
credit losses
Effective interest
on gross carrying
amount
Stage 3
 If the credit risk of a financial asset
increases to the point that it is
considered credit-impaired, interest
revenue is calculated based on the
amortised cost (ie the gross carrying
amount adjusted for the loss
allowance)
 Financial assets in this stage will
generally be individually assessed
 Lifetime expected credit losses are
still recognised on these fi nancial
assets
Lifetime
expected
credit losses
Effective interest
on amortised cost
Description
Expected loss impairment model 2

42
Fundamental review of hedge accounting Aspects reconsidered
Hedge
accounting
Objective
Alternatives to
hedge
accounting
Hedged items
Presentation
and
disclosure
Hedging
instruments
Groups and net
positions
Effectiveness
assessment
Discontinuation
and rebalancing
Hedge accounting 3

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