Panel I: Credit Risk

Panel I:

RWA

=

RWA

The proposed changes to the IRB approaches aim to:

1. reduce complexity, and improve comparability

2. address excessive variability in the capital requirements

Reducing variation in CRWA

Reducing variation in CRWA

Constraints on the use of internal model approaches

Proposes:

•

To remove the option to use IRB approaches for certain exposures

•

To reduce variability in (RWA) for portfolios where the IRB

approaches remain available

Revisions to the SA for Credit Risk

•

2

CD/ Dec. 2015, Comments by 11 March 2016

•

Objectives:

1. To balance simplicity and risk sensitivity

2. To promote comparability by reducing variability in RWA

3. To ensure that SA is a suitable alternative & complement to the IRB

Current SA: what is the problem?

Mechanistic reliance on External assessor: ECAI

• 1st _{CD: remove references to external ratings/2 risk drivers} • Overly complex, insensitive to specific risks

• 2nd _CD:

• reintroduce ratings: Countries that allow use of ratings for reg. purposes

• alternative approaches: Countries that don’t allow ratings for reg. purposes

Proposed Revisions

1. Exposures to banks

2. Exposure to Corporates (

Specialized lending)

3. Subordinated debt, equity & other Capital instruments 4. Retail portfolio

5. Real estate exposure class (

RRE, CRE, ADC)

7. Defaulted exposures 8. MDB’s

•

241 banks from 27 countries

• 30 G-SIB’s

• 92 were Group 1 banks

• 119 were Group 2 banks

•

300 QIS templates submitted for the 2015 Basel data collection exercise:

• 242 provided data for the analysis and

• 153 were from Europe

QIS on the 1

CD: data as of 31/12/2014

QIS on the 1

CD: overall results

Panelists

Mrs. Sahar El-Damaty:

• Deputy executive Director & Board member

• Chief Risk Officer (CRO)

• Emirates NBD - Egypt

Mr. Khaled Abdel Samad:

• Lebanon & Golf Bank (LGB)

Mr. Bashir Yakzan:

• Chief Risk Officer (CRO)

Currency mismatch

Currency of the loan is different from that of the borrower’s main source of income

• 1st _{CD: retail & RRE}

• 2nd _{CD: more broadly}

Unhedged exposure:

• borrower that has no natural or financial hedge against FX Risk arising from currency mismatch

Off-balance sheet exposures: UCC

Ex.: unused balances

• 1st CD: all CCFs should be greater than 0%. Proposal is 10%.

• Respondents:

• Will adversely affect lending and economic growth, 0% CCF more appropriate

• 10% CCF would be particularly unjustified for the corporate segment, loans are closely monitored and banks could reduce such credit lines immediately.

• Supervisors note that:

• Consumer protection laws, risk management capabilities, reputational risk or other factors appear to constrain banks’ ability to cancel such commitments in practice.

• Many of the commitments assigned to this category may only be cancelled subject to certain contractual conditions (therefore, they are not really unconditionally cancellable).

• New proposal: CCF between 10% and 20% for retail, and all non retail will be higher (general commitments)

Retail exposures

• 4 potential risk drivers to increase granularity:

(a) debt-service coverage ratio

(b) secured vs unsecured exposures (c) maturity of the exposure

(d) length of the relationship with the customer.

• Analysis revealed that options (b) & (d) were clearly superior to (a) & (c)

• Option (b) was the best performing driver on the basis of the evidence observed

• definition of “secured” vs “unsecured” was not specifically defined for QIS purposes, the submissions might not be entirely comparable.

Banks and Retail Class

Mr. Khaled Abdel Samad:

• Chief Risk Officer (CRO)

Corporate exposures

•

1

CD:

• No ratings

• Risk drivers are leverage and revenues ,

• RW’s (60% - 300%)

•

QIS results:

• unrated corporates are dominant (SMEs & non-SMEs)

• Leverage behaved reasonably well compared to PDs

Specialized Lending exposures

•

1

CD:

•

to align the SA with the IRB

by introducing the IRB’s five subcategories

•

the higher of a 120% RW and the RW of the counterparty:

- Project finance

- Object finance

- Commodities finance

- IPRE finance

•

the higher of a 150% RW and the RW of the counterparty:

- Land acquisition,

- Development and construction finance.

Corporate exposures

Mrs. Sahar El-Damaty:

• Deputy executive Director & Board member,

• Chief Risk Officer (CRO)

Real Estate Loans & Regulatory Capital

• Under Basel I

•

CRE

RW 100%

•

RRE

RW 50%

•

Under Basel II

• RRE & CRE: RW based on Collateral not Counterparty

• Under Basel II's SA,

• RRE RW 35%

• Substantial margin of additional security over the loan,

• Strict valuation rules for the property.

• CRE RW 50%,

• exception, and subject to specific and strict operational requirements.

21

2014 CP

•

maintained distinction : RRE & CRE

•

introduced 2

specialised lending

subcategories:

• income-producing real estate (IPRE) and

Treatment of RRE in the CP 2014

RW (from 25% to 100%) based on 2 risk drivers:

1. loan-to-value (LTV) ratio; and

2. debt servicing coverage (DSC) ratio,

RRE: Responds

• QIS results show:

• PD & LGD tended to correlate closely to the LTV ratio.

• DSC ratio was found to be:

• a relatively good discriminator of risk for the exposures

• concerns about the consistency of its definition

Commercial real estate

• Empirical evidence from the QIS is not conclusive as to the CRM benefits of commercial real estate as collateral,

• Results suggested that LTV ratios – within a conservative range – may be appropriate for risk weighting methodology for commercial real estate.

Real Estate exposures

Mr. Bashir Yakzan:

• Chief Risk Officer (CRO)