Basel III Liquidity Risk Compliance and Stress Testing Approaches and Best Practices
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Basel III Liquidity Risk Compliance and Stress Testing Approaches and Best Practices 因應 因應 因應 因應Basel III 流動性風險合規和壓力測試之對策與實務 流動性風險合規和壓力測試之對策與實務 流動性風險合規和壓力測試之對策與實務 流動性風險合規和壓力測試之對策與實務 For Taiwan Academy of Finance and Banking 台灣金融研訓院 11 Aug 2014 潘 潘 潘慰 慰 慰游 游 游, PAN Wei You, 总监,風險管理解決方案案團隊主管 (大中華區) FRM, PMP, SCEA, [email protected]
Basel III Liquidity Risk Compliance and Stress Testing Approaches and Best Practices
1. Basel III Liquidity Risk Compliance and Stress Testing
Approaches and Best Practices Basel III For Taiwan Academy of
Finance and Banking 11 Aug 2014 , PAN Wei You, FRM, PMP, SCEA,
[email protected]
2. Agenda 1. Basel III Liquidity Risk Overview 2. Challenges of
Basel III Liquidity Risk Compliance 3. Best Practices in Managing
the Compliance Challenges 4. Conclusion Enterprise Risk Solutions
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3. Agenda 1. Basel III Liquidity Risk Overview 2. Challenges of
Basel III Liquidity Risk Compliance 3. Best Practices in Managing
the Compliance Challenges 4. Conclusion Enterprise Risk Solutions
3
4. Basel III Liquidity Risk Ratios Liquidity risk ratios : A
short term ratio (LCR) with a 30 days time horizon : Liquidity
Coverage Ratio = Stock of High Quality Liquid Assets Total Net cash
outflow over 30 days 100% A long term ratio (NSFR) with a 1 year
time horizon relying on regulatory factors Enterprise Risk
Solutions Net Stable Funding Ratio = Available stable funding
Required stable funding 100% defined for stress test scenarios
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5. Agenda 1. Basel III Liquidity Risk Overview 2. Challenges of
Basel III Liquidity Risk Compliance 3. Best Practices in Managing
the Compliance Challenges 4. Conclusion Enterprise Risk Solutions
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9. Basel Credit Risk Challenges What if we have multiple
ratings for the same issue eg. AA-, A-, BBB+, BBB ??? 3 Enterprise
Risk Solutions 9 Reference : 5. -
12. Multiple Regulatory Compliance National Discretions
National Discretions Example : HQLA Eligibility Comparison HQLA 2B
TW Eligibility SG Eligibility HK Eligibility RMBS Case by Case
Common Equity Different Eligibility or Factors due to National
Discretions eg. HQLA example above Different Applicability of Rules
eg. banks classified into different tiers (FED, HKMA, MAS, CBRC,
etc) Simplified Rules eg. TW Stable Deposits definition for 3% and
5% runoff Additional Rules eg. APRA Less Stable Deposits scorecard
approach to determine 10% and 25% runoff Higher Benchmark eg. FED
Peak Cumulative Net Cash Outflow Other Differences Enterprise Risk
Solutions 12
13. MAS Foreign Bank Branch Compliance MLA Minimum Liquid
Assets Enterprise Risk Solutions 13
14. HKMA - Foreign Bank Branch Compliance For Foreign Bank
Branch, the inclination is towards qualitative considerations -
HKMA considers it appropriate to adopt an approach that focuses
more on the qualitative elements (including the home factors) in
determining the classification status of FBBs. Ref : Consultation
Paper Implementation of Basel III Liquidity Standards in Hong Kong
(L3) Adequacy of home jurisdiction liquidity requirements Group
compliance with home jurisdiction liquidity requirements Global
liquidity risk management system Effective home-host
information-sharing arrangements Enterprise Risk Solutions 14
16. BCBS vs TW : Different Deposit Runoff Rates Enterprise Risk
Solutions 16
17. BCBS Stable vs Less Stable Deposit Data Challenges
Established Relationships depositor and account based analysis How
many type of banking relationship ? How long has been for each
relationship ? How long has the account be dormant or inactive ?
Enterprise Risk Solutions Transactional Accounts account based
analysis Funds receive on regular basis ? Eg. Salary account
automatically deposited ? Used for payments on regular basis ? Eg.
bill payments ? Number of transactions monthly ? 17
18. Regulatory Compliance Changes and Time Pressures Enterprise
Risk Solutions 18
20. Stress Testing and Scenario Analysis Stress tests and
Scenario Analysis help banks to identify and quantify exposures to
risks and also impacts on cashflows, liquidity position,
profitability and solvency. BCBS requires internal stress test
beyond LCR stress scenarios. Internal stress tests allows
incorporate of banks construct their own stress scenarios and for
longer time horizon. Besides historical stress events, regulators
may require banks to consider the impact of portfolios changes,
customer behavior changes and other potential risks. US FED
liquidity stress test requirement for qualifying BHO and FBO
Monthly stress test Cash flows, liquidity profile, profitability,
solvency Overnight, 30d, 90d, 1y, custom horizons (driven by
business model) Adverse, combined, idiosyncratic and custom
scenarios (driven by business model) Enterprise Risk Solutions
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21. Challenges of Stress Testing and Scenario Analysis Stress
Testing Approach ? Scenarios Design ? Behavior Model ? Data
Availability ? Enterprise Risk Solutions System and Infrastructure
? 21
23. Operational Challenges Daily LCR BCBS recommended Min
Monthly and Weekly or Daily LCR regulatory reporting in times of
stress BCBS requested LCR reporting using Daily Averages over
financial reporting period (eg. quarterly or semi-annually) Global
trend on practicing Daily monitoring and compliance Daily LCR
Monitoring : For example - Singapore MAS Enterprise Risk Solutions
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24. U.S. Financial Industry - Operational Challenges Collect
Daily Collect extensive data to classify Classify counterparties
Alter current deposit systems to determine Enterprise Risk
Solutions 24 Contractual Cash Flow operational and non-operational
deposits based on various definitions coverage by deposit insurance
on daily basis Reference: 20140519 Joint Trades Comment Letter on
LCR Daily Calculation Requirement
25. Agenda 1. Basel III Liquidity Risk Overview 2. Challenges
of Basel III Liquidity Risk Compliance 3. Best Practices in
Managing the Compliance Challenges 4. Conclusion Enterprise Risk
Solutions 25
26. Data Granularity and Quality Management Best Practices Data
Granularity and Consolidation Data Quality Team Data Quality
Improvement Process Data Quality Management Tool Enterprise Risk
Solutions 26 Liquidity Credit Risk ALM
27. Liquidity Risk Indicators Computation Best Practices Cash
Inflow, Outflow Classification and Factors Retail, Wholesale,
Stable vs Less Stable, Operational vs Non-Operational, Derivatives,
etc HQLA Eligibility, Classification and Haircuts Rules Level 1,
2A, 2B, Haircut , Caps and Adjustments Home/Host Rules Enterprise
Risk Solutions 27 Management Granular Liquidity Cashflows
Asset/Liability, Off-Balance Commitments and Derivatives Principal
vs Interests Daily Cashflows Generation Basel II/III Credit Risk
Framework Counterparty Type, Rating/PD, Country, Aggregated
Exposure, etc Daily Risk Weight Calculations Account and
Transaction Characteristics and Operational Requirements Data
28. Compliance Rules Management Best Practices Make use of a
systematic and transparent management approach Train up a team with
risk, compliance and system knowledge Build a cooperative structure
within bank HQ, Subsidiaries and Branches for compliance Enterprise
Risk Solutions 28
29. Stress Testing and Scenario Analysis Best Practices Country
Outlook Macroeconomic Context Risk Factors Outputs Risk Maps
Scenarios Creation Enterprise Risk Solutions Behavior Models Assets
(Modeled) Assets (Non Modeled) Liabilities (Modeled) Liabilities
(Non Modeled) Off balance Sheet (Modeled) Off balance sheet (Non
Modeled) Mild Moderate Severe Market Institutional Combined Balance
Sheet
30. Scenario Design ( Example- Risk Maps Bank Specific )
Concern (Solvency) Regulatory Concern Retail Depositors Large
withdrawal Large Interest Rate Early Warning Indicators Internal
Risk and Profitability Indicators No rollover Enterprise Risk
Solutions Bank Credit Downgrade Corporate Depositors Withdrawal of
Funds Rollover less than 50 -70% Rollover more than 70%
32. Multiple Regulator Reporting Best Practices Enterprise Risk
Solutions 32
33. Report Compliance Audit Best Practices Enterprise Risk
Solutions 33
34. Strategy Refinement for Compliance and Profitability
Enterprise Risk Solutions 34
35. Agenda 1. Basel III Liquidity Risk Overview 2. Challenges
of Basel III Liquidity Risk Compliance 3. Best Practices in
Managing the Compliance Challenges 4. Conclusion Enterprise Risk
Solutions 35
36. Conclusion New Era for Liquidity Management Liquidity
management is now part of Basel regulatory indicators framework.
This triggers a new wave for managing Basel compliance challenges
and implied business challenges for ALM team and banks. Multiple
Challenges Posed By Basel III Liquidity Management New
considerations and challenges : credit risk, multiple regulatory
compliance, operational and the associated data requirement and
will be worsen by daily LCR Enterprise Risk Solutions reporting
requirements. Stress Testing and Scenario Analysis Key to managing
liquidity risk and balancing profitability expectations. Should be
an at the forefront of banks liquidity risk management strategy.
Addressing Basel III Liquidity and Stress Testing Challenges Employ
industry best practices of integrating liquidity and credit data,
risk calculation processes and stress testing/scenario analysis
into a common platform to manage the new compliance and induced
profitability challenges. 36
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