Introduction to Basel 2 Tartalom n Bzel III

Introduction to Basel 2 Tartalom n Bázel III. bevezetés, ICAAP n Tőkekövetelmény kalkuláció n Tőkemanagement Slide 1

Introduction to Basel 3 Bázel III keretrendszer FINANCIAL STABILITY Pillar III Minimum Capital Requirements Supervisory Review Process Market Discipline Capital requirements for … Credit risk - Standardized Approach - Foundation IRB Approach - Advanced IRB Approach Market risk - Standardized Approach - Internal Va. R models Framework for banks (ICAAP*) - Capital allocation, including - Risk management Supervisory framework (SREP**) - Evaluation of internal systems of banks - Assessment of risk profile - Monitoring of compliance with all regulations - Supervisory measures Operational risk - Basic Indicator Approach - (Alternative) Standardized Approach - Advanced Approaches * ICAAP = Internal Capital Adequacy Assessment Process Slide 2 **SREP = Supervisory Review and Evaluation Process Disclosure requirements for banks - Transparency for market participants concerning the bank's risk position (scope of application, risk management, detailed information on own funds, etc. ) - Enhanced comparability among banks

Introduction to Basel 2 ICAAP elvek Az ICAAP I. minden intézményben kötelezően előírt, hogy folyamattal, mérésekkel nyomon követhető legyen a kockázati profil II. az intézmény felelőssége (saját módszertanok MNB elfogadás mellett megengedettek) III. specifikált és dokumentált, az intézmény managementjének felelőssége ennek elvégzése (ICAAP committee) IV. rendszeresen felülvizsgálatra kell, hogy szoruljon V. kockázat alapú. VI. forward-looking / előretekintő VII. Része lehet kalkuláció, process VIII. Célja a különböző kockázattípusok és tőkemegfelelési elvárások vizsgálata Slide 3

Introduction to Basel 3 Kockázattípusok Slide 4

Introduction to Basel 3 Pillar 2 (ICAAP) I. Regulatory requirement: Ensuring sufficient capital coverage for the overall bank risk exposure The principle of proportionality: Size and complexity of business is relevant The implementation of ICAAP requires severe changes and a good information base Internal capital Emergency plans Pillar 2 ICAAP Documentation Risk strategy Stress tests Processes ICAAP complexity Overall risk position Accuracy of supervisory review Risk bearing ability Double proportionality Risk allocation Size of bank u. Given the size and the complexity of RBI Group, the use of „advanced risk methods“ is mandatory u. The use of regulatory procedures can only be considered as an interims solution The ICAAP focuses on the bank‘s internal perspective Slide 5 Complexity of business

Introduction to Basel 3 Pillar 2 (ICAAP) II. Capital training 2 nd part: Calculation methods 2012. 08. 10 Slide 6

Introduction to Basel 3 Tartalom n Bázel III. bevezetés, ICAAP n Tőkekövetelmény kalkuláció n Tőkemanagement Slide 7

Introduction to Basel 3 Summary of Basic Terms 2/1 n Várható veszteség (Expected loss): n Expected loss in 1 y based on long run estimation n Should be covered by provision (the difference has effect on own funds) n Capital requirement: n To cover unexpected losses on 1 y time horizon n Pillar 1 - Regulatory Capital Requirement (RCR): strictly defined - RWA = RCR*12, 5 n Pillar 2 - Economic Capital (EC) – liquidation perspective - Loss Va. R 99% - going concern (enough capital buffer to absorb losses at 99%) n SREP: between 100%-200% * RCR n Capital available for loss absorption n Pillar 1: Own Funds (OF) n Pillar 2: • Internal Capital (IC) – liquidation perspective • Risk Taking capacity (RTC) – going concern (capital buffer above 8% capital adequacy) n SREP: ~ pillar 2 n Capital adequacy ratio (CAR) n Pillar 1: OF / RWA n Pillar 2: IC / EC * 8% (RTC – LVa. R 99%) n SREP: IC / SCR * 8% (bottle neck!) Slide 8

Introduction to Basel 3 Basel logic: the one year loss function n To understand the impact of some tricky one-offs, it is necessary to understand ”The B 2 big picture”: 2 important elements of Own Funds: Ytd profit Expected Loss Capital Requirement Provision – EL Total Own Funds Frequency Unexpected Loss @ 99. 9% conf. level Capital Requirement Req. for 8% n CAR=8% means: Total own funds do not cover losses above EL occur once in 1000 years (aka. capital requirement) n EL should be fully covered by provision (within ytd profit) but this never holds! So profit should be calculated based on EL instead of Provision (”risk cost”) ‘Provision less EL’ is a necessary correction in Total own funds Slide 9

Introduction to Basel 3 Basic concepts (reminder) Capital requirement (tőkekövetelmény) (the same: Capital requirement x 12. 5 = RWA) Risk Weighted Asset – RWA (kockázattal súlyozott eszközérték) Exposure at Default – EAD (bedőléskori kitettség) Risk Weight – RW (kockázati súly) depends on the • Method (STA, IRB – (Foundation, Advanced) • Asset (customer type, product specificities) • Risk (of the customer, product, collateral…) Slide 10

Introduction to Basel 3 IRB method – Overview of the elements Internal Ratings Based method – IRB (belső minősítésen alapuló) RW is „unique” for each customer, depending on • Probability of Default – PD (csőd- / bedőlési valószínűség) • Loss Given Default – LGD (bedőléskori veszteségráta) • Asset correlation – ρ (eszközkorrelációs együttható) • Maturity – M (lejárat) • Annual Sales – S (éves árbevétel) F (…) is a function defined by the law Slide 11

Introduction to Basel 3 IRB method – EAD Credit Conversion Factor – CF / CCF: until default, this percentage of the off-balance exposure will go on-balance. • CF depends on contractual terms (law pre-defines possible values) Slide 12

Introduction to Basel 3 IRB method – Risk parameters PD is the probability that the borrower defaults within one year Legal minimum 0. 03% (except for sovereigns), 100% when in default The „default” event happens when either of the two holds • 90+ DPD: More than 90 days past due on a material obligation • „Unlikeliness to pay”: other signs of a possible loss (like the decease of the customer or high provision coverage) LGD is the loss percentage (relative to the exopsure) in case the borrower defaults. Legal minimum 10%, normally less then 100% For example an LGD of 45% means that if the customer goes to default, then we will lose 45% of its exposure (and can still collect 55% of it from collaterals, or other sources) Slide 13

Introduction to Basel 3 IRB method – Expected Loss – EL (várható veszteség) EL is the expected value of loss within one year – i. e. on average borrowers will not pay back this amount of money calculated on deal level (and then summed up) If for example EAD is 100 Million HUF, PD is 10%, LGD is 45% then EL is 4. 5 Million HUF. EL is normally covered by loan loss provisions. Adequate pricing will compensate the bank for this loss. Slide 14

Introduction to Basel 3 IRB method – Unexpected Loss – UL (nem várt veszteség) UL is the 99. 9% quantile (Va. R) of the one year loss distribution, i. e – the probability that borrowers do not repay more than UL is 0. 1%, – in other words: losses might exceed UL once in a 1000 year. calculated on deal level (and then summed up) UL is the same as capital requirement. Pricing should consider the higher cost of fund for capital compared to other liabilities. Slide 15

Introduction to Basel 3 IRB method – The RW formula – the F(…) function – is • defined by law • but originally was found out by modeling UL Idea behind the formula: 1. Derive a very pessimistic „PD” from PD: PD 99. 9% 2. UL will be (PD 99. 9% – PD) x LGD x EAD (roughly) Note: this directly gives UL. To get RWA it is multiplied by 12. 5 (since 1 / 8% = 12. 5 ). Slide 16

Introduction to Basel 3 IRB method – The precise RW formula where , for non-retail, 0. 04 for retail revolving, 0. 15 for retail mortgage and for other retail. Notes: • No maturity adjustment for retail (M is 1); M is 2. 5 in Foundation IRB • For firm-size adjustment S is in Million EUR, capped between 5 and 50 Slide 17

Introduction to Basel 2 Tartalom n Bázel III. bevezetés, ICAAP n Tőkekövetelmény kalkuláció n Tőkemanagement Slide 18

Introduction to Basel 3 Pillar 1 Regulatory requirement: Compliance with a bank specific capital objective (capital adequacy ratio > 8% of Risk Weighted Assets - RWA) Risk categories n Credit risk requirement n Standardized n Internal rating based (Foundation, Advanced) n Market risk n Standardized Approach n Internal Va. R models n Operational risk n Basic Indicator Approach n (Alternative) Standardized Approach n Advanced Approaches Slide 19 Risk coverage Regulatory capital: n Required to cover unexpected risks n Elements of regulatory capital is defined by law

Introduction to Basel 3 Definition of internal capital n n n The definition of internal capital slightly differs from the definition of regulatory capital HFSA permitted differences to regulatory capital (Pillar 1) Main differences: Intention: only two different capital concepts (mid term), transparent definitions Slide 20

Introduction to Basel 3 Basic concepts (reminder) • Capital requirement obtained from Asset side • (Regulatory / solvency) Capital on liability side • Capital adequacy: the following should hold: Capital requirement ≤ Capital • Capital adequacy ratio – CAR (tőkemegfelelési mutató): Capital / capital requirement * 8% • Capital requirement is sum of • credit risk • market risk • operational risk capital reqs. • Capital is sum of • registered shares • retained earnings • other elements, deductions • subordinated loans • balance sheet provision – expected loss (IRB shortfall) Slide 21