Banking Control Commission - World Banksiteresources.worldbank.org/FINANCIALSECTOR/Resources/DR_AWAD... · Banking Control Commission DrAmine Awad Executive Director, Lebanon’s

Banking Control Commission

Dr Amine Awad

Executive Director, Lebanon’s Banking Control Commission

Member of the Higher Banking Council

Coordinator of Basel III Implementation Task Force

Washington D.C.: October18, 2011


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Outline

1) The Lebanese Banking Sector (facts & Figures)

2) Lebanon & The International Financial Crisis

3) How Lebanese Regulators prepared the transition to Basel 2

4) Quantitative Impact Study of Basel 3 implementation:

* Equity / Capital Adequacy

* Liquidity

5) Lebanon’s Action Plan for the Implementation of Basel 3


The Lebanese Banking Sector(Facts & Figures)

September

2011

Number of Banks Operating in Lebanon 70

Commercial Banks 50

Investment Banks 15

Islamic Banks 5

Lebanese Banks Operating Abroad 73

Number of Branches abroad 17

Number of Subsidiaries abroad 56

Number of Countries 28

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The Lebanese Banking Sector(Facts & Figures)

(Millions of USD) 2008 2009 2010June

2011

Total Assets 101.589 124.277 138.828 145.560

Customer Deposits 78.353 96.914 108.881 113.835

Loans to private sector 25.164 28.425 35.346 38.257

Total Equity 8.622 8.903 10.164 11.246

CAR 12.21% 13.72% 13.34% n.a.

Non-performing Loans / Total Loans 7.5% 6.0% 4.3% 4.1%

Non- Performing Loans / Total assets 1.8% 1.4% 1.1% 1.1%

R.O.A.A. 1.11% 1.05% 1.23% 0.55%

R.O.A.E. 13.80% 14.29% 17.07% 7.16%

Concentration8 Largest banks hold about 64% of the Sector

Assets, Deposits & Equity


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Lebanon & the Financial Crisis

Lebanon was not impacted by the financial crisis in

2008 due to the wise policy of the Central Bank, the

preventive measures taken by Banking Control

Commission and the close cooperation with the banking

industry which follows a conservative strategy.


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Extract from

IMF Executive Board

2010 Article IV Consultation Report on Lebanon

The Lebanese Banking Sector has been resilient in the face of the global crisis, thanks to :

Relatively conservative funding & Asset structures

Prudent Banking regulations & Supervision

Banks remain profitable, well Capitalized, and highly liquid, with adequate provisions and declining Non Performing Loans ratios.

Commercial banks’ deposits surged by 24% in 2009 & deposit dollarization dropped below 64%, driven by high domestic interest rates & the decline in political & security risks.


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Capital Adequacy Ratio

(according to Basel 2)

12.58% 12.21%

13.72% 13.34%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

31/12/2007 31/12/2008 31/12/2009 31/12/2010

CAR

MCR


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3,490 4,211

4,727 5,210

7,419 8,200 8,622 8,903

10,164

-

2,000

4,000

6,000

8,000

10,000

12,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Equity in Millions of USD

Growth in Equity


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Date Assets Growth in Assets Equity Growth in Equity

Dec-02 53,337 - 3,490 -

Dec-03 61,237 14.8% 4,211 20.7%

Dec-04 70,956 15.9% 4,727 12.3%

Dec-05 73,600 3.7% 5,610 18.7%

Dec-06 79,948 7.5% 7,419 42.4%

Dec-07 82,255 2.9% 8,200 10.5%

Dec-08 101,500 14.6% 8,622 5.1%

Dec-09 124,300 23.4% 8,903 3.3%

Dec-10 138,828 11.7% 10,164 14.2%

Growth in Assets & Equity

(Millions USD)


10

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

2002 2003 2004 2005 2006 2007 2008 2009 2010

Growth in Assets

Growth in Equity

building up of

capital buffers in

good times


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Basel 3: QIS on Capital

BCC Impact

Study Results

(June 2010)

Basel 3

Basel 3 Min. +

Conservation

Buffer

Common Equity Ratio 8.43%4.5%(2015)

7%(2019)

Tier 1 Ratio 11.84%6%

(2015)

8.5%(2019)

Total Equity Ratio 13.34% 8%10.5%

(2019)

Leverage Ratio (Tier

1/Total Assets + Off BS

Items)

6.71% 3% -


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Basel 3:New Set of C.A.R.

The Lebanese Ratios

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Common EquityRatio

Tier1 Ratio Total EquityRatio

Leverage ratio

Lebanon

Lebanon

Lebanon

Lebanon

Lebanon

Basel III (Min)

Basel III (Min + Conservation

Buffer )

B.3

B.3+

B.3

B.3+ B.3

B.3+

B.3


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Capital should not be regarded as a substitute for

addressing fundamentally inadequate Control,

Governance, Risk Management, Processes and

Procedures etc…

Capital is not the only solution

Banking Control Commission Basel 3 Liquidity Framework

Basel 3 introduced 2 liquidity ratios:

Liquidity Coverage Ratio (LCR) (2015):

(Level 1 + Level 2) Stock of High Quality Liquid Assets ≥ 100%

Total Net Cash Outflows for the next 30 calendar days

Net Stable Funding Ratio (NSFR) (2018):

Available Amount of Stable Funding ≥ 100%

Required Amount of Stable Funding

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Impact of the LCR on

the Lebanese Banking Sector

Since the date of implementation of the LCR (2015) is

closer than the date of implementation of the NSFR (2018),

the B.C.C.L. made a Q.I.S. relating to the implementation of

the LCR in the Lebanese banking sector.


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Impact of the

New Liquidity Framework (June 2011)

Total Stock of High Quality

Liquid Assets

(L1+L2)

High Quality Liquid Assets

Level 1 (only)

> 99%


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As we mentioned above the level 1 & level 2 of high quality liquid

assets were computed exactly as per the definition of the Basel 3

liquidity framework

In addition to the results shown above, we have set different

liabilities’ drawdown scenarios, and made a realistic approximation

of the drawdowns as per Basel 3 definition, in order to estimate the

LCR of the Lebanese banking sector.


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The realistic approximation assumed the drawdown of:

30% of all customers’ deposits

100% of all other balance sheet liabilities

20% of all contingent liabilities

The Disadvantage of these assumptions:

They do not regard the maturity of liabilities

No contractual cash inflows & outflows,

However the B.C.C.L. assumptions are more conservative than those of Basel III

LCR


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Lebanese Banking Sector’s LCR with

5 Assumptions of Drawdown (31/12/2010)


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Lebanon’s Action Plan for the

Implementation of Basel 3

Subject Actions Taken Date

Elimination of Tier 3BDL required banks to omit Tier 3 capital from the eligible equity components, in

accordance with the Basel 3 requirements (amendment of Basic BDL circulars No. 35,

43 and 44).

April 2011

Reclassification of

Financial Instruments

BDL redefined the components of Equity in accordance with the new IFRS 9 for the

classification of Financial Instruments (amendment of BDL circular No.43).April 2011

Calculation of Capital

Adequacy Ratio

BDL asked banks not to submit anymore their calculation of Capital adequacy Ratio

(CAR) according to Basel 1, putting an end to the parallel-run period whereby banks

submitted their CAR calculation according to Basel 1 and Basel 2 at the same time.

April 2011

QIS

on Basel III

BCCL started publishing Memos (during 2011 and 2012) on the calculation of the CAR

according to Basel 3.

The results are discussed on a case – by – case basis with every bank and an action

plan is set when needed.

June and

December

Pillar I


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Subject Actions to be Taken Date

Equity ComponentsBDL will amend the Equity components in accordance with Basel 3 definition of Equity

(amendment of Circular 43 dated 25/3/1998)

September

2011

Minimum Required Capital

BDL will fix the minimum required C.A.R.:

- Common Equity/RWA (4.5% under Basel 3) + Conservation Buffer

- Tier 1/RWA (6% under Basel 3) + Conservation Buffer

- Total Equity/RWA (8% under Basel 3) + Conservation Buffer

December

2011

Amendment of the Capital

Adequacy Ratio

BDL will publish the new C.A.R. according to Basel 3 (including the Risk Weights and

the Areas of National Discretion).(amendment of Circular 44, dated 25/3/1998)June 2012

Calculation of Market RiskBCCL will amend the Risk Weights relating to the calculation of the Interest Rate Risk

in the Trading Book (part of specific risk) (Circular No. 256 dated 26/9/2007).Feb. 2012

Calculation of Operational

Risk

BCCL will issue the new methodology for the calculation of Capital Charges to cover

Operational Risk, according to the Standardized Approach (that will replace the B.I.A.)June 2012

Basel 3 Implementation BDL will amend its Circular No. 104 dated 1/4/2006 on the implementation of Basel 2.December

2011

Advanced Approaches BCCL will Follow-up banks’ plans to move to Advanced Approaches for measuring

Credit, Market and Operational Risks.

October 2013

&

September

2014



Pillar I


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Internal Loan Grading

BDL issued new Loan Classification Criteria, requiring banks to adopt 2 types of

classification systems:

1. A supervisory classification system

2. A loan grading system for banks’ internal risk management.

(amendment of BDL circular No. 58)

April 2011

Internal AuditBDL issued new guidelines for enhancing Internal Audit Practices (amendment

of BDL circular No.77).April 2011

Internal Control FrameworkBDL issued new guidelines for improving the effectiveness of the Internal

Control framework (amendment of BDL circular No.77).April 2011

Corporate GovernanceBDL issued additional guidelines on Corporate Governance (amendment of BDL

circular No.106).March 2011

Board Audit Committee

BDL requires banks to appoint a minimum of three Non-Executive Board

Members within the Board Audit Committee and an Independent Chairman for

this committee (amendment of BDL circular No.118).

March 2011

Board Risk Committee

BDL requires banks to establish a Board Risk Committee with a minimum of

three Non Executive Members and an Independent Chairman (amendment of

BDL circular No.118).

March 2011

Compliance OfficerB.D.L. issued a new Circular asking banks to have an independent Compliance

OfficerMarch 2011

Stress Testing

The BCCL has conducted two “Stress Testing Exercises”

The first during December 2010 (Interest Rate Stress Test)

The Second during July 2011(Credit Risk Stress Test (loans granted and in

some unstable countries)

Results are discussed on a one – to – one basis with the Board of the

concerned banks to take the necessary preventive measures

2011


Implementation of Basel 3Pillar II


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ICAAPBCCL will assess ICAAP Templates submitted by banks as per Memo 9/2010

dated 20/10/2010.

From July 1st to

September 30,

2011

(on – going)

SREP Methodology

BCCL will resume the missions related to “BCC - CAAM” after banks’

submission of their ICAAP Templates in 2011 (priority list). Starting January

2012

Operational RiskBCCL asks banks to submit the templates related to Operational Risk Losses

(as per circular 252 dated 14/9/2006 on Operational Risk Management).

June 2011

For submission

September 2011

Interest Rate Risk in the

Banking Book

BCCL will amend its circular No. 250 dated 23/5/2006, on Interest Rate Risk

Management and Gap calculation and will introduce Duration models.Feb. 2012

Stress Testing

BCCL will conduct new Stress Testing Exercises.December

2011

BCCL will issue final guidelines on Stress Testing.December

2012

Dynamic ProvisionsBDL & BCCL are studying the methodology of a “Dynamic Provisioning

Process” in Banks

December

2012

Supervisory Colleges

BCCL started its contacts with the supervisory authorities of the Host Countries

of Lebanese Banks’ subsidiaries in order to create Supervisory Colleges that

help performing Risk Focused Supervision on a Consolidated Basis

to be completed

in 2013


Implementation of Basel 3Pillar II


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Financial Statements

BDL issued a circular on the Financial Statements to be published by banks and

financial institutions according to the new IFRS 9 requirements for the

classification of financial instruments (amendment of BDL circular No.33).

April 2011

Consumer ProtectionBDL issued new regulations aiming at implementing a Consumer Protection

Scheme in the financial sector (Circular No. 124 dated May 17, 2010)May 2010




IFRS 7 and 8 BCCL will issue guidelines on the implementation of IFRS 7 and 8.February

2012

Pillar 3 Disclosures

BDL will issue a circular on Pillar 3 Disclosure Requirements (including the

role of External Auditors).

June

2012

BCCL will issue a circular on the Disclosure Forms related to Pillar 3

requirements.

July

2012

Pillar III


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Capital Conservation BufferBDL will issue guidelines on the Capital Conservation Buffer and will decide on the

minimum required (2.5% under Basel 3).

June

2012

Countercyclical Capital BufferBDL will issue guidelines on the Countercyclical Capital Buffer and will decide on

the minimum required (range 0-2.5% )

March

2013

Leverage Ratio BDL will issue a circular on the calculation of the Leverage Ratio and will decide on

the minimum required (3% as a test under Basel 3)

End

2012

QIS on Liquidity BCCL will conduct a second Q.I.S. for the calculation of the L.C.R. in accordance

with Basel 3 Liquidity Standards.

June

2012



Other Basel III Actions

Banking Control CommissionLebanon’s Action Plan for the



Liquidity Coverage Ratio

(L.C.R.)

BCCL will develop templates for the calculation of the L.C.R. in accordance with

Basel 3.

December

2012

Net Stable Funding Ratio

(N.S.F.R.)

BCCL will develop templates for the calculation of the N.S.F.R. in accordance with

Basel 3 Liquidity Standards.

December

2015

Provisioning BCCL will issue new guidelines on provisioning methodology.September

2013

SIFI’sBDL will decide on the definition for Systemically Important Financial Institutions

and the treatment to be adopted.

June

2013

Consumer Protection &

Financial Education

BCCL is in the process of issuing new regulations, to draw the path that Banks &

F.I.’s should follow to ensure a Consumer Protection Process. In addition, a series of

circulars will be published progressively to initiate a Financial Education Process.

Starting

November 2011

Early Warning Indicators

BCCL is creating a Data Base of E.W.I. (Micro & Macro Prudential Indicators) with

time series of 10 years (min.) that will help Preventive Actions to protect the

financial sector.

January

2012

Other Basel III Actions

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E – Mail: [email protected]

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Banking Control Commission - World Banksiteresources.worldbank.org/FINANCIALSECTOR/Resources/DR_AWAD... · Banking Control Commission DrAmine Awad Executive Director, Lebanon’s