BASEL III Regulation and effect on leasing market Phaure.pdf · reinforce the global solidity and stability of the financial system, improve risk management and governance practices

© 2013 Deloitte Conseil

BASEL III Regulation and effect on leasing market

Milan, May 17 th 2013

Hervé PhaureAssociate Partner, Risk Advisory

© 2013 Deloitte LLP. Private and Confidential.2

Rationale for Basel 3

© 2012 Deloitte

Rationale for Basel 3Objectives

Eurolease - May 17th, 20133

Basel 3 is a set of new measures elaborated after t he beginning of the last crisis, in order to reinforce the global solidity and stability of the financial system, improve risk management and governance practices and constitute a more comm on regulation framework

Key

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Improve capital structure and enhance capital minima l requirements

Manage liquidity and funding risks, integrating exp licit ratios as constraints

Extended regulatory framework for specific risks (ma rket risks, counterparty risk, CCPs)

Limit the leverage potential

Reduce cyclical effect through additional buffers

Reduce systematic risk arising from too extensive re lationships between financial institutions


© 2012 Deloitte

Rationale for Basel 3From Basel 1 to Basel 3


20081988

Basel I

• The 1988 Cooke ratio established a first level of capital minimal requirements

Basel II

• Basel 2 introduced : • A wider perimeter of risks• An increased sensitivity of

capital requirements• A 3 pillars structure

Own funds

Capital requirements(Credit + Market)

> 8%

• Initially only credit risk

• Market risks introduced in 1996

From 2014

• Operational risk included in Pillar 1

• Possible use of internal models for credit and operational risks

• Potential use of add-on by regulators

Basel III

• Basel 3 brings major evolutions aiming to answer the financial crisis

Own fundsCapital requirements

(Credit + Operationnal + Market)

> 8%

Pillar 1 : Capital minimal requirements

Pillar 2 : Regulatory monitoring & ICAAP

Pillar 3 : Market discipline

Pillar 1 : Increased minimal requirements + Liquidity ratio (LCR)

Pilier 2 : Reinforced prudential monitoring

Pilier 3 : Market discipline

• Reinforcement of the solvency ratio and introduction of liquidity constraints in Pillar 1

• Introduction of new measures (leverage ratio, NSFR)

• Macro-prudential monitoring (ie SIFIs)

Evo

lutio

ns

Liquid assetsLiquidity needs

> 100%

Own funds (CET 1, T1, global)Minimal requirements

(Credit + Operationnal + Market)

>(6%;8%;10,5%)

LCR =

A progressive but continuous evolution


© 2013 Deloitte LLP. Private and Confidential.

Main evolutionsOverview

CRD IV package

Capital base

• More and better capital• Better risk weights

Liquidity

• Liquidity Coverage Ratio (short term stress)

• Net Stable Funding Ratio (longer term stress)

Leverage

• Non-risk based back stop measure (exposure / capital fixed at 3%)

Capital buffers

• Capital Conservation buffer

• Countercyclical Capital buffer

• Systemic Risk buffer

Counterparty credit risk

• Higher capital requirements for derivatives exposures

• Stronger incentive to use CCPs

Corporate governance

• Remuneration• Risk management• Board role / suitability /

diversity

Regulation – CRR (directly applicable) +

Directive – CRD IV (transposition to national law)

Eurolease - May 17th, 20135 © 2013 Deloitte Conseil


Main evolutionsOverview

Increase regulatory

capital for all banks

RegulatoryProposals

Further market risk

requirements

New remunerations

constraints

Derivatives standardisation / counterparty

credit risk

Through the cycle provision

and other countercyclical requirements

Further reg. requirements and capital

charge for large / complex firms

Leverage ratio Enhance quality of capital

New Securitisation

framework

Legend

1

23

4

5

7

8

9

10

Liquidity framework

6

Basel 2,5 (CRD 2 et CRD 3)

Basel 3 (CRD 4)

Combination of Basel 2,5 and Bâle 3

Capital components• Ordinary shares (“predominant”)• Additional Tier 1 capital• Tier 2 Capital• Deductions substantially amended

Liquidity framework

Stable sources of funding

Liquidity Coverage

Ratio

Net Stable Funding

Ratio

=

Stock of liquid assets

Net cash outflows

=Required

sources of funding

100%

100%

≥

≥

Leverage Ratio

Exposure=

Capital

≥ 3%

•Through the cycle provision

* 2 capital buffers• Capital conservation buffers• Countercyclical buffers

Ordinary shares ≥ 4,5 %

Tier 1 Capital ≥ 6 %

Total Capital

Solv. = 8%Capital

Minimum Capital Requirements

≥

Increase regulatory capital

≥ 8 %

•On-going discussions for ncreased charge of capital for SIFs


© 2012 Deloitte

Rationale for Basel 3Implementation schedule of Basel 3


• A progressive implementation until 2020…

• … but a market pressure on the new regulations impact that bring banks to anticipate the regulatory schedule

• Transposition deadline (of the Directive) / starting date of application (of the Regulation)?

Progressive implementattion of CRD 4 and CRR1

2010 2011 2014Bâle 2.5 /

CRD 2

SecuritizationCapital Tier 1

Large exposuresBâle 2.5 /

CRD 3Bâle III / CRD 4

Remuneration SecuritizationMarlet risks

2019

2012 2013 2014 2015 2016 2017 2018 2019January

2020

Leverage ratio Publication (Pillar 2)

Migrationto Pillar 1?

Minimum Common Equity Capital Ratio 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%

Capital Conservation Buffer 0.625% 1.25% 1.875% 2.50%

Minimum common equity plus capital conservation buf fer 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0%

Phase-in of deductions from CET1 (including amounts exceeding the limit for DTAs, MSRs and financials 20% 40% 60% 80% 100% 100%

Minimum Tier 1 Capital 4.5% 5.5% 6% 6% 6% 6% 6%

Minimum Total Capital 8% 8% 8% 8% 8% 8% 8%

Minimum Total Capital + Conservation buffer 8% 8% 8% 8.625% 9.25% 9.875% 10.5%

Capital instruments that no longer qualify as non-c ore Tier 1 capital or Tier 2 capital

Phased out over 10 year horizon beginning 2013

Liquidity coverage ratio Observation period begins

Generalrequirement

Introduce minimum standard

Net stable funding ratio Observation period begins

Introduce minimum standard


2012 2013

© 2012 Deloitte

Rationale for Basel 3Implementation timetable of the reform in Europe


IMPLEMENTATION AND COMING REGULATORY TEXTS TIMETAB LE

1 January 2014

1 January 2014

1 January 2014 – phased until January 2020 (to be confirmed)

1 January 2014 – someParts phased in until January 2020 (to be

confirmed)


Jan2014

Jan2015

Jan2012

Jan2011

Jan2010

© 2013 Deloitte LLP. Private and Confidential.9

Expected impacts for banks


Expected impacts for banksBasel 3 : Focus on financial institutions


Summary of main impacts for banks* (Impact study – QIS from European Community)

• In December 2011, the CET1 ratio for Group 1 banks stand at 7,7% against a minimum of 4,5% as required by Basel III.

• The new regulatory adjustments (exclusions from equity) will lead to an increase of core equity (CET1) of 11,9 Bn€ for Group 1 banks** and 7,6Bn€ for Group 2 banks**

• To answer these new requirements, banks should have to raise a capital amount of 84Bn€ in 2016 and 460 Bn€ in 2020 , which represents around 2,9% of the banking sector risk weighted assets.

• In regards to short-term liquidity, Group 1 banks LCR stand around 91% (against 90% in June 2011) while Group 2 banks LCR ratio stand at 98%.

• Concerning long-term liquidity ratio, NSFR, Group 1 ratio stand at 98% against 95% for Group 2 banks.

*70% of the EU banking sector (in terms of capital) was concerned by this study, which represents 246 banks in 21 countries (50 were in Group 1 and 196 in Group 2 **)

**Banks classification in Group 1 and Group 2 : Group 1 is relative to banks in which Tier 1 is greater than 3 billions €, diversified and active at an international level. Group 2 gathers the rest of other banks.

Significant costs for European banks

Competitivity issues in regards to other banking

systems which do not comply with Basel III

Risk to see the emergence of shadow

banking (non regulated)



Expected impacts for banksA complex regulatory and normative context


Since 2008, multiple areas have been under the scope of regulatory, accounting and othernormative adjustments, which for the most of them aim at reinforcing the global stability,governance and transparency of the financial system.

• High complexity of on-going reforms

• Potential lack of consistence

• Global impact difficult to identify and evaluate

For answering these issues and constraints, banks need to define global answers andpotentially evolve drastically



Expected impacts for banksArising issues


Structuring impacts that significatively affect the profitability of banks

Increase of equity structure, quality and requirements

Separation of banking activities

Managementof scarce resources

Leverage constraints

Increased liquidity constraints

Diversification of funding sources

Impairment since origination

Pressure on profitability and

margin

Optimization of ALM transformation /

Strategic review of activities

A Deloitte study shows that the reinforcement of solvency and liquidity requirements are the major reasons for “deleveraging “ approach

* Etude « Capital Gain, asset loss: European bank Deleveraging » - Deloitte (2012)

Reduction of the size of balance sheets Management of scarce resources (capital, collateral, liquid assets…)

Innovation

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Expected impacts for banksPotential answers


Managementof scarce resources

Diversification of funding sources

Pressure on profitability and

margin

Optimization of ALM transformation /

Strategic review of activities

Capital optimization

Concentration on core business activities

Product Innovation

Better use of internal resources

Accelerated turnover of credit portfolios

Process efficiency

Securisation of deposits on a mid term horizon

Systematic use of collateralized debt

Review of the liquidity management framework

Adjustement of the IS infrastructure

Reviewed cost of funding for market related activities

Focus on client oriented management

Increase debt duration

Outsourcing

Alignment between deposits and credits

Initiation of new markets

Review of allocation principles


© 2012 DeloitteEurolease - May 17th, 2013

Expected impacts for banksNew constraints

14

Lower expected profitability from market related activities

Need to rely more heavily on historical banking activities

Increased cost of liquidity (financial and regulatory) and adjusted liquidity management framework

Market expectations in regards to banks strategies and expected profitability

Trend to move forward an « originate to distribute » business model

Increased competition and innovation

Others …

Newparadigm

Adjusted principles

Longer time horizon(recurrent of revenues)

Underlying revenue dimensions

(client/product common factors)

Adapted indicators

Explicit use of structural constraints(costs of structure adaptation)


© 2013 Deloitte Conseil15

For the leasing industry


For the leasing industryMain impacts of Basel 3


Increase needs of Capital

Short-term liquidity constraints

Long-term liquidity constraints

Leverage

Comply with new capital structure and ratiosAnticipate the impacts of buffers on a multiyear horizon

Comply with LCR ratio (liquidity crisis assumption)

Need to stabilize funding resources (availability,volume, price)

Need to demonstrate the business rationale

Limited ability to adapt on a stand-alone basis

* 2012 Deloitte study on liquidity


For the leasing industryPotential answers

Eurolease - May 17th, 2013 © 2013 Deloitte Conseil17

“ Teasing ”

Liquidity manage-

ment

Cost reduction

- Focus on strategic mix client-products

- Industrialization & Outsourcing (even within the Group)

- Generally limited credit risk and RWA

- Operational cost well controlled

- Recurrent revenue and stable client basis

- Increasing demand from corporates which also need to diversify their financing sources

- Possible alignment with Group strategy

Stand- alone entities- Initiate deposits banking

activities

All- Adjust the product mix to

limit the gap- Develop collateralization on

common and long-term engagements

Costs savings

Leasing entity level

Group level

- Renegotiate funding conditions (internal rates)

- Increased interaction with other entities (synergies)

© 2013 Deloitte LLP. Private and Confidential.Eurolease - May 17th, 201318 © 2013 Deloitte Conseil

Documents

BASEL III Regulation and effect on leasing market Phaure.pdf · reinforce the global solidity and stability of the financial system, improve risk management and governance practices