Bucharest, 23 October 2008 Transform CRD Mandatory Requirements into Business Benefits Dr. Mathias Schmit

Bucharest, 23 October 2008www.sagora.eu

Transform CRD Mandatory Requirements into Business Benefits

Dr. Mathias Schmit

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Managing Risk in Leasing Business

Agenda

• Basel II: What is it about?

• Does Basel II achieve the level playing field objective?

• How does Basel II impact my business opportunities?

• Conclusions

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Basel II: A new framework

CAPITAL DISCLOSURESUPERVISION

FINANCIAL STABILITY

capital requirements

based on market, credit, and

operational risk

disclosure including the

control of risks

qualitative supervision internal process & risk control

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Basel II or CRD?

• First draft of Basel II in 1999

• EU Official Journal on 30/06/2006 Ref: L 177/201

• How far along is the national transposition process?

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In Romania

The Capital Requirements Directive and the Lease

Industry in Romania1st Edition

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Cover credit risk

new risk weights for

capital requirements

Credi spreads will change

credit spreads will change

ROE will be impacted

Balance sheet

RRE/CRE

Loan

Leasing

Other

Capital

Capital

Debt

Off-balance instruments

Debt

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And to avoid….

• Kerviel, Jérôme US$ 7.1 billion France Société Générale

• Hunter, Brian US$ 6.5 billion Canada Amaranth Advisors

• Meriwether, John US$ 4.6 billion United States Long Term Capital Management

• Hamanaka, Yasuo US$ 2.6 billion Japan Sumitomo Corporation Copper

• Flöttl, Wolfgang US$ 2.5 billion Austria BAWAG

• Citron, Robert US$ 1.7 billion United States Orange County

• Leeson, Nick US$ 1.4 billion United Kingdom Barings Bank

• Schimmelbusch, Heinz US$ 1.3 billion Germany Metallgesellschaft Oil Futures 1993

AND

• Subprime Crisis

• Northern Rock

• Just to name a few….

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Additional Requirements

Challenging areasChallenging areas

Organizational StructureOrganizational Structure

Management BodyManagement Body

Internal ControlInternal Control

TransparencyTransparency

Capital Adequacy vs. Capital Adequacy vs. Economic CapitalEconomic Capital

Set of Set of guidelines to guidelines to

be be implemented implemented and followed and followed

in order to in order to achieve achieve these these

objectivesobjectives

ValidationValidation

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Agenda




• Conclusions

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Regulatory capital for real estate investment

• Capital may differ from a ratio of 1 to 5 in respect to:

– The approach adopted by the credit institution• STD: product vs. counterparty approach• IRB approaches (PD, LGD)

– The type of product / Counterparty (STD)• CRE/ Lease/ Specialized lending• Retail / Corporate / PSE• What if a lease to a PSE?

– Qualitative requirements are met or not• Independent valuation• Legal certainty• Insurance

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Source: Schmit M., Journal of Banking and Finance, April 2004.

Basel I I vs. Internal Model - Automotive leasing -

(age: 12-23 months, maturity: >47 months)

0123456789

10

Standardised IRBF(corporate;LGD: 40%)

IRBA (retail) Internal Model

%

Standardised

IRBF (corporate;LGD: 40%)

IRBA (retail)

Internal Model

Hiiiiiiiiiiiii !!!

Yeahhhhh!!

OK but…

Regulatory capital for equipment lease

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Impact on pricing

Capital Requirement RAROC / ROE Pricing

=(margin constant)

=

(decrease margin)

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Agenda




• Conclusions

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A fiction?

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Thoughts from the current crisis

• Unsustainable products and practices

• Buyer biais and wishful thinking

• Unsound credit processes

• Slice and gambling finance

• Regulators under the spotlights

Embrace rather than resist market conduct regulation: by preventing from the worst abuses, it protects the legitimate responsible players

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Risk governance methodology

Mission & VisionMission & Vision

Internal ControlInternal Control&&

DocumentationDocumentation&&

ReportingReporting


AssessmentAssessment

ImplementationImplementation

Guidelines &

Guidelines &

Requirements

Requirements

UsageUsage

Rev

iew

Rev

iew

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Internal Internal governancegovernance

Internal Control&

Documentation&

Reporting

Assessment

Implementation

Guidelines &

Requirements

Usage

Rev

iew

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CorporateCorporate governancegovernance

Strategy & Objective & Risk Appetite

Mission & Vision

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Risk Management & Business Support

• New practices are about an integrated approach of Risk Management

• Risk management – Is a process effected by people at every level of the organisation– Is applied in strategy setting– Is applied across the enterprise and includes taking an entity-level

portfolio view of risk– Is designed to identify events potentially affecting the entity and

manage risk within its risk appetite– Provides reasonable assurance to an entity’s management and

board– Is geared to the achievement of objectives in one or more separate

but overlapping categories

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Agenda




• Conclusions

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Conclusions

• A deep knowledge of (all) risks is key

– Regulated and non-regulated

– Lease specificities (low LGD in the car leasing !!)

• An integrated risk management framework will allow to better identify

and assess business opportunities

– Risk governance & business support

• Rethinking leasing business relationships will offer new opportunities

• Start with a high level gap analysis

– A few days (interview based) – Know yourself !!

– Analyse all aspects of risk governance in order to support the business

– Define a roadmap and implement

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For More Information

Dr. Mathias Schmit

Partner

SAGORA, Lease and Risk Management

Avenue de Haveskercke, 28

B-1190 Brussels

Mobile: (32)-496.93.22.70

Email: [email protected]

Website: www.sagora.eu

Thank you for your attention !

Documents

Bucharest, 23 October 2008 Transform CRD Mandatory Requirements into Business Benefits Dr. Mathias Schmit