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Data Requirements For Assessing the Health of Systemically Important

Financial Institutions (SIFIs)

for IMF-FSB Users ConferenceWashington, D. C., July 8-9, 2009

Hans GenbergHong Kong Monetary Authority

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Outline

1. What is a SIFI?

2. What data do we currently collect?

Data requirements before the credit crisis

Extra data requirements after the credit crisis

3. What other data can potentially improve our risk assessment?

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Characteristics of SIFIsCharacteristics of SIFIsSystemically Important

= potentially pose significant risks to financial stability

= potentially pose significant risks of severe disruptions to the smooth functioning of the financial system

Size is the single most important determining factor – the larger it is , the greater its potential systemic consequences

Apart from size, what other features that may characterize a SIFI?

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Characteristics of SIFIsCharacteristics of SIFIs

Financial institutions whose difficulties tend to produce a domino effect in the financial system

1. Deposit taking financial institutions Great impact on the confidence of the

general public

2. Major financial market players Large number of counterparties

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Financial institutions whose profitability tends to be positively correlated with financial market volatility :

Hedge fund

Highly leveraged financial institutions

• Volatility = profitable opportunities

= risks to stability of the system

Lead to herding and rush-to-exit

Some trading strategies undermine the financial system

Characteristics of SIFIsCharacteristics of SIFIs

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Characteristics of SIFIs : Characteristics of SIFIs : Hedge Fund and Highly Leveraged FIsHedge Fund and Highly Leveraged FIs

They are difficult to monitor because of :

1. The absence of supervisory mandate under existing laws

Credit lines are provided by banks overseas

2. The lack of international framework for information exchange

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Data RequirementsData RequirementsBefore the Global Credit CrisisBefore the Global Credit Crisis

Balance Sheet Asset and Liabilities

- Capital and reserves, deposits from customers, cash, and certificates of indebtedness

Profit and Loss

- Interest income/ loss, income from investment, and dividend

Large Exposures- Commitments and contingencies, interest rate

contracts, and foreign exchange contracts

Loans and Advances - Classification of loans and advances by economic

sector, and asset quality

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Data RequirementsData RequirementsBefore the Global Credit CrisisBefore the Global Credit Crisis

Capital Adequacy

Capital Adequacy

- Core capital, supplementary capital, and risk-weighted positions

Interest Rate Risk

- Total interest bearing assets and liabilities classified by time band

Market Risk

- Debt securities, debt-related derivative contracts, interest rate derivative contracts in the trading book, and FX and equity exposures

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Liquidity

Liquidity

- Gold, marketable securities, exchange fund bills/notes, and eligible loan repayment

Data RequirementsData RequirementsBefore the Global Credit CrisisBefore the Global Credit Crisis

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• Two half-yearly surveys on off-balance sheet exposures and debt securities portfolios

• Banks encouraged to disclose:

Sub-prime related assets and their impairment charges

Complex financial instruments and structured financial products

Additional Data RequirementsAdditional Data RequirementsAfter the Global Credit CrisisAfter the Global Credit Crisis

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Potentially Useful DataPotentially Useful Data

• No significant data gaps

• Two areas of potentially useful data for conducting stress testing analysis

1. Breakdown of undrawn irrevocable credit commitments by types of customers

2. Creditworthiness of debt securities other than credit ratings

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Potentially Useful Data: Undrawn Potentially Useful Data: Undrawn Irrevocable Credit Commitments by Irrevocable Credit Commitments by

Customer TypeCustomer Type• The breakdown of undrawn irrevocable

credit commitment by customer type is important in assessing contingent liquidity risk

• Sources of contingent liquidity risk :

Considerable drawdowns on irrevocable credit commitments

Over-concentration of irrevocable credit commitments

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Potentially Useful Data: Potentially Useful Data: Creditworthiness of Debt SecuritiesCreditworthiness of Debt Securities

• Drawbacks of through-the-cycle credit ratings

Low sensitivity of ratings to current market risk

• Particularly important for SIFIs risk assessment

Usually hold larger investment portfolio

Exposed to significant market risk

Examples

Current Market Yield

Internal model default risk of banks’ holdings of debt securities

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Potentially Useful Data: Framework for Potentially Useful Data: Framework for Information Exchange and DisclosureInformation Exchange and Disclosure

• International framework for information exchange of large non-bank SIFIs could enhance the monitoring process

• Central banks and financial regulators could disclose data on the activities of non-bank SIFIs at an aggregate level