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Bâle 2 & les entreprises ACI Belgium 20 octobre 2005 La vision du banquier Alain de Brauwere - Basel2 Coordinator - Fortis Bank.

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Presentation on theme: "Bâle 2 & les entreprises ACI Belgium 20 octobre 2005 La vision du banquier Alain de Brauwere - Basel2 Coordinator - Fortis Bank."— Presentation transcript:

1 Bâle 2 & les entreprises ACI Belgium 20 octobre 2005 La vision du banquier Alain de Brauwere - Basel2 Coordinator - Fortis Bank

2 Bâle 2 : La vision du banquier - 20 octobre Agenda 1. Bank’s objectives and constraints 2. Fortis Bank overall targets 3. Relationship between the bank and its customer

3 Bâle 2 : La vision du banquier - 20 octobre BASEL REVISED FRAMEWORK (June 2004) Strengthen soundness & stability of international banking system Promote stronger risk mgt practices Minimum Required Capital Supervisory Review Market Discipline

4 Bâle 2 : La vision du banquier - 20 octobre BASEL REVISED FRAMEWORK (June 2004) PILLAR 2 Supervisory review 4 principles Internal assessmentSupervisory reviewCapital > minimumSupervisory intervention PILLAR 3 Market discipline Disclosure requir’ts CapitalCapital adequacyP 1 measurement methods and resultsRisk Exposures PILLAR 1 Minimum capital requirement (New) Standardised Approach - NSA Evolutionary approaches Internal Ratings Based - IRB Foundation IRB Approach - FIRBA Advanced IRB Approach - AIRBA Basic Indicator Approach - BIA Standardised Approach - STA Standard Method (Conversion CRD risk) Simulation Analysis Method Credit Risk Operational Risk Market Risk Advanced Measurement Appr - AMA Value at Risk models

5 Bâle 2 : La vision du banquier - 20 octobre Basel RF - PILLAR 1 : MINIMUM REQUIRED CAPITAL Risk assets ratio Capital (Tier ) Credit risk + Market risk  8% + Operational risk Unchanged, but Impacted by IFRS Limited to Unexpected Loss Under review by BC & EC Unchanged, but Capital covers Unexpected Loss Shortfall coverage EL by provisions Unchanged, but Definition of Banking & Trading Books reviewed New : Add-on New approaches Risk sensitive Based on Bank own estimates Credit risk mitigation integrated

6 Bâle 2 : La vision du banquier - 20 octobre European Capital Requirements Directive - CRD Scope  All credit institutions (=banks)  All investment firms Level of application  CRD is applicable primarily on an individual basis  CRD is also to be applied at sub- and consolidated levels Supervision - Responsibilities  Consolidating supervisor  Pillar 1 - Modelling  Pillar 1 - Permission to go IRB and/or AMA  Pillar 3  Coordination role  Host supervisors

7 Bâle 2 : La vision du banquier - 20 octobre Subsidiaries other than credit institutions & investment firms not submitted at solo level CRD - Level of application Credit Institution Investment Firm Ultimate Parent Credit Institution Holding Company Diversified Financial Group Parent CI Credit Institution

8 Bâle 2 : La vision du banquier - 20 octobre Pillar 2 Capital Adequacy Assessment Bank’s -Driven PILLAR 1 MINIMUM REQUIRED CAPITAL SUPERVISOR - DRIVEN Pillar 3 Disclosure Market - Driven SUPERVISOR’S REQ. Approaches Quantitative requirement Qualitative requirement Calculation Formula Permission to go : AIRBA AMA BANKs CHOICE Choice of approaches Modelling : PD LGD EAD VAR Data Use Systems Policy CRD - 3 Pillars - Key drivers

9 Bâle 2 : La vision du banquier - 20 octobre PILLAR 2 CAPITAL ADEQUACY ASSESSMENT BANK’s -DRIVEN ICAAP Produce ICAAP number and assessment SREP Produce conclusions Dialogue Challenge ICAAP Iteration Pillar 1 Minimum Required Capital Supervisor - Driven Pillar 3 Disclosure Market - Driven CRD - 3 Pillars - Key drivers Supervisory measures

10 Bâle 2 : La vision du banquier - 20 octobre Pillar 1 Minimum Required Capital Supervisor - Driven PILLAR 3 DISCLOSURE MARKET -DRIVEN Pillar 2 Capital Adequacy Assessment Bank’s - Driven Supervisory Disclosures CRD requirements Banking industry pressure Market pressure => Supervisors Policy Institution Disclosures Minimum List CRD = Pillar 1 Market pressure => Bank’s Policy CRD - 3 Pillars - Key drivers

11 Bâle 2 : La vision du banquier - 20 octobre CRD - 3 Pillars - Link between Pillars P1 Min.Req.CapitalP2 Adequate CapitalPrudential Own funds Only CR, OR & MR Supervisory requirements Supervisory calculation formula Operate above MRC Capital Mgt Strategy All risks Bank’s requirements ICAAP = Bank’s own process + own calculation formula SREP = Supervisory challenge = Numerator P1 Supervisory filters Accountancy figure amended by prudential filters <<

12 Bâle 2 : La vision du banquier - 20 octobre CRD - 3 Pillars Some banks use economic capital Rating agencies figures Rating AA P1 Min.Req.CapitalP2 Adequate CapitalPrudential Own funds Only CR, OR & MR Supervisory requirements Supervisory calculation formula Operate above MRC Capital Mgt Strategy All risks Bank’s requirements ICAAP = Bank’s own process + own calculation formula SREP = Supervisory challenge = Numerator P1 Supervisory filters Accountancy figure amended by prudential filters << ECAP = ICAAP

13 Bâle 2 : La vision du banquier - 20 octobre CRD - 3 Pillars - Reporting PILLAR 1 Only credit, operational, market risks Minimum Required Capital Supervisor - Driven PILLAR 2 All risks Capital Adequacy Assessment Bank’s - Driven PILLAR 3 Bank’s disclosures Pillar 1 Market - Driven PILLAR 3 Supervisors disclosures CRD implementation Market - Driven CoRep Dialogue Publications

14 Bâle 2 : La vision du banquier - 20 octobre CRD - 3 Pillars - Reporting PILLAR 1 Only credit, operational, market risks Minimum Required Capital Supervisor - Driven PILLAR 2 All risks Capital Adequacy Assessment Bank’s - Driven PILLAR 3 Bank’s disclosures Pillar 1 Market - Driven PILLAR 3 Supervisors disclosures CRD implementation Market - Driven CoRep Dialogue Publications Financial StatementsFinancial Reporting (FinRep)Other Reportings

15 Bâle 2 : La vision du banquier - 20 octobre Agenda 1. Bank’s objectives and constraints 2. Fortis Bank overall targets 3. Relationship between the bank and its customer

16 Bâle 2 : La vision du banquier - 20 octobre FORTIS BANK OVERALL TARGET FROM IMPLEMENTATION DATE, i.e. 1 January 2008, START WITH THE MOST ADVANCED APPROACHES Pillar 1 Credit riskAIRBA Pillar 1 Operational riskAMA Pillar 1 Market riskVaR(unchanged) Pillar 2 All risksVaR Pillar 3 DisclosuresMarket high standards GOALS  Have in use an embedded high-performance risk management Keep in line with the most advanced peer banks aiming our competitive position  Reconcile the management tools and the supervisory constraints Ensure convergence between regulatory and economic capital Minimise the P1 Minimum Required Capital and P2 Adequate Capital  Accelerate cross-border integration Use Basel Program as a leverage

17 Bâle 2 : La vision du banquier - 20 octobre FORTIS BANK OVERALL TARGET ACT AS ONE COMPANY  One cross-border bank, based on business lines  FB-wide consistent choices of Basel approaches  Models developed centrally or under central supervision  Centralised data repositories  Centralised calculation of Risk Weighted Assets & Capital requirements  Centralised solvency reporting and market disclosures  Consolidated supervisory review  Top-down : From consolidated level to local level Customer is the cornerstone of our business

18 Bâle 2 : La vision du banquier - 20 octobre FORTIS BANK OVERALL TARGET P1 - CREDIT RISK = Advanced Internal Ratings Based Approach  Materiality assessment performed on consolidated level and consistent top-down  Outstandings to customers can be linked to B/L and legal entity  One single FB-wide rating by customer  Central repository and central computing of risk weighted assets and minimum required capital  Economic capital computed bottom-up and using as inputs the P1 data P1 - OPERATIONAL RISK = Advanced Measurement Approach  “AMA on a unified basis for parent and subsidiaries” (CRD art. 105) FB-wide single policy & framework, consistently implemented  “Qualifying criteria met by the parent and subsidiaries considered together” (CRD art 105)  AMA applied at top consolidated level and based on business lines  Central computing of capital requirements and Risk sensitive apportionment of the capital to the legal entities  Same methodology for computing economic and regulatory capital

19 Bâle 2 : La vision du banquier - 20 octobre Pillar 2 ICAAP = ECAP = ForCap Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) = Economic Capital (ECAP) = Internal management tool (ForCap) Integrated risk management and organisation based on Business Lines. One single approach, one single management tool, one single capital figure  One single tool ForCAp and one single figure  ForCap incorporates the full diversification within and between risk types  Bottom-up computing Supervisory challenging  In line with principles 1 (ICAAP) & 2 (SREP) of Pillar 2  Approach, methodologies and models fully documented  SREP conclusions => Dialogue => ICAAP iteration

20 Bâle 2 : La vision du banquier - 20 octobre Pillar 2 ICAAP = ECAP = ForCap Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) = Economic Capital (ECAP) = Internal management tool (ForCap) UNEXPECTED LOSS  Bank must hold capital to ensure it will remain solvent even if it experiences an unusually adverse outcome inits activities and thereby suffers a large loss. This amount is directly proportional to the amount of risk to which the bank is exposed.  Economic capital is the appropriate tool ; Not the Pillar 1 Minimum Required Capital  The cost of capital is one of the element to be covered by the margins EXPECTED LOSS  Bank suffers “expected losses” linked to the current operating of their activities.  Those “expected losses” are supported by the P/L  Expected losses in one of the element to be covered by the margins.

21 Bâle 2 : La vision du banquier - 20 octobre Pillars 1 & 2 Consistency P1 Min Req Capital Supervisory formula P1 calculator Internal Ecap method ForCap calculator P2 Adequate Capital Other P2 risksModel approved Ready for use In use System ready Ready for sourcing Value at default Central DWH sourced = Pillar 1 Dwh & calculator ready

22 Bâle 2 : La vision du banquier - 20 octobre Agenda 1. Bank’s objectives and constraints 2. Fortis Bank overall targets 3. Relationship between the bank and its customer

23 Bâle 2 : La vision du banquier - 20 octobre Credit Risk: Pillar 1 Advanced IRB Approach Risk components Risk components are all based on bank’s own estimates  Probability of Default: is the assessment of the likelihood of default of the borrower over one year.Expressed as a %, and counterparty specific.(PD)  Loss Given Default: is the assessment of the loss incurred on a facility at default of a counterparty. Expressed as a %, and transaction specific.(LGD)  Exposure at Default: expected gross exposure of the facility upon default of the obligor. Expressed in amounts, and transaction specific.(EAD)  Maturity: the effective maturity of a credit facility with a maximum of 5 years (M)

24 Bâle 2 : La vision du banquier - 20 octobre Dialogue Customer Information Corporate Relation Inputs calculator Credit Risk: Risk drivers QualitativeQuantitative External data provider Internal data Flashing lights Calculated PD - LGD - EAD - M Models OverrideReview Final PD - LGD -EAD - M

25 Bâle 2 : La vision du banquier - 20 octobre


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