Improve liquidity management under a regulation framework

Nicolas Kunghehian

24th May 2011

Moscow, 24th May 2011

From Basel II to Basel III

» Too much leverage

» Excessive credit growth

» Insufficient liquidity buffers

» Weaknesses of risk management systems

» Too much systemic risk

» Greater capital buffers

» Capital of higher quality

» Liquidity buffers

» More accurate measurement of risks (e.g.

market risks)

» Addressing systematically important banks

Moscow, 24th May 2011

What is new in Basel III?

Moscow, 24th May 2011

Basel III squeezes capital !

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» More strict rules on capital, lowering it (own funds review)

» Higher capital requirements (updated calculation rules increase RWA for some asset classes)

» Increased capital ratios (Core Tier 1, Tier 1, Conservation buffer, Countercyclical buffer)

Moscow, 24th May 2011 5

Results of the QIS: Capital Ratios

Source: http://www.bis.org/publ/bcbs186.pdf

Moscow, 24th May 2011 6

Results of the QIS: Liquidity Ratios

Source: http://www.bis.org/publ/bcbs186.pdf

Moscow, 24th May 2011 7

Liquidity coverage ratio (LCR) – example

*Additional requirements are also considered as outflow (e.g. 100% of outstanding liquidity facilities to non fin. Corporate, etc)

** 100% of planned inflows from performing assets

Assets 470

Cash 50 Stock of high quality liquid assets 150

Gov. Bonds 100

Financial Institution Bonds 50

Loans 270

Liabilities and Equity 470 Run-off

factor

Outflows* Inflows** Net

outflows

Stable retail deposits 100 7.50% 7.5

Less stable retail deposits 100 x 15% = 15 -

Unsecured Wholesale Funding (Non fin.

Corporate with no operational relationship)

170 75% 127.5

Equity 100 150.0 20 130

LCR 115%

v

v

Moscow, 24th May 2011 8

Net stable funding ratio (NSFR) – example

Assets 470 Required stable

funding factor

Required stable

funding

Cash 50 0% 0

Gov. Bonds 100 5% 5

Loans (to retail) 320 85% 272

277

Liabilities and Equity 470 Available stable

funding factor

Available stable

funding Stable retail deposits 100 85% 85

Less stable retail deposits 100 70% 70

Unsecured Wholesale Funding (Non fin.

Corporate with no operational relationship)

170 x 50% =

85

Equity 100 100% 100

340

NSFR 123%

Moscow, 24th May 2011

Higher costs… for a better risk control performance

Operational reports

• Limit monitoring

• P&L reports

• Budgeting reports

• Single portfolio reports

Risk reports

• Credit risk

• Liquidity risk

• Market risk

• Operational risk

Regulatory reports

• Local reports

• Group reports

Internal reports

• Specific risk drivers

Board of Director

• Daily summary report

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Moscow, 24th May 2011

Higher costs… and a better allocation

10

Assets 470

Cash 50 Stock of high quality liquid assets 150

Gov. Bonds 100

Financial Institution Bonds 50

Loans 270

Liabilities and Equity 470 Run-off

factor

Outflows* Inflows** Net

outflows

Stable retail deposits 100 7.50% 7.5

Less stable retail deposits 100 x 15% = 15 -

Unsecured Wholesale Funding (Non fin.

Corporate with no operational relationship)

170 75% 127.5

Equity 100 150.0 20 130

LCR 115%

v

vCost of holding these assets:

C = X% per year x 150

C is allocated

depending on the

outflows generated

by the instrument

» Short term assets

» Long term liabilities

» Assets eligible to the Buffer

Negative FTP component

» Risky assets

» Unsecured wholesale funding

Positive FTP component

Moscow, 24th May 2011

Conclusions

» More constraints for banks

– More capital of better quality

– Liquidity buffers

» A great opportunity

– Shared ownership

– Better risk management

– Better performance management

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•Planning•Budgeting

•Limit monitoring

•Action plans

•Modeling

•Forecasting

Risk Calculation

Reporting

StrategyOptimization

Moscow, 24th May 2011

Contacts

12

Nicolas Kunghehian

Associate Director

Moody's Analytics

436, Bureaux de la Colline

Bâtiment E - 12e étage

92213 Saint-Cloud Cedex, France

+33 (0) 4.56.38.17.05 direct

+33 (0) 6.80.63.83.34 mobile

nicolas.kunghehian@moodys.com

www.moodys.com

Moscow, 24th May 2011 13

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Moscow, 24th May 2011 14

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