Peru Basel II implementation Setiembre 2009 APEC.
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Transcript of Peru Basel II implementation Setiembre 2009 APEC.
PeruBasel II implementation
Setiembre 2009
APEC
Experience in Basel II implementation
The SBS has reinforced a regulatory framework to enable firms making an appropriate identification, evaluation, treatment and control of risks.
Basel II implementation process is progressing quite well in Peru:Changes in the General Law allow the application of capital requirements to credit, market and operational risk according to Basel II.A regulatory framework for the implementation of Basel II has been made available to the public (publications and pre announcing of new rules)
2
Main changes in Banking LawDL 1028
Minimum capital requirements for credit, market and operational risks (Pillar I of Basel II)Increase of the minimum capital ratio and maintenance of suitable additional buffer, according to entities’ risk profile and the business cycle (Pillar II of Basel II) Definition of capital structure and proposal of limits on its composition (Basel) Information transparency (Pillar 3 of Basel II)Transparency: Obligation to pre announce new rules regarding capital requirement and loan loss reserves.
Implementation Schedule
April 2009
Opening application to Operational risk
(OR) - ASA
July 2009
Capital requirement: CR: no change MR: Standardized
approachOR: Basic approach
Opening application to advance models: VaR,
IRB, AMA
July 2010
Capital requirement:
CR: standardized approach
F irs t year F rom the s econd year F irs t year S econd year T hird year
P arallel calculation
During the validation proces s After finis hing the validation proces s
----- 95% 90% 80%
90% 80% -----
T rans ition towards the implementation of internal
models */
B as ic IR B and Internal models of market ris k
Advanced models of credit ris k and/or O perational
ris k
P arallel calculation
P arallel calculation
PeruBasel II implementation:
Pillar I: Credit risk
Definition of Portfolios
Basel II Peru
Regulatory Portfolios
Corporate + 50MM€ Corporate + 200MMS/. of sales
SME corp. between 5MM€ and50MM€
Big firms betweenMore than 20MMS/. of sales and 200MMS/. of sales
Medium firms More than 300MS/. of debt and until 20MMS/. of sales
SME retail under 5MM€
Small firms Between 20MS/. and 300MS/. of debt
Retail Until 20M S/. of. debt
Change of WeightsCurrent Law:
Basel IBasel II Peru CR regulation
Commercial loans 100% 100% unless an issuer assessment applies. (20%)
Leasing 50% 100% unless an issuer assessment applies. (20%)
Special Regime until Dec-12
Debt instruments 100% According to external ratings
Retail, includingRevolving consumptionNon revolving consumption
100% 100%
Mortgage 50% 50%, until the guaranteed portion
Shares 100% 300% - 400%
Change of Weights
Current LawBasel I
Basel II Peru CR regulation
Peruvian sovereign in local currency and Central Bank exposures
0% 0%
Peruvian sovereign in foreign currency 0% according to formula (do not include reserves in CB)
Rest of sovereigns 0% - 20% According to external ratings
SUNAT 100% 20%
Public and private Financial System institutions
20% According to external ratings
Mivivienda (mortgage program supported by government)
0% 20% stock.According to institutional external ratings for new
credits
Other changes that affect capital requirement
Current LawBasel I
Basel II Peru CR Regulation
Use of mitigators Do not allow its use Recognition of financial collaterals and guarantees
Use of credit conversion factors
Through internal rules Through public rules
Recognition of provisions in capital
Until 1% of standard credits
1.25% RWA
Settlement and delivery risk - Between 100% and 1000%
Default definition - 90 days, affects risk weights (150% if specific loan loss reserves < 20% of debt, except mortgages)
Use of internal models - Requires supervisor approvalFundamental and advanced models
Sovereign exposures
Weight factors of Sovereign exposures of foreign countries are found in the Accord according to international risk rating agencies.
Sovereign exposures referred only to Central Banks and Central Government exposures. The rest of public institutions will be treated as corporates.
Peruvian local currency sovereign exposures, as well as local and foreign currency reserves and other Peruvian Central Bank operations have a weight factor of 0%.
Peruvian foreign currency sovereign exposures (except reserves), will have a weight factor according to the following formula:
0,
11.1
1maxfactorweight 32Pe
1-month tat capital regulatorymonth tat currency foreign in exposuressovereign P
11
Credit conversion factors (CCF)
Basel I Basel II Peru CR Regulation
Confirmations of self-liquidating irrevocable trade letters of credit up to one year, when the issuing bank is a high rating foreign financial system institution according to the CB.
Not clearly defined 20%
Performance bonds, bid bonds and warranties to guarantee satisfactory completion of a project
Not clearly defined 50%
Guarantees , bank acceptances, rest of trade letters of credit, rest of letters of guarantee
Not clearly defined (100%)
100%
Credit lines 0% Between 0% and 50%
The regulation considers fundamental IRB (FIRB) and advanced IRB (AIRB)Parameters are required to be calculated taking into account a complete business cycle (independently of the minimum period of observations)
Internal Models (IRB)
Definition of Default
Past due loan for more than 90 daysRetail debtors: by operation Non retail debtors: by debtor
Debt instruments are considered in default since the first day of delay after the settlement period.Change to a restructuring situation In the last 5 years, the debtor or the operation has registered more than one change in contract conditions (unless the firm can make a better estimation of its change to a default situation)The firm considers that the debtor is unable to partially or totally fulfill its obligations according to the agreement .
Leaving default
From the moment of non default, punctually fulfillment of liabilities for 12 consecutive months. During this period, the debtor will be able to register a maximum delay of 7 consecutive days and a maximum accumulated delay of 25 days (unless the firm can make a better estimation of the change to a non default situation)The firm considers that the debtor is able to fulfill all its obligations. This condition will be valid only when the reason of non fulfillment is due to qualitative criteria.
PeruBasel II implementation:
Pillar I: Market risk
Current Methodology
Firms will be able to calculate capital requirement for market risks through one of the following ways:1. Standardized Method2. Internal Models3. Combination of standardized method and internal models. It must be considered that each type of risk should be evaluated
using only one method. Changes in regulation
Inclusion of interest rate risk measurement in trading book and commodities risk measurement, as part of the standardized method.Use of internal models with previous authorization of the SBS.
Trading book for market risk capital requirement
SBS will consider the following instruments as part of trading book:a) Instruments registered in trading bookb) The following instruments registered in available-for sale category:
DebtCDBCRPSovereign bonds (VAC-bonds not included)Global bondsBrady bonds
Equity:IGBVL sharesMutual funds (at least 70% of the fund in shares)
a) Speculative derivativesb) Derivatives that hedge a and b investmentsc) Commodities
PeruBasel II implementation:Pillar I: Operational risk
Capital requirement for operational risk
Firms must use one of the following methods.
a. Basic indicator approach – BIA (function of net income)b. Alternative Standardized approach - ASA (function of net income by business
lines, except retail and commercial banking lines) c. Advanced measurement approaches – AMA (probabilistic calculations)
The use of ASA or AMA requires express authorization of the SBSBasel II established methodologies are followed.
Operational Risk
Gradual implementation of operational risk requirement:
SBS would expect that during the implementation, entities are able to meet the requirements to apply to ASA, and thus avoid the application of 100% according to BIA.
Jul 2009 Jul 2010 Jul 2011
40% 50% 100%
Peru:Implementation of pro-cyclical loan loss
reserves
Regulatory reform of the SBS
Foreign exchange credit risk regulation
January 2005
Resolution N° 0041-2005 Regulation for foreign exchange credit risk management
Sets minimum prudential standards with respect to granting redits in foreign currency , as an additional component for defining the ability to pay.
To that effect, minimum requirements in managing this risk are defined. In case of not satisfying those requirements, additional provisions are set.
May 2005 CIRCULAR Nº B- 2145 -2005 F- 0485 -2005CM- 0332 -2005CR- 0201 -2005EAF- 0229 -2005EDPYME- 0117 -2005
Over-borrowing regulation
September 2006
S.B.S. ResolutionNº 1237 -2006 Regulation for retail debtors debt overhang risk management.
Stipulates that firms must establish policies regarding granting, amendment and revision of revolving credit lines, including explicit standards and measures to include over-borrowing of retail debtors in credit
evaluation. Additionally, sets minimum requirements for management of retail debtors over-borrowing. Additional provisions will be established on the unused portion of retail revolving credit lines if requirements are not fulfilled.
August 2008
S.B.S. ResolutionNº 6941 -2008New Regulation for retail debtors debt overhang risk management
How does Accumulation Rule work?
The variable component of procyclical loan loss reserves will be activated in the following situation:
The average GDP growth rate YoY of the last 30 months passes from less than 5% to 5% or more.
When the average GDP growth rate YoY of the last 30 months is over 5%, and the average GDP growth rate YoY of the last 12 months is higher by 200 basic points to this same indicator calculated a year earlier.
When the average GDP growth rate YoY of the last 30 months is over 5%, and 18 months had elapsed since the procyclical rule was deactivated
How does Decumulation Rule work?
The accumulation rule will be deactivated in the following situations:
The average GDP growth rate YoY of the last 30 months passes from a level equal or greater than 5% to one less than this threshold.
The average GDP growth rate YoY of the last 12 months is lower by 400 basic points to this same indicator calculated a year earlier.
Reserve rates for credits in standard category
Types of credit Fixed component
Variable component
Corporate credits 0.7% 0.4%
Credits for large firms 0.7% 0.45%
Credits for medium firms 1.0% 0.3%
Credits for small firms 1.0% 0.5%
Retail credits 1.0% 0.5%
Revolving consumption credits 1.0% 1.5%
Non revolving consumption credits 1.0% 1.0%
Mortgage loans for housing 0.7% 0.4%
Procyclical rule evolution
30 months
0%
5%
10%
15%
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
PBI (var. %) Promedio 30 meses umbral 5%Average GDP growth rate 30 months Threshold 5%
Procyclical rule evolution
12 months
-12%
-8%
-4%
0%
4%
8%
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
variación anual de PBI (Prom. 12 meses) umbral -4% umbral 2%
-3.98%
Threshold 2%Threshold -4%Average GDP growth rate 12 months
The Banking System has S/. 916 millions of loan loss reserve buffer and S/. 4 134 millions of capital buffer
5 0196 755 7 886
9 304 9 151778
1 0471 222
1 442 1 418
1 098
901
1 488
1 386 2 716
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
Dic-2006 Dic-2007 Jun-2008 Dic-2008 Jun-2009
Banking System: Total Capital(Millions of S/.)
Minimum regulatory capital Prudential capital required by the SBSVoluntary capital
1 958 2 118 2 284 2 3862 733
454553
233375 355
369
363
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
Dic-2006 Dic-2007 Jun-2008 Dic-2008 Jun-09
Banking System: Total loan loss reserves(Millions of S/.)
Required reserves Procyclical reserves Voluntary reserves
PeruBasel II implementation:
Pillar II
Additional capital buffer
• In Peru, the additional buffer is a function of the type of institution (10.5% for commercial banks, 14% for microfinance institutions). This indicator is not very sensitive to risk.
• Regulatory capital should consist of:1. Minimum capital : Pillar I2. Additional capital: Should be determined based on the institution's risk
and business cycle .3. Additional capital according to ICAAP
.,max reqadditionalKKK PillarIICAAPregulatory
PillarIICAAPregulatory KKK ,max
Business cycle indicator
Decumulates
Accumulates
How should the additional capital requirement be calculated in terms of risk profile and economic cycle?
Business lines
Participation (%)
Risk weight by business line(according to stress testing)
Risk indicator
L1 P1% W1 P1%*w1
L2 P2% W2 P2%w2
L3 P3% W3 P3%w3
L4 P4% W4 P4%w4
… … … …
Ln Pn% Wn Pn%wn
TOTAL 100% - ΣPi%*wi = H
Total indicator shocks micmacroecono
,
gPD
LGDPDPDfW
stress
turndownciclestress
How should the additional capital requirement be calculated in terms of risk profile and economic cycle?
Ranges of H Minimum capital Requirement adjusted to risk
(Base: 10%)
Capital requirement according to supervisor assessment of ICAAP
Good (I,II) Bad (III,IV,V)
H1 – H2 11.5% 11.5% 11.5%*(1+ α1)
H2 – H3 12% 12% 12%*(1+ α2)
H3 – H4 13% 13% 13%*(1+ α3)
H4 – H5 14% 14% 14%*(1+ α4)
… … … …
H(n-1) – H(n) 17% 17% 17%*(1+ αn)
αi = weight adjustment according to ICAAP evaluation
Peru:Impact of Basel II implementation
Timing of implementation of law 1028
Today JUL 2009 JUL 2010
JUL 2010 JUL 2011
JUL 2011 JUL 2012
JUL 2012 JUL 2013
RWA adjustment
(CR, MR)1 0.96 0.96 0.98 1
(OR) adjustment Ø 0.4 0.4 0.5 1
Inverse of capital ratio
including additional
requirement
10.5 banks 11 11 ?? ??
14.3 IMFNB 14.3 14.3 ?? ??
New methodology
Evolution of Capital Ratio (Banking sector)
Ratio de Capital: BANCA MULTIPLE
Ene-09, 11.93
11.12
11.69
9.59.8
10
11
10.5
9.19.4
9.8
7
8
9
10
11
12
13
14
Jul- 2005 Jul- 2006 Jul- 2007 Jul- 2008 Jul- 2009 Jul- 2010 Jul- 2011 Jul- 2012
Ratio de capital Ratio minimo Req prudencial Ajuste calendario
Rop
Rop ajustado
Ajuste APR
OR
Adjusted OR
RWA adjustment
Capital ratioMinimum ratio
Prudential requirement
Scheduled adjustment
Evolution of Capital ratio (microfinance institutions)
Ratio de Capital: IMFNB
16.41
18.47
Ene-09, 19.07
109.89.5
14.3
9.89.49.1
7
9
11
13
15
17
19
21
23
Jul- 2005 Jul- 2006 Jul- 2007 Jul- 2008 Jul- 2009 Jul- 2010 Jul- 2011 Jul- 2012
Ratio de capital Ratio minimo Req prudencial Ajuste calendario
Rop
Rop ajustado
Ajuste APR
Adjusted OR
OR
RWA adjustment
Capital ratioMinimum ratio
Prudential requirement
Scheduled adjustment
Banking sector capital (S/. MM)December 2008
CAPITAL BANCA MULTIPLE MILES DE S/.
0
12,131,574
-
12,000,000
CAPITAL REQUERIDO PATRIMONIO EFECTIVO
Minimum req.
9,313,961
Additional req.1,380,510
Minimum req.9,831,794
Prudential req. 1,552,389
Additional Req.864,188
Initial Situation
Final Situation
Required capital regulatory capital
Prudential req.1,438,003
Microfinance institutions capital (S/. MM)December 2008
CAPITAL IMFNB MILES DE S/.
0
1,600,792
-
1,600,000
CAPITAL REQUERIDO PATRIMONIO EFECTIVO
Minimum req.
766,574
Prudential req.438,042
Additional req.
398,212
Minimum req.825,874
Prudential req.417,284
Additional req.
362,824
(December 2008)Initial Situation
Final Situation
Required capital regulatory capital
Capital ratio according to portfolio growth scenarios: banking sector
0%
15%
42.63%
Portfolio growth
RWA (+ OR, +growth)Capital Ratio=---------- Reg. capital (+ earnings capitalization +reserves of standard credits (+growth) )
Ratio de Capital: Banca Multiple
11
15.31
13.46Ene-09, 11.93
9.1
10.5
8
9
10
11
12
13
14
15
16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ratio de capital Ratio minimo Req prudencialCapital ratioMinimum ratio
Prudential requirement
Capital ratio according to portfolio growth scenarios: microfinance institutions
0%
20%
43.83%
Portfolio growth
RWA (+ OR, +growth)Capital Ratio=---------- Reg. capital (+ earnings capitalization +reserves of standard credits (+growth) )
Ratio de Capital: IMFNB
20.00
16.92
14.30
Ene-09, 19.07
9.1
8
10
12
14
16
18
20
22
24
26
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ratio de capital Ratio minimo Req prudencialCapital ratioMinimum ratio
Prudential requirement
PeruBasel II implementation
Setiembre 2009
APEC