Transcript Existing proposals for taming procyclicality

Procyclicality in Regulation
and Macroprudential Policy
Jan Frait
I.
Procyclicality and Provisioning
Procyclicality
• Financial system procyclicality means the ability of the financial system to
amplify fluctuations of economic activity via procyclicalit patterns in financial
institutions’ lending and other activities.
• The procyclical behaviour of financial markets transmits to the real economy in
amplified form through easy funding of expenditures and investments in good
times and financial restrictions leading to declining demand in bad times.
• Procyclicality increased prior to the crisis due to (i) the greater use of leverage in
the financial and real sectors, (ii) closer ties between market and funding
liquidity e.g. through increased use of collateral in secured financing, (iii)
increased contagion effects in integrated markets as well as (iv) the
(unintended) effects of some regulations, including accounting standards.
To provision or not to provision
• Debate about the instruments that might reduce the potential procyclicality of
regulations is not a new one.
• Borio and Lowe (2001) – To provision or not provision
• paper written just prior to the setting and implementation of new set of regulations,
• describes a conflict between the interests of supervisors and accountants,
• financial supervisors have tended to emphasise the role that provisions can play
in ensuring that banks maintain adequate buffers against future deteriorations in
credit quality,
• accounting authorities have stressed the importance of provisions in generating
fair and objective loan valuations.
• The accountants won the battle … but after a few years we got back to the
start again.
To provision or not to provision, to buffer or not to buffer
• After the crisis - to provision or not to provision, to build capital buffers or not to
build capital buffers
• bank supervisors have always been more supportive of general provisioning
regimes and reserves than have accounting and securities authorities
• this time the supervisors used the opportunity, but it is not so easy to win a war …
• Procyclicality may be caused by broad spectrum of factors going much beyond
accounting and capital regulation framework of financial institutions‘ regulation.
To provision or not to provision
• In general principle, banks should set aside provisions to cover their expected
losses while their capital should primarily be used to cover unexpected losses.
• There generally exist several provisioning systems differing in either when the
provisions are created and entered in the accounts or what event triggers
provisioning.
• Currently prevailing practice is “specific” provisioning.
• specific provisions are fixed against losses on predominantly individually
assessed loans and start at the moment an evident event occurs;
• specific provisioning is backward looking (i.e. it identifies risk ex post).
• General provisions
• are usually set against losses from portfolios of loans and can be forward looking
(i.e. they identify credit risk ex ante)
To provision or not to provision
• The key argument for forward-looking provisioning is the inherent tendency of
banks to relax excessively lending standards during economic upturns and tighten
them excessively during downturns
• the risks are underestimated during upturns leading to credit booms with loans
extended with prices set too low,
• subsequent downturn leads to re-pricing under the impact of higher default rate,
prices are too high, potentially ending in credit crunch.
• Forward-looking provisioning should therefore help to ensure correct pricing of
expected credit risk (via margins) emerging at time when the credit is extended.
To provision or not to provision
• The international accounting standards currently in force (IAS 39) allow banks to
provision only for loans for which there is clear evidence of impairment (i.e.
backward-looking provisioning).
• specific provisions are created and entered in the accounts only after credit risk
comes to light (which usually occurs in times of recession),
• In the general/dynamic/through-the-cycle provisioning systems provisions are also
created when credit risk comes into being (i.e. to a large degree in times of boom)
• banks provision against existing loans in each accounting period in accordance
with the assumption for expected losses:
• at times when actual losses are smaller than assumed a buffer is created which
can then be used at times when losses exceed the estimated level…
• This looks straighforward, but in practice it is not so.
Provisioning in Spain
• Spain used „traditional“ provisioning up to 2000:
general provisions (GP) reflected estimate of average expected loss from total loans:
GP = g*ΔL , where L stands for total loans and g for the parameter (between 0.5%
and 1%),
while specific provisions (SP) were set in a standard way:
SP = e*ΔM, where M stands for impaired loans and e for the parameter (between
10% and 100%).
total provisions: TP = g*ΔL + e*ΔM.
• In 2000, additional compotent was added – statistical provisions:
Total provision (TP) = Specific (SP) + General (GP) + Statistical (StP)
Provisioning in Spain
• Banks sorted loans to six homogenous categories with different risk
coefficient s (defined by supervisor as average specific provision rate over
the whole cycle).
• StP = Lr – SP, where Lr is a latent risk s*L, where s stands for the
coefficient of a historical average specific provisions (between 0% and 1.5%
in the standard approach),
 SP < Lr (low impaired loans)  StP>0 (building up of the statistical
fund),
 SP > Lr (high impaired loans) StP<0 (depletion of the statistical fund),
 balance of the statistical fund: StF = StPt+StFt-1, with a limit:
0 ≤ StF ≤ 3 * Lr
Provisioning in Spain
• System had to be modified with effect from 2005 due to the IRFS –
statistical provisions were hidden in newly defined general provisons:
Total provision (TP) = Specific (SP) + General (GP)
SP: unchanged,
6
 6

GPt    i Lit     i Lit  SPt 
i 1
 i 1

GP:
• banks must make provisions against the credit growth according to parameter
 which is the average ratio of estimated credit losses (“collective assessment
for impairment” in a year neutral from a cyclical perspective) and  parameter
which is the historical ratio of average specific provision (coefficient s in
previous version),
• 1st component reflects losses in the past, 2nd reflects specific provisions in the
past relative to current ones (dynamic component),
• limits for fund set as 0,1% ≤ GF ≤ 1,5% of total loans.
Provisioning in Spain
• Developments in provisioning funds in Spain after 2000 –
developments of provisions‘ components
IMÉNEZ, G., ONGENA S., PEYDRÓ, J., SAURINA, J. (2012): Macroprudential policy, countercyclical bank capital buffers and credit supply: evidence
from the Spanish dynamic provisioning experiments. Barcelona GSE Working Paper Series, No. 628.
Provisioning in Spain
• Spanish authorities considered a new system IFRS compatible (IASB not).
• Fund was set in good times, buffer was created prior to current crisis
• NPLs 200% covered at the beginning of 2008 (EU average 60%),
• nevertheless, at the end of 2008 only 100% covered, later on not covered …
• never sure whether the fund will suffice ... still better that nothing.
• Spanish system viewed as accounting tool – though BdE considers it as part of
toolbox for macroprudential supervision.
• BdE did not think it distorts accounting statements:
• Banks are required to disclose the amount of the dynamic provision, apart from
the specific provision.
• Thus, users of accounting statements can “undo” the impact of the dynamic
provision on the P&L.
Provisioning in Spain
• Spanish system was rather simple – a kind of pre-dynamic provisioning:
• not optimal, just one of potential solutions,
• doubts whether it really restricts excessive lending,
• can hardly be adopted in current recessionary conditions,
• unilateral attempts to do so might do more harm than gain – see Brunnermeier, M.
et al. (2009),
II.
Loan loss provisioning in selected European banking
sectors:
Do banks really behave in a procyclical way?
UK some time ago
• Financial Times website: 4 December 2012 - Welcome to Japanstyle crisis management by John Plender
• The banks sell at a discount of around a third to net asset value
because of uncertainty about the value of assets that are difficult
to price and a well justified conviction that the assets are
overvalued.
• The biggest source of (potential) overvaluation relates to the form
of provisioning required by international financial reporting
standards (IFRS), which operates on an incurred loss basis.
• Banks have only a limited ability under this rule to make full
provision for expected losses.
16
The euro area of these days
• ECB website: 23 October 2013 - ECB starts comprehensive
assessment in advance of supervisory role
• The assessment will consist of … an asset quality review (AQR) to
enhance the transparency of bank exposures by reviewing the
quality of banks’ assets, including the adequacy of asset and
collateral valuation and related provisions.
• Reuters website: 8 December 2013 - Banks trim risk but fail to
raise provisions ahead of EU review
• Most of Europe's big banks shed risky assets in the quarter to
September, but they have yet to take extra provisions against
doubtful loans to show they have put the financial crisis behind
them.
17
What we struggle to do
• Motivation:
• One of the most important factors behind the financial crisis is
that they were simply lending too much and too easily in good
times, i.e. their lending behaviour was procyclical ...
• … and subsequent loss of confidence in reported state of banks‘
balance sheets not only in the EU/euro area brought to the
attention the quality of loans as well as the way the banks priced
credit risk in good times,
• the important piece of evidence regarding the pricing of credit
risk provides the level and dynamics of provisions set against
the loans classified as non-performing (at default).
• We look empirically at the issue of behaviour of the banks in the
bank-based financial systems to find out the extent to which they
behave procyclically under existing regulatory framework (via
extension of Frait and Komárková, 2013).
18
Added value of this paper
• We can find number of studies focusing on the provisioning in
Asian and emerging economies.
• However, there is limited information on banks’ provisioning in European
countries after the IRFS (international accounting standards) adoption
including the period of crisis.
• We try to fill the gap to some extent via looking at the data of banks from
Central Europe.
• The approach:
• Not a fully-fledged research approach, but more a policy approach looking
also at regulatory and accounting issues: asking, for example, whether
through-the-cycle provisioning regime could serve as one of the possible
regulatory responses to the ongoing financial crisis.
• We believe that understanding the true extent of procyclicality in
provisioning is crucial factor in designing any regime of this sort.
19
Empirical evidence from abroad
• In the most recent study Packer and Zhu (2012) found mixed evidence
for countercyclicality in provisioning of Asian banks.
• They show that countercyclical loan loss provisioning has dominated
throughout emerging Asia.
• Loan loss provisioning did not become more conservative at all points in
time subsequent to the Asian financial crisis, but actively leaned in a
fashion that moderated swings in earnings and the macroeconomy.
• On the other hand, Japanese banks showed procyclical provisioning.
• The evidence on advanced economies prior to adoption of the IFRS and
the crisis is also available
• Hardly any information on banks’ provisioning in European countries after
the IRFS adoption including the period of crisis.
• There is major “data” problem in analysing the European provisioning
issue (see the debate on ongoing asset quality review in the euro area).
20
Do the CE banks provision procyclically? I
Loan loss provisions/total loans and GDP growth
(Czech Republic, 1Q2001–2Q2013; Slovakia, 1Q2004-2Q2013)
15
10
5
0
5
7
9
11
13
15
17
-5
-10
Source: CNB, NBS, OECD
Note: y-axis: GDP growth in %, x-axis: ratio of provisions to loans in %;
Note: Unweighted average for ratio of provisions to loans.
19
• There is a negative
relationship between GDP
growth and the ratio of loan
loss provisions to total loans in
the Czech Republic and
Slovakia for the period 1998–
2013.
• This relationship that should
be a logical consequence of
the prevailing IFRS-based
provisioning system, is
subjected to an empirical
analysis.
• Does it reflect procyclical
behaviour? If yes, how strong
are the non-procyclical
21
features of banks‘ behaviour?
Do the CE banks provision procyclically? II
• The creation of provisions – especially those directly linked to impaired loans
(“specific provisions”) – can be affected by changes in the macroeconomic
environment, the regulatory and taxation rules in force and, last but not least, by
the chosen behaviour of a particular bank in a given environment.
• To reveal the potential procyclical behaviour of Central European banks, we
applied the model developed by Bikker and Metzemakers (2003), modified in order
to analyse the behaviour of the banking sector of a single country.
• We determine whether there is a significant relationship between bank
provisioning (the left-hand side of the equation) and proxies for the business cycle,
regulations and bank behaviour (the right-hand side of the equation).
22
Do the CE banks provision procyclically? III
( LLP / TA)i , j ,t  1,i   2 ( LLP / TA)i , j ,t 1  3Δ ln GDPj ,t   4UNEMPL _ gap j ,t 
 5 ( EARN / TA)i , j ,t   6 Δ ln LOANSi , j ,t   7 (CAP / TA)i , j ,t   i ,t
Variables:
(i)
macroeconomic: the growth rate of real GDP per capita (ΔlnGDP),
the unemployment gap (UNEMPL_gap);
(ii) bank-specific: the ratio of loan loss provisions to average total assets
(LLP/TA), real credit growth (ΔlnLOANS), the ratio of total loans to average total
assets (LOANS/TA), pre-tax earnings (EARN/TA), the ratio of equity capital to
average total assets (CAP/TA);
(iii) other: „t“ denotes time and „i“ the individual banks, TA stands for the average total
assets for the two periods (0.5(TAt+TAt-1));
(iv) i is a bank/country fixed effect.
23
Do the CE banks provision procyclically? IV
• The growth rate of real GDP and the level of unemployment are used in the
equation to proxy the business cycle.
• If banks behave procyclically, the rate of economic growth will be negatively
correlated with provisioning, because an economic downturn is usually
followed by growth in the volume of provisions.
• The unemployment rate follows GDP growth with a lag and affects banks’
earnings indirectly, it should be positively correlated
• It was included in the model because unlike GDP, which indicates the
degree of change in the business cycle, the level of unemployment
shows the actual phase of the cycle.
24
Do the CE banks provision procyclically? V
• The other factors in the equation are the real loan growth and the ratio of total
loans to average total assets, which we included in order to capture credit risk
associated with lending activity.
• Should the banks be prudent, both these variables found positively associated
with loan loss provisions (lower credit quality i.e. higher credit risk, higher risk
absorber).
• In some studies provisioning expenses vary negatively with loan growth provisions are declining even as surges in new loans might indicate increased
riskiness.
• In a latter case, significant increase in the loan growth rate (indirectly growth in
credit risk) may reflect over-optimistic expectations about future economic
developments and future earnings.
• Over-optimistic expectations and underestimation of credit risk, in turn, may
result in a low growth rate of provisions relative to loan growth.
25
Do the CE banks provision procyclically? VI
• Another variable in the model is pre-tax profit to average total assets.
• Regulatory constraints on capital and other considerations can motivate the
bank to smooth out earnings over time.
• Provided income smoothing, provisioning should be positively correlated with
profits.
• The final variable included is the ratio of equity capital to average total assets. The
relationship between provisioning and capital can be either negative or positive.
• If a bank takes into account its equity ratio when provisioning, the relationship
between the variables is negative. If the bank decides that its capital buffer is
large enough to cover any loan losses arising, as is usual at times of credit
expansion, its provisioning may be low.
• By contrast, a positive relationship would suggest that provisions and capital
are more or less independent of each other. The bank thus sets aside loan
loss provisions no matter how large its capital buffer is.
26
Do the CE banks provision procyclically? VIIa
Sample:
14 Czech banks, 2001Q1-2013Q2
15 Slovak banks, 2004Q1-2013Q2
Baseline without outliers:
Baseline:
L.llp_ta
GDP
Unem
Pbt_ta
rdLoans
loans_ta
equit_ta
_cons
N
Standard errors in parentheses
="* p<0.10
(1)
Fixed effects
0.8810***
(0.0145)
-0.0004
(0.0003)
0.0021***
(0.0007)
0.0040**
(0.0015)
0.0000**
(0.0000)
0.0050**
(0.0019)
-0.0117
(0.0078)
-0.0096**
(0.0042)
1196
** p<0.05
(2)
GMM
0.8731***
(0.0164)
-0.0000
(0.0002)
0.0054**
(0.0024)
0.0047***
(0.0017)
0.0000
(0.0000)
0.0032
(0.0024)
-0.0147
(0.0116)
-0.0164**
(0.0073)
1196
L.llp_ta
GDP
Unem
Pbt_ta
rdLoans
loans_ta
equit_ta
_cons
N
Standard errors in parentheses
="* p<0.10
(1)
Fixed effects
0.8526***
(0.0245)
-0.0003
(0.0002)
0.0014*
(0.0008)
0.0073***
(0.0025)
0.0001
(0.0001)
0.0034
(0.0029)
0.0163*
(0.0091)
-0.0159**
(0.0060)
1031
** p<0.05
(2)
GMM
0.8561***
(0.0308)
-0.0002
(0.0003)
0.0033*
(0.0018)
0.0094**
(0.0044)
-0.0001
(0.0001)
-0.0023
(0.0075)
0.0062
(0.0211)
-0.0048
(0.0117)
1031
27
Do the CE banks provision procyclically? VIIb
Sample:
14 Czech banks, 2001Q1-2013Q2
15 Slovak banks, 2004Q1-2013Q2
Baseline without Loans/TA:
Baseline without Loans/TA and outliers:
(1)
(2)
(1)
Fixed effects GMM
Fixed effects
L.llp_ta
0.8752***
0.8674*** L.llp_ta
0.8624***
(0.0198)
(0.0206)
(0.0230)
GDP
-0.0006**
-0.0001
GDP
-0.0004
(0.0003)
(0.0002)
(0.0002)
Unem
0.0015**
0.0047** Unem
0.0011*
(0.0007)
(0.0022)
(0.0006)
Pbt_ta
0.0066***
0.0071*** Pbt_ta
0.0088***
(0.0011)
(0.0011)
(0.0015)
rdLoans
0.0000
-0.0000
rdLoans
0.0000
(0.0000)
(0.0001)
(0.0001)
equit_ta
0.0016
-0.0076
equit_ta
0.0239**
(0.0092)
(0.0085)
(0.0106)
_cons
-0.0009
-0.0095
_cons
-0.0111**
(0.0039)
(0.0070)
(0.0043)
N
1150
1150
N
1040
Standard errors in parentheses
Standard errors in parentheses
="* p<0.10
** p<0.05
="* p<0.10
** p<0.05
(2)
GMM
0.8695***
(0.0284)
-0.0002
(0.0002)
0.0031**
(0.0015)
0.0105***
(0.0018)
-0.0001
(0.0001)
-0.0276*
(0.0165)
0.0025
(0.0078)
1040
28
Do the CE banks provision procyclically? VIII
• Some variables, both macroeconomic and bank-specific, had statistically significant
effect on the size of the loan loss provisions.
• As expected, the coefficient on GDP growth was generally negative (though
often not significant), indicating that provisioning is higher during economic
downswings and lower during upswings.
• Positive coefficient on the unemployment gap suggests that provisioning
depends on a stage of cycle and lacks forward-looking assessment of cyclerelated risk.
• The results suggest that banks tried to smooth their income (or optimise their
taxes) in the period under review by provisioning.
• Positive coefficient for the relationship between provisioning and the ratio of
total loans to average total assets could indicate (if significant) positive effect of
expected credit risk on level of provisions.
• Banks may tend to behave prudently to some extent.
29
Do the Czech banks provision procyclically? IX
• The final relationship under review is that between the equity capital to average total
assets ratio and provisioning.
• The results are inconclusive.
• To sum up, the results confirmed the assumptions regarding the procyclical
provisioning behaviour of banks, even though there are features in behaviour that
mitigate procyclicality to some extent.
• The results represent an argument for putting through-the-cycle provisioning into
accounting and regulatory practice.
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III.
Proposals for taming procyclicality in
accounting
Existing proposals for taming procyclicality
• Through-the-cycle expected loss provisioning (TELP) – EU Commission
consultation to further changes in CRD from July 2009:
• Based on through-the-cycle expected loss – forward looking estimation of losses
that should be covered by TELP.
• TELP designed in line with Spanish approach – baseline method uses both α and β
parameters, more simple method considers parameter β only.
• Prudential measure of a „corrective kind“ which nevertheless has impact on the
accounting.
• Proposal does not address the issue of consistency between IFRS and CRD.
• TELP potentially in conflict with regulatory concept of expected loss in Basel II.
• IRB institutions (only) apply models to set expected losses and their coverage
by provisions is tested (if provisions not sufficient, difference deducted from
regulatory capital).
• Proposal by Commission to use it via CRD supported neither by industry nor by
supervisors.
Existing proposals for taming procyclicality
• Expected loss approach (IASB, June 2009)
• Facing criticism of the existing framework and the conclusions of a report produced
by the Financial Stability Forum’s Working Group on Provisioning, the International
Accounting Standards Board (IASB) suggested a move to the expected loss (EL)
approach in June 2009 as part of the IASB’s project on replacing IAS 39 Financial
Instruments Measurement and Recognition.
• A major deviation from incurred loss approach - no trigger for an impairment test
required
• it should reflect better the economic reality of banks’ lending activities than the
incurred loss approach in that it requires an earlier recognition of expected
credit losses,
• it should help to avoid ‘incurred but not reported losses’.
• The present value of the expected future cash flows is measured using an initial
internal rate of return calculated on the basis of cash flows actually expected at
inception (taking into account expected credit losses), and not on the basis of
contractually agreed cash flows.
Existing proposals for taming procyclicality
• Expected loss approach (IASB, June 2009) cont.
• Initial internal rate of return will thus be lower than the contractual rate, with the
difference representing the risk premium charged to the borrower in order to cover
the statistically foreseeable risk of non-recovery.
• Difference between cash flows received that represent contractual interest and
interest recognised as revenues on the basis of the (lower) internal rate of return
would be recognised in the balance sheet as a credit expected loss provision.
• Subsequent or additional impairment loss is recognised through continuous reestimation of credit loss expectations. Reversal of impairment loss is recognised in
profit or loss when there is a favourable change in credit loss expectations.
• EL approach may be quite complex and could generate excessive subjectivity and
credibility/transparency issues.
• Any expected loss model has to rely on judgement supported by a set of
indicators.
• But the quest for a precise model of this sort can give rise to undue complexity.
Existing proposals for taming procyclicality
• In June 2010, the Basel Committee on Banking Supervision (BCBS, 2010b),
came up with its own proposal, in which provisions are based on best estimates
of expected credit losses built over the life of the loan at the balance sheet date
considering the loss experience over the complete economic cycle.
• Provisions are generally built up progressively by allocating a share of the
interest income over the life of the loan or loan portfolio to an allowance
account at the time interest income is recognised.
• The BCBS also argued for the use of a simplified average loss rate, which
would represent expected credit losses by loan type derived from historical
experience based on some measure of actual losses and adjusted for
current conditions.
Existing proposals for taming procyclicality
• Initially, there were expectations that the existing approach would be replaced
quite soon by the forward-looking countercyclical provisioning methodology
being developed by the BCBS and the IASB. However, the pace of preparation
of the new approach has become rather slow.
• In addition, the debate on impairment accounting subsequently became
dominated by the initiative of the IASB and the U.S. Financial Accounting
Standard Board (FASB) for reaching a common approach based on expected
losses and amortised costs.
• They issued a joint proposal in January 2011 (IASB, 2011) as a
"supplementary document" to their original proposals which can be viewed
as a step towards the common approach.
• The proposal would require an entity to determine an impairment allowance
based on internal risk management decisions to split financial assets to a
“bad book” or “good book,” depending on the degree of uncertainty about the
collectability of the assets’ cash flows.
Existing proposals for taming procyclicality
• IASB and FASB:
• An entity would be required to immediately recognize lifetime expected
losses for assets in the “bad book.”
• For assets in the “good book,” an entity would recognize the higher of: a
portion of lifetime expected credit losses determined under a timeproportional approach; and credit losses expected to occur within the
foreseeable future (not less than 12 months).
• Later on, the IASB and FASB’s deliberations moved to a three bucket approach
to capture the pattern of deterioration in credit quality.
• In this approach, loans are classified into three categories depending upon
their credit risks characteristics and any change in credit risk since
origination.
• The level of provisions recorded would be expected to increase as credit
deteriorates over time.
Existing proposals for taming procyclicality
• IASB and FASB cont.:
• Assets will begin in Bucket 1 and the measurement of impairment will be
based on 12 months of expected losses.
• Assets will shift to either the Bucket 2 or Bucket 3 if and when credit
deteriorates. The measurement of impairment in Bucket 2 and 3 will be
based on lifetime expected losses.
• In the Bucket 2, expected credit losses are not identifiable for individual
loans whereas in the Bucket 3 expected credit losses are individually
identifiable.
• The boards agreed that the impairment model will allow for migration of credit in
both directions. In addition, they agreed that the probability of default should be
the predominant characteristic for determining the collectibility of cash flows.
• The IASB and FASB joint proposal brings accounting rules more in line with the
proposal put forward by the Basel Committee
• But it got stuck …
Existing proposals for taming procyclicality
• In an updated reaction to a new proposal from the IASB, the Basel Committee
(BCBS, 2011a) expressed its support for an approach that requires the
recognition of adequate levels of provisions on the balance sheet to absorb all
expected credit losses.
• Not reflecting an adequate level of an allowance for expected credit losses
on the balance sheet could result in overstating the related asset balances
as well as the yield on those assets in any given period in the income
statement.
• This could be potentially misleading to investors, other users and other
market participants, while also raising the safety and soundness concerns of
prudential authorities.
• The BCBS underlines that incorporating a broader range of available credit
information than presently included in the incurred loss model should result
in an earlier identification of credit losses.
Finální změna přístupu k tvorbě opravných položek
• Mezinárodní účetní standardy – od IAS 39 k IFRS 9:
• přechod od modelu „incurred loss“ k modelu „expected loss“,
• opravné položky by z hlediska cyklu měly být vytvářeny dříve než v
současnosti.
• Dopady jsou nyní obtížně odhadnutelné a budou se mezi zeměmi
lišit.
• pravděpodobně půjde převážně o dílčí změnu v načasování tvorby,
nelze vyloučit i dopad do úrovně opravných položek.
40
IV.
Capital buffers
Capital buffers: nothing new
• Borio and Lowe (2001) revisited
• One possibility … is a clearer treatment of the relationship between provisions and
regulatory capital …
• set provisions so that they cover an estimate of the net embedded loss in a bank’s
loan portfolio,
• capital could then be calibrated with respect to the variability in those losses (their
“unexpected” component). (p. 46)
• Another approach … supervisors could supplement capital requirements with a
prudential provisioning requirement …
• instead of having the annual statistical provisioning charge deducted from a
bank’s profit and loss statement, have it added to the bank’s regulatory capital
requirement for unexpected losses. (p. 48)
Existing proposals for taming procyclicality
• Economic cycle reserve (ECR) – UK Turner review
• An additional non-distributable reserve which would set aside profit in good years to
anticipate losses likely to arise in future.
• A formula driven method would simple and non-discretionary similarly to Spanish
system:
• a buffer of the order of magnitude of 2 – 3 % of RWAs at the peak of the cycle,
• reserve could vary according to some predetermined metric such as the growth
of the balance sheet or estimates of average through-the-cycle loan losses.
• A discretionary method would be entity-specific, tailored to the peculiarities of each
bank’s portfolios.
Existing proposals for taming procyclicality
• Economic cycle reserve (ECR) – UK Turner review cont.
• The approach has a macro-prudential defensive focus and is meant to be
accounting neutral
• it is to be shown only as a movement on the balance sheet, rather than on the
P&L (is intended to be built and drawn by appropriation of retained earnings),
• but there are very strong arguments that it should also appear somewhere on
the P&L,
• allowing bottom line profit and earnings per share (EPS) to be calculated both
before and after its effect, and thus providing two measures of profitability, the
‘traditional’ accounting figure and a second figure struck after economic cycle
reserving.
Capital buffers: nothing new
• Procyclicality of Basel II was widely debated prior its implementation.
• There was a clear understanding that risk-sensitive regulatory capital
requirements tend to rise more in recessions and grow less during expansions,
laying the ground for potentially pro-cyclical effects.
• The authors of the framework therefore pretended that they included some
mitigating factors to dampen the potential pro-cyclical effect of Basel II's
increased risk-sensitivity.
• Although improved risk management was one of the arguments for the
introduction of Basel II, it is now accepted that neither regulatory capital nor
economic capital has been set adequately to capture actual risk, particularly the
risk contained in the trading book.
Capital buffers: nothing new
• High (perceived) costs of scraping Basel II down was reflected in the desire of
regulators/supervisors to continue relying on Basel II framework in dealing with
procyclicality.
• First, they hoped, after the current crisis, micropolicies might become easier for
implementation including „ initially theoretical“ tools within current Basel II-Pillar 2:
• Internal Capital Adequacy Assessment Process, Supervisory Review and
Evaluation Process
• Stress testing with scenarios and methodology from supervisors
• Backward testing of PDs and LGDs, downturn LGDs, conservative margins, tests
of adequacy of provisions ...
• Second, they struggled to add some procyclicality-mitigating factors into the
concept.
Where will this lead?
• D. Tarullo (2008): „ … there is a strong possibility that the Basel II paradigm might
eventually produce the worst of both worlds—a highly complicated and
impenetrable process (except perhaps for a handful of people in the banks and
regulatory agencies) for calculating capital but one that nonetheless fails to
achieve high levels of actual risk sensitivity”...