adequacy - Blog - Global Risk Community2024-03-29T06:13:41Zhttps://globalriskcommunity.com/profiles/blogs/feed/tag/adequacyClimate-Changing Regulatory Standards Challenge Banking Industryhttps://globalriskcommunity.com/profiles/blogs/climate-changing-regulatory-standards-challenge-banking-industry2013-07-18T14:52:02.000Z2013-07-18T14:52:02.000ZMichele Westergaardhttps://globalriskcommunity.com/members/MicheleWestergaard<div><p>Today’s banking industry must deal with an evolving regulatory landscape by developing new and innovative strategies for acquiring and optimizing capital. Banks must find a new way to raise capital, maintain a functional capital structure, and continue providing the products and services their customers demand while staying profitable. The new deadline for implementing the Basel III capital requirements makes capital management the most important issue for banks today.</p><p>Bogie Ozdemir, Vice President, Risk Models and Governance, Sun Life Financial recently spoke with the Global Financial Markets Intelligence (GFMI) about key topics to be discussed at the upcoming <a href="http://www.global-fmi.com/CASS2013_BO">GFMI 2nd Annual Capital Adequacy, Strategy And Stress Testing Conference</a>, September 30–October 2, 2013, in New York.</p><p><b>What are the key implications of Basel III for capital adequacy and capital optimization?</b></p><p><b>Bogie Ozdemir:</b> Basel III amounts to a climate change in the banking industry. It increased the capital requirements significantly — especially for certain businesses (most notably capital markets) and decreased the acceptable forms of capital. Capital has become a scarce resource under Basel III, putting significant downward pressure on ROE. In this new environment, Banks will need to change their business mixes, exit or shrink capital-heavy businesses, and adjust their operating models, while meeting income targets. During this course correction, their ROE and Income Targets will be challenged further as some rebalancing of operating models may compromise short-term income to improve ROE in future years. Subject to more onerous capital requirements under Basel III, banks will need to increase the efficiency of capital utilization and place greater emphasis on optimizing capital allocation and business mix across their operations.</p><p><b>How could banks integrate their regulatory and economic capital?</b></p><p><b>Bogie Ozdemir:</b> Regulatory capital is a fact of life and cannot be ignored. The economic view of capital also must not be ignored, as most recently seen in the J.P. Morgan case where attempt to reduce RWA consumption resulted in massive increase in economic risk and, ultimately, losses. On the insurance side, products such as variable annuities emphasize the importance of understanding economic risks that may not have been covered by regulatory capital requirements. The first order of business is to control the regulatory capital, which becomes the binding constraint for certain business. But regulatory capital and economic capital must be co-managed. I have noticed some banks using more simplistic — but not very robust — ways of managing the two, such a creating a composite metric that is a mix of economic and regulatory capital. Banks should establish a more robust optimization framework, define an objective function (such as maximizing ROE), and define explicit relationships between regulatory, economic (and its stressed version), and available capital. This framework should be a part of their capital and strategic planning process.</p><p><b>What are the best sources of funding in this scarce capital environment?</b></p><p><b>Bogie Ozdemir:</b> Contingent capital is becoming a viable source of funding undergoing concern. Junior Debt would be a source of capital under the “gone-concern” to protect deposit holders (and perhaps senior debt holders). By more carefully managing capital through ongoing and gone concern bases through an Economic Capital Framework, financial institutions can be more precise as to their required capital mix across common equity, senior debt, junior debt and hybrid instruments, and therefore minimize the average cost of capital.</p><p><b>How could you make sure stress testing results are integrated in capital strategy?</b></p><p><b>Bogie Ozdemir:</b> We know from the last crisis that EC can increase significantly under stress — particularly when taking into account stressed inter and intra risk correlations. In their ICAAP/ORSA exercises, FIs define an explicit risk appetite under stress (minimum acceptable rating and capital adequacy) and ensure that they remain consistent with that risk appetite under a series of forward-looking conditional stress scenarios. As part of the Use Test under ICAAP and ORSA, FIs should demonstrate how the results of their stress testing and capital projection exercises have been incorporated into business planning decisions. In particular, the results of stress testing are used directly to inform the appropriateness of an FI’s capital buffer above its internal targets and whether the integrity of its capital structure is sufficient in stressed conditions. Degrees of vulnerability to stress must also be considered as part of capital optimization strategies.</p><p><i>Bogie Ozdemir is Vice President of Sun Life Financial Group, responsible for Enterprise Economic Capital, Operational Risk, Model Vetting & Risk Analytics, Risk Policy, and Economic Scenario Generation groups. He was a Vice President of the BMO Financial Group responsible for Economic Capital, Stress Testing, and Basel Analytics and jointly responsible for ICAAP. Previously, he was a Vice President of Standard & Poor’s Risk Solutions group, where he was globally responsible for engineering new products and solutions, business development and management. He is the coauthor of a book titled “Basel II Implementation: A Guide to Developing and Validating a Compliant, Internal Risk Rating System.”</i></p><p>The <b>GFMI</b> <b>2<sup>nd</sup> Annual Capital Adequacy, Strategy and Stress Testing Conference</b> will take place in New York, September 30–October 2, 2013. For more information, visit the <a href="http://www.global-fmi.com/CASS2013_BO">event website</a>.</p><p>For more information, please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-894-6377 or <a href="mailto:Michele@global-fmi.com">Michele@global-fmi.com</a>.</p></div>The Importance of Economic Capital in the New Regulatory Environmenthttps://globalriskcommunity.com/profiles/blogs/the-importance-of-economic-capital-in-the-new-regulatory2012-08-20T15:54:32.000Z2012-08-20T15:54:32.000ZMichele Westergaardhttps://globalriskcommunity.com/members/MicheleWestergaard<div><p>The Dodd-Frank Act and Basel III are going to change the way banks raise, allocate and manage capital. Banks need to prepare for these changes now and develop effective strategies for achieving capital optimization and sustainable return on equity. The <a href="http://www.mefinance.com/CAS_InterviewCL"><b>GFMI, a marcus evans, Capital Adequacy and Strategy Conference, September 12-14, 2012 in New York, NY</b></a>, will help banks to understand what the legislation means for capital adequacy, as well as what they need to do to achieve the optimum level of capital to ensure continuous profitability.</p><p>Not only do US banks have to understand the Basel compliance rules, but they also need to understand how this relates to the Dodd Frank compliance act and how these two regulations work together to build a capital strategy.</p><p>Clifton Loo answered a series of questions written by GFMI before the forthcoming <b>Capital Adequacy and Strategy Conference</b>. <i>All</i> <i>responses represent the view of Mr. Loo and not necessarily those of SunTrust Bank.</i></p><p><b>What do you think of the latest additions/clarifications to the Basel III requirements?</b></p><p>Overall the requirements are consistent with both the CCAR process and also the Dodd Frank Act. Although we agree in concept with the majority of the information, some of the requirements seem to have erred on the overly cautious side causing banks to be at conflict with their basic process of lending. Other items appear to need more thought like the change in the reps and warranties. </p><p><b>How do the regulations really affect capital adequacy on a daily basis?</b></p><p>Risk weights have gone up and there are less capital instruments that can be used to meet our capital requirements and ratios. In addition, depending on how you interpret the rules, some of the buffers may not actually be buffers because of the Prompt Corrective Action that is attached to failing to meet the requirements.</p><p><b>How important is economic capital (EC) at the moment?</b></p><p>EC is still important for risk adjusted pricing, portfolio mix management and risk tolerance/limit setting. However, EC is not important from a capital adequacy or regulatory perspective. Regulators have almost no focus on EC, but there are rumours this will change.</p><p><b>What are the ways (if any) to minimize regulatory capital?</b></p><p>This is a hard question because to minimize regulatory capital, you have to change your product mix as regulatory capital calculations are based on products. This change in product mix may make the bank less profitable or unprofitable. Banks may need to rethink how to measure profitable return from a regulatory perspective.</p><p><b>What do you feel attendees will gain from attending this conference?</b></p><p>I think the regulatory environment has become restrictive and this conference is a forum to discuss how businesses are reacting to the new regulatory environment to keep their businesses profitable. Also, the conference may be a good forum to rethink how EC and regulatory capital are used in the risk adjusted decision making process.</p><p><i>Clifton Loo, PhD currently serves as the Head of Economic Capital at SunTrust Banks. In this capacity, he leads the effort to calculate economic capital along with assisting in the bank-wide calculation of risk adjusted return on capital. In addition, his team builds the econometric models for the CCAR process. In previous positions, he has worked as Portfolio Risk Manager and Operational Risk Manger in SunTrust Robinson Humphrey and also a Model Validation Manager at SunTrust.</i></p><p>For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-540-3000 ext. 6625 or <a href="mailto:Michelew@marcusevansch.com">Michelew@marcusevansch.com</a>.</p></div>