BIS Risk Control - MEFMI

BIS Risk Control - MEFMI

Counterparty credit risk assessment at the BIS Giorgio Glinni Deputy Head of Credit Analysis Restricted Agenda Counterparty credit risk assessment approaches (slides 3 4) Counterparty credit risk assessment at the BIS - general (5 6) Credit risk assessment of Sovereigns (7 16) Credit risk assessment of State Agencies (17) Credit risk assessment of Financial Institutions (18 26) Credit risk assessment of Supranationals (27 31) Credit risk assessment of non-financial Corporates (32)

Credit approval and limit setting (33 34) Possible indicators for counterparty resilience (35) Useful links (36) Restricted 2 Approaches for counterparty credit risk assessment Full reliance on external ratings Internal risk assessment Combinations of external ratings and internal risk assessment Restricted 3

Choice of approach - factors to consider Extent of credit risk exposures Regulatory requirements Impact on organisation: Resource implications Availability of skillset Governance and ownership of risks Policy/procedural changes Potential business impact For combinations of external ratings and internal assessments, the dynamics/sensitivities of the two compontents need to be assessed Restricted 4 Counterparty credit risk assessment at the BIS

general All new counterparties are subject to internal credit assessment Regular review requirement Credit assessment is based on an internal ratings approach: Methodologies defined for different asset classes Assessment criteria include: - quantitative financial and/or economic indicators - qualitative factors using standardised definitions

External assessments (eg. external ratings; market data-implied default risk) used as an additional source of information Internal credit grade (BIS grade) is an inputRestricted into 5 Information sources Counterparty under assessment Personal contact Website Public and Private Data providers (e.g. IMF, SNL,

FACTSET etc) Standardised presentation/wide range of peers Timeliness? Rating Agency Reports/Ratings Bloomberg CDS/equity prices Sell side research Journals/newspapers/online Restricted 6 Credit risk assessment of Sovereigns - criteria selection Economic Fundamentals / Structure Criteria

Ability to Pay Institutional effectiveness and Political risk Criteria Criteria Willingness to Pay Indebtedness Criteria Debt Financing Flexibility Restricted 7

Economic fundamentals Factors may include: Size of the economy Absolute GDP Wealth of the country GDP-per-capita Performance of the economy Real GDP growth Stability of the economy Inflation rate Competitiveness / Development of the economy World Economic Forums Global Competitiveness ranking Restricted 8 Institutional effectiveness

Factors may include: Policy credibility and track record Budget deficits, structural reforms Level of transparency and corruption Transparency International Global Corruption Index Business environment / attitude towards investors World Bank of Doing Business Ranking Quality of countrys institutions PRS Group / Economist Intelligence Unit (EIU) scores Attitude towards creditors Default history Restricted 9 Political Risk Factors may include:

Socioeconomic conditions / risk of social unrest United Nations Human Development Index Government stability / risk of conflict / law and order PRS Group political risk score Membership of international organisations (eg, EU etc) GDP-per-capita Event risk Qualitative assessment Restricted 10 Indebtedness Factors may include: Government spending Government budget balance / GDP

Government indebtedness Government debt/ GDP Debt affordability Government interest payments / government revenue Restricted 11 Indebtedness (continued) Factors may include: Country spending Current account balance / GDP Consumption- or investment-driven Country indebtedness Net External debt/ GDP Debt affordability External debt service / current account receipt

Restricted 12 Debt financing flexibility Factors may include: Access to capital markets Market prices (bond yields, CDS spreads) Market-implied ratings Euromoneys access to capital markets score

Restricted 13 Debt financing flexibility (continued) Factors may include: Capacity (depth) of domestic capital markets World Bank data on stock market capitalisation Proportion of debt denominated in local currency

Proportion of debt held by domestic investors Restricted 14 One year prior to default for which country? Restricted 16 One year prior to default for which country? Restricted 16 Credit risk assessment of State Agencies - criteria

selection Starting point: Internal grade of sovereign providing implicit guarantee or implicit support to state agency Notching from sovereign grade based on Strength of government support (governments willingness and ability to support the state agency); Standalone credit quality of state agency (based on financial ratios) Restricted 17 Credit risk assessment of Financial Institutions - criteria selection Operating environment Criteria

Company specific factors Criteria Ability to Pay Management and Criteria Governance Criteria Financial analysis Restricted 18 Qualitative factors (I)

Operating Environment - factors may include: Current - Market Conditions Consider factors such as: - General financial metrics margins delinquency rates - Competition - Regulation/creditor protection changes in regulation, bail in Outlook - Market Conditions Restricted 19 Qualitative factors (II)

Company Specific Factors - factors may include: Current - Bank Position Consider factors such as: - Business profile/bank type Investment bank/retail/specialised - Market share/pricing power - Diversification Positive/negative - Concentrations Outlook - Bank Position Restricted 20 Qualitative factors (III)

Management and Governance - factors may include: Management and Governance related factors including: - Financial reporting - Other communications - Track record re forecasts, integrations - Compliance record/governance issues Restricted 21 Qualitative factors (IV) Liquidity and Funding - factors may include:

Liquidity and funding factors including: - Access to markets - Diversification of funding mix - Other sources of liquidity - External support Restricted 22 Quantitative factors (I) Bank Specific Financial Analysis - factors may include: Profitability Ratios such as:

- ROA - Net interest margin - Cost/income - Provision/pre-provision operating income Restricted 23 Quantitative factors (II) Bank Specific Financial Analysis - factors may include: Asset Quality Ratios including: - Impaired loans/gross loans - Loan loss reserve coverage

- Concentrations (borrower/sector) Restricted 24 Quantitative factors (III) Bank Specific Financial Analysis - factors may include: Liquidity and Funding Ratios such as: - Liquid asset ratios; liquidity coverage ratio - Loans/deposits - Term structure of funding; LT funding/Total funding - Core funding (deposits); deposits/total funding

Restricted 25 Quantitative factors (IV) Bank Specific Financial Analysis - factors may include: Capital Measures including: - Absolute amount of capital - Risk-weighted capital adequacy - Capital composition - Leverage - Internal capital generation Restricted 26

Credit risk assessment of Supranationals criteria selection Shareholder Support Individual criteria Creditor Status Individual criteria Management Policy Individual criteria Financial Profile Individual criteria

Ability to Pay Willingness to Pay Restricted 27 Shareholder Support Supranationals are non-profit-maximising institutions that fulfil a policy role on behalf of their shareholders. As a result, shareholder support is a key rating factor for a supranational. Could consider two elements: Shareholders willingness to support the supranational and the degree to which this can be enforced. Criteria could include: - Degree of shareholders influence on (and commitment to)

the supranational - Strategic importance of the supranational to its shareholders. Ability to support: Criteria could include Credit quality of shareholders Shareholders economic strength Breadth and diversity of shareholders Callable capital / Total assets (%) Restricted 28 Creditor Status A unique feature of supranationals, relative to commercial financial institutions, is the extent to which they enjoy preferred creditor status. This de facto status means that the repayment of

supranationals loans take precedence over other creditors in the event of a sovereign default. In addition, experience shows that among borrowers, public entities are those which typically establish such priorities for debt repayment. Therefore, it is useful to gauge the institutions exposure to the public sector. Criteria may include Existence of preferred creditor status Exposure to public, or publicly-guaranteed, loans / Total Loans (%). Restricted 29 Management Policy Consideration of supranationals typically low risk tolerance and

stringent risk management policies. Relevant criteria could include: Risk tolerance and risk management practices - Credit and market risk appetite Risk management practices Liquidity and capital management Governance and compliance - Shareholder profile Organisation of the risk management and compliance functions Restricted

30 Financial Ratios The factors considered are similar to those used for assessing commercial banks, for example the following: Capital adequacy - Total equity / Total assets (%) Liquidity - Liquid Assets / Total assets (%) - LT funding / Total funding (excl. derivatives) (%) Asset quality - Impaired loans / Gross loans (%) Profitability - Net income / Total equity (%) Restricted

31 Credit risk assessment of non-financial Corporates criteria selection Operating environment (criteria may include: cyclicality, capital intensiveness/barriers to entry; competition; regulatory oversight; growth potential; market trends) Company specific profile (criteria may include: strength of business; management/governance, corporate event risks) Financial ratios (criteria may include: operating margin; return on assets; free cash flow to sales; cash flow to debt; interest coverage; gearing; leverage)

Restricted 32 Counterparty credit risk assessment: credit approval process Credit approval process based on written procedure 3 step process: Risk Management rating and limit recommendation Banking Department - review/support Deputy General Manager (DGM)- approval All rating and limit changes require DGM approval Restricted 33

Setting limits and maximum maturities Business considerations Qualitative Factors BIS Grade Quantitative Factors Limits & Maturity Size (risk bearing

capacity of counterparty Peers Analyst Judgment Restricted 34 Possible indicators for counterparty resilience Risk bearing capacity of counterparty (shock absorption) Likelihood and extent of external support (willingness and ability of support provider) Diversified business operations/revenues Competitiveness Proven adaptability to changes in the business

environment; successful policy response to adverse situations Impact of operating environment/macroeconomic factors Prudent funding strategy and diversified funding mix, allowing access to funding/debt refinancing in adverse market environment Restricted 35 Useful links http://www.fsb.org/wp-content/uploads/ r_101027.pdf http://www.iosco.org/library/pubdocs/pdf/ IOSCOPD488.pdf

https://ec.europa.eu/info/system/files/ alternatives-to-credit-rating-study01122015_en.pdf https://www.bis.org/bcbs/publ/d347.pdf Restricted 36

Recently Viewed Presentations

  • Georgias Government EXECUTIVE BRANCH Presentation, Graphic Organizers, &

    Georgias Government EXECUTIVE BRANCH Presentation, Graphic Organizers, &

    TEACHER INFO: Memory Clues. Print off Memory Clues chart for each student. They should complete the chart after discussing the presentation. The students should write a brief description of each state department, as well as draw a symbol to help...
  • The Byzantine Empire and the Crusades

    The Byzantine Empire and the Crusades

    The Byzantine Empire and the Crusades Agenda Bell Ringer: What is the main function of the feudal system in Europe? - Reading Quiz Chapter 10 and 11 Lecture: Byzantine Empire and Crusades The Black Death Analysis Pope Urban II and...
  • InfoVis 2014 ITI - Flash Slides and Demos

    InfoVis 2014 ITI - Flash Slides and Demos

    Flash Demonstration - Unit 3 Create Multi-Part Animation Animate Images Fade-in and Fade-out Text Add Interactivity to Instance of MovieClip Animated Buttons for UP and DOWN States
  • Welcome to ECE 250 Algorithms and Data Structures

    Welcome to ECE 250 Algorithms and Data Structures

    Backtracking algorithms. ECE 250 Algorithms and Data Structures. Douglas Wilhelm Harder, M.Math. LEL. Department of Electrical and Computer Engineering. University of Waterloo. Waterloo, Ontario, Canada
  • Post-Bacc in PSB orientation

    Post-Bacc in PSB orientation

    Respectful/formal language. Call all faculty members "Dr." or "Professor" Only call by first name if they specifically tell you to. Avoid "overly gendered" language (e.g., girls, ladies) Complete evaluations at the end of the quarter
  • Database Systems Instructor Name: Lecture-9 Contents Degree of

    Database Systems Instructor Name: Lecture-9 Contents Degree of

    It is the relationship between Entity Instance of the same Entity Type, also called Recursive Relationship Usual Situations When Unary Relationship exist are: One to One Relationship, when an entity instance is associated with exactly one entity instance, for example,...
  • ONR 6.2 Project Annual Review Presentation

    ONR 6.2 Project Annual Review Presentation

    Scoring: a team point awarded for every five seconds location remains controlled ... Each bot is assigned a single domination location that it attempts to capture and hold during the whole game. GreedyBot. Attempts to recapture any location that is...
  • Introduction to Rhetoric - Mrs. Pixler's English Classes

    Introduction to Rhetoric - Mrs. Pixler's English Classes

    Introduction to Rhetoric. Freshman Honors - Spring 2015. ... Classical argument [in 42] Five parts of discourse necessary for persuasion. Introduction - warms up audience, builds rapport, thesis. Narration - presents issues, summary of background.