December 23, 2007
Home-Host discussions continue
About a month ago the Bank for International Settlements released its Home Host supervisory cooperation and allocation mechanisms in the context of AMA. This can be found at BIS Paper
While this brings a long debate closer to a definitive rule set, it isn`t a done deal yet, mind you BIS themselves don`t claim it to be so either; ``This document elaborates on the home-host paper by applying the home-host principles and practices emerging in the broader implementation of Basel II`` however ``a range of practice in this area has not evolved as yet.``
In short, banks that have sizeable subsidiaries in foreign jurisdictions will need to walk through the recommendations in this paper. Precisely what is classified as sizeable I can`t say but then neither does BIS:
``The Basel Committee has not defined ``significance`` for purposes of determining which internationally active banking subsidiaries are ineligible to make use of the hybrid approach and Host supervisors are the ultimate arbiters of whether a subsidiary is significant within a given jurisdiction``
While insight for identifying a banks significance factor is probably a relatively obvious step, I can see such a nebulous statement causing some debate between the banks and their associated regulators, particularly with regulators that are behind the game and it is most likely that it will be those countries that cluster a larger collection of foreign banks.
None the less without becoming tied to the semantics at this point, the paper is a beacon on the hill for the absolute blind (pun intended) with its main emphasis being an outline of the key elements of how to co-operate with a supervisor. That is, it re-iterates the very perceptible in the importance of sharing information between home-host banks to home-host regulators and this information may include measurement approaches but most likely `colleges` are going to have to work together.
While some might find this slightly amusing, perhaps audaciously so, I actually have no intention to mock BIS for writing several pages on how banks need to communicate with regulators and what is expected of them in doing so because on the ground in many respects this is what regulators have to deal with much of the time as worrying as that may seem.
Anyway once we move through the paragraphs of general principles for information sharing, scope and frequency of information sharing, mechanics of information sharing and responsibilities of banks, we reach the gritty bits and bobs.
``Banks should be able to quantify the diversification benefits factored into the capital allocated to the subsidiary and to demonstrate that mechanisms are in place to facilitate such capital transfers.``
That isn`t so easy to do across clearing zones and currencies, on the surface it appears very straight forward but the addition of the word diversification in the context of capital goes hand-in-hand with of course non-diversified and in this way it will require banks to dimension how easy it would be to pass capital over without leaving the host entity under capitalised, policy will also need to consider timing and authority. In some cases dependency is likely to exist however fortunately for the banks they don't have to show how to calculate any knock on effects or correlation. Conceptually the statistics are relatively standard in such a top level model however the bank might need to support these models with data or show the robustness of them using hypothetical situational analysis and that is going to require a little bit of creativity.
Next, stability; ``This implies that capital amounts allocated to subsidiaries should not fluctuate unduly from one period to another``. This is all good assuming the bank is static, but operations gear up and down all the time and most banks are going to need to track such strategic changes however very few actually do in line with operational risk agendas.
Banks can of course run different modes of sophistication between one subsidiary and the next or run stand alone AMA for a subsidiary as stated in the article but if a bank is looking to have a centralised operational risk framework where it calculates capital internally for each foreign entity, it is going to need to do some additional work.
The approach is straight forward and after all of the debates that have gone back and forth with Home-Host requirements, its great to see a refined way forwards.
Posted by CausalEvents at 02:24 AM
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December 21, 2007
Who's in and Who's Out
After living in Australia for some years or perhaps anywhere relatively pleasant, one does start to feel a bit connected to the people, businesses and ethos of the land and only the other day I read the APRA publication on whos in and whos out for Basel II accreditation with some interest.
Who made it?
*) Australia and New Zealand Banking Group (ANZ) was awarded both IRB for credit risk and AMA approach for operational risk.
*) Commonwealth Bank of Australia (CBA) also IRB for credit and AMA for operational risk
*) Westpac Banking Corporation IRB and AMA as well
*) Macquarie Bank Foundation for credit risk and AMA for operational risk
*) Bank of Western Australia AMA for operational risk
*) National Australia Bank AMA for operational risk
So what happens to those that do not make the credit risk accreditation? Well they have to stay on Basel I. Quite Interesting; so Australias largest bank, National Australia Bank has been approved for AMA but must stay on Basel I for its existing capital arrangements. One does ponder how this is going to be calculated because under Basel I operational risk was not part of the program and was `overlapped` on the other risk disciplines. There are two ways out of this situation; AMA will be a parsimonious exercise for the bank or APRA will create some `special` capital calculation for them, highly unlikely, perhaps we can expect snow in the Middle East first.
Apparently Dr John Laker said that ``the process of applying for Basel II AMA has led to significant improvements in risk management systems`` and personally I would agree with him, before Basel II many of these institutions didn`t have a formal loss data process outside write-off to the GL.
Macquarie Banks approach is certainly well planned and while it is a power house investment bank in Australia its client facing operation is relatively private. It does not run the huge processing centres or massive retail portfolios that the other Australian banks control and it follows that the leap to AMA would have been quite straight forward, then in the same token, return from risk weights on retail credit by applying IRB would be a modest kick-back for the marginal efforts that are needed.
ANZ has certainly been an early adopter of operational risk systems with Dr Mark Lawrence`s scorecard approach some years back and they might be able to share some of their ability with the recent acquistion in South East Asia to bring that financial institution up to speed for Basel II.
The interesting omission from the list is St George, a massive retail lender in New South Wales. No IRB, No AMA, nothing just Basel I. Quite amazing what could have gone wrong there especially as only a year ago Incisive Media awarded Group Risk at St George WINNER : Op Risk executive of the year, so we were all expecting that bank to make it over the line.
The full media release can be found at APRA releases Basel II prudential standards
Posted by CausalEvents at 12:53 AM
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December 19, 2007
Throwing it around at UBS
Over the last couple months there has been quite a substantial amount of discussion regarding the sub prime mortgage crisis and the collateralized debt obligation instrument, mortgage backed securities and the likes. In much respect I haven't made any formal statement on this ongoing event outside the occasional commentary debate during morning coffee but after reading the news this morning in respects to UBS and their current situation, one does really wonder what kind of risk systems, if any, some of these big banks are running.
Taking a wild position on a market is one thing, going back for more, 10 billion dollars worth is another but to not even keep track of what is on the balance sheet simply shows a total lack of accounting procedure, risk policy and governance support. It is possible that UBS will record a net loss for 2007, although no one is really sure unbelievable that it might seem and while one perceives a bunch quant jocks with their feet on the desk and management chasing the tails, the European Central Bank is going to float 500 or so billion up for cheap grabs and that might ease the pressure some of these banks are under, certainly it will improve their liquid position at the end of the year. The ECB stated that 390 banks across the region had sought funding, so UBS is not alone.
Come on Martin, its UBS do you know how big this organisation is I hear everyone say but in reality when one of your own customers has to prop you up for capital support, it shows how fragile the institution truly is or perhaps how delicate the business model has become through a total lack of risk management and insight in the market place.
To be precise UBS announced this week that they would sell 10.8% of their investment business to the Singapore government as well as a Middle Eastern firm that UBS didn't name as is often the case with some investors.
Mr Ospel told investors during a conference call that "the bank would stick to its existing business model of running a private bank, an asset manager and an investment bank under one roof" whatever that is and was it something else before this? He also added that there was no pressure internally for him to step down, externally he didn't make a reference to.
This is not a first for the Singapore government which runs two large investment funds, GIC which has grown to about 100 billion and Temasek Holdings, which manages about the same sized investments and is run by Ho Ching, the wife of the prime minister Lee Hsien Loong. Both funds have grown over the last few years and have acquired assets in telecommunications, property, shipping, health care, shopping centres in the UK and Australia, aviation carriers and a swag of banks scattered across South East Asia that perhaps incorrectly look to these European big players as a standard for risk management. With Tamasek controlling 17% of Standard Chartered this is not a first for Singapore and in many respects the crisis in mortgage backed securities has presented an opportunity for Singapore to take a stronger foot hold overseas, one that has doubled over the last two years to 38.7 billion for GIC the cousin of Tamasek.
As the deal sits, UBS will issue 9.75 billion of convertible securities to GIC where it pays a coupon rate of 9% until the notes convert to ordinary shares two years on. What a deal for Singapore assuming of course the management of UBS do something with their risk frameworks, so all up 9% return followed by a dividend paying position. The relationship however is a little more symbiotic than may first appear as UBS is also a financial advisor to the Singapore Government on assisting Singapore become a major financial hub. Anyway, if you hang around till the middle of February, there may be more to come from UBS as it plans to sell treasury shares and replace its 2007 cash dividend with stock boosting capital by a further 6.4 billion francs.
Posted by CausalEvents at 02:30 PM
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