Finanskonferencen
Pension og Asset
Management
Lars Norup, PwC
Den 6. april 2017
Revision. Skat. Rådgivning.
Top five scary scenarios
1st
2nd
3rd
4th
5th
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A global cyber attack
New regulation, restricting ability to
generate profitable business
Loss of market share to
non-traditional players
A large macro idiosyncratic risk, that
hurts global economies
High inflation due to central bank
policies
Finanskonferencen 2017
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Regulatory reform programme
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Finanskonferencen 2017
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Basel IV effects on capital requirements
New rules lead to a capital shortfall for almost all banks
Available and (expected) required capital
H1 2015 in Tn€
Average bank
shortfall1)
-
€0.5 bn
€5.0 bn
Comments
•
Combined the capital buffers and the expected increase
in RWA due to the current “Basel IV” proposals would
approximately double the capital requirements from
Tn€1.1 to an expected Tn€1.9 to 2.3
•
In spite of the current excess in capital, the current
“Basel IV” requirements are expected to lead to a
capital shortfall for nearly all banks in scope
•
On average, banks with a shortfall, would need to raise
between €5.0 bn and 8.5 bn additional capital which is
equivalent to an increase of 30 to 50%1)
•
The capital shortfall absolutely and relatively increases
with the size of the bank, as larger banks tend to rely
more on internal models for RWA calculations
€8.5 bn
# banks with
34
87
94
shortfall
1) Number weighted average across all banks which have a shortfall
2) Assuming a current SREP requirement of 10.3% (based on ECB SSM SREP document) and an additional systemic risk and countercyclical
buffer of 2.0%
Source: Strategy& analysis
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Finanskonferencen 2017
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Section 1 – Executive Summary
Business models in the financial industry under
pressure by increased regulation
Increased regulation in
the financial sector
Key impact factors:
• Regulation
• Macro economic reality
• Political uncertainty and
unpredictability
• Technological
developments and
innovations
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Strategic response in the
shape of flexible and
easily adjustable
business models
Big picture
consequences:
• Drastic shifts in market
share – both for banks and
institutional investors
• New market participants –
and well established ones in
new roles
• Great opportunities – and
great risks
• New technologically and
socially driven
customs/niches/wishes
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An opportunity to prioritise and optimise
The focus will be on capital, risk and business models
1.
Banks will look to the
consequences borne out of
regulatory changes embodied in
Basel III, Basel IV/FRTB and
IFRS 9
The shadow-banking
sector will carefully
evaluate the products it
will be able to supply as it
is aptly poised to replace
traditional banks as
counterparties to many of
the trades with
institutional & professional
investors, e.g. currency
forwards used in large
part by institutions for
currency hedging
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Funds & Firms will
2. Investment
evaluate threats and opportunities
in financial markets as nonregulated participants
of large game changers are on their way: they will give
1. Arisenumber
to both risks & opportunities. The more a bank can prepare, the
better it will be able to navigate the sea of changes, adapt its
business and benefit from the opportunities. The right changes and
adjustments can lead to the bank having a better business model,
capital structure, clientele and product focus.
and fundamental changes to the banking domain will alter
2. Large
the financial markets and their pricing. The regulatory changes will
emphasize the divide between regulated and unregulated entities
even more, creating interesting market opportunities for the latter
– the latter being outside the scope of banking regulation.
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Own funds quality
and quantity for
banks were the focus
of Basel III. Basel IV
seeks to harmonise
Risk Weighted Assets
The financial
landscape will
evolve, and speedily,
as banks look to
contain capital
shortfalls
Banks repositioning
will lead to
opportunities for
Institutional
Investors and
unregulated entities
in financial markets
Basel IV & Banks/Institutionals
The Basel (BCBS)
committee is a
proponent of a global,
uniform regulatory
framework for banks. To
this end, regulation has
been updated
continuously over the
years, starting in 1988.
Basel IV is the latest
such iteration, the spirit
of which is to assign
similar risk weights to
similar exposures with
no exemptions for SIFIs.
The changes to the
regulatory framework
will have profound
consequences on the
financial sector, with
effects ranging from
market participants to
market microstructure.
Banks will address
capital shortfalls due to
increased credit and
market risks by
prioritizing and
optimizing business
models and products.
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This makes room for
institutional investors to
step in and scoop up
portfolios that fit well
within their mandates.
Banks exiting some
businesses could alter
the future landscape of
market participants and
counterparties, which
has implications for
liquidity and pricing. It
is a golden opportunity
for institutional
investors to divest into
new products.
Risk Weighted
Assets of major
European banks will
rise an estimated
35+%
Basel IV revisions to
estimation practices for
internal models will
lead to significant
increases in credit and
market risk capital
charges for banks.
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Determining the opportunity
Disruption in the market micro structure
The impact on OTC derivatives markets will be
quite substantial. For instance, corporate treasury
functions will have fewer banks to choose amongst
that are willing (and capable) of bearing the
additional capital requirements.
Concentration risks amongst counterparties capable of transacting in size
will increase, while the ability to
hedge portfolios quickly and
efficiently will get severely limited
as banks relinquish their roles as
market-makers.
Pricing of existing products will
suffer as complexity in the
standard approach increases, and
internal models for market, credit
and CVA risks get “outlawed”.
Coupled with increased risk weights, 4
wider bid-offer spreads will become
the norm as banks will look to be
compensated for the additional
capital requirements as well as the
additional regulatory risks that must
be factored in.
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1
De-facto Removal of the IRB approach for large
corporates will lead to banks exiting many
corporate engagements – but corporate
financing & hedging needs will not disappear.
This may lead to a fundamental reorientation to a market-based
funding structure for many large
corporates.
5
Prime brokerage
and market
making remains a
joker
Pricing suffers
Corporate funding
(SA credit risk)
Market micro
structure changes
Market depth and
inventories shrink
(trading book)
3
Increased
securitizations
(credit risk)
2
Banks may want to hold on to
some debt, and the MBS and ABS
markets may see significant
pickups as tranching takes centre
stage while banks off-load
different portfolios.
MBS and ABS markets may see a
large increase in significance as
new market participants step in
and the hunt for yield continues.
Maintaining bond inventories in the trading
book will incur higher capital charges – banks
will no longer be able to offset against the
banking book leading to decreased
inventories.
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Redefine the business model
2. Portfolio mix
1. Strategic vision
Review of business
and definition of
strategic priorities:
Business model
redesign should be
driven by the
organisation’s
strategy and adapted
to the context of
available capital and
in-house capabilities:
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Products
Geographies
Clients
3. Business design
Optimisation of
portfolio against
capital (risk weight)
constraints:
Economic contribution (EP)
Capital markets
players will need
to make
significant
structural
changes to their
business models,
rethinking their
strategic scope,
portfolio mix, and
business design
Alignment of front
office to support vision
and portfolio mix:
Organisation and
governance
EP post optimization of
capital allocation
EP pre optimization
(BU) C
(BU) D
(BU) E
(BU) B
Coverage models
and incentives
Business Unit (BU) A
Booking models
Risk weighted asset (RWA)
Defined set of core and auxiliary
businesses
Allocation of capital to support
optimum portfolio mix
Optimum allocation of resources
Business lines identified for
core vs. non-core portfolios
consideration
Definition of non-core portfolios
Business model aligned to strategic
vision and capital allocation
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Outlook – as seen by the financial industry itself
The top three priorities for
respondents over the next
five years are: Enhancing
customer service; filling
talent gaps and new
product development.
Top three investment priorities
1900
Talent (or lack of
appropriate talent) is a key
constraint across all
themes.
The top three challenges
are: Increasing profitability
of clients; the impact of new
technologies; and attracting
and retaining talented
employees.
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Enhancing customer service
56
Filing talent gaps
New product development
39
45
Implementing new technology
35
31
Regulatory compliance
27
Product rationalisation
27
Top three challenges
Increasing profitability of clients
36
Impact of new technologies
33
Attracting talent
33
New market entrants
31
Retaining existing clients
31
Digital transformation
28
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