regional seminar on the supervision of large banks organised by the arab monetary fund and the...

Regional Seminar on the Supervision of Large BanksOrganised by the Arab Monetary Fund and the Financial Stability InstituteAbu Dhabi 17-19 November 2015

Andrew CunninghamFounder Darien Analytics Ltd.

The Regulation and Supervision of Large Banks in the Middle East


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Outline of the presentation

1. The trouble with big banks…

2. Some statistics on banking systems and big banks in the Middle East

3. Examples of regulatory and supervisory responses to D-SIBS the Middle East

4. The Risk Management Agenda for banks and for supervisors


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Why have big banks?

In the Middle East we want big banks:

• Because there are many big industrial projects that need financing (and we don’t want to be completely reliant on foreign banks).

• Because we want to have some banks that are large enough to be at the front of innovation and development in the banking industry: only banks with regional scale are likely to be able to do that.

• Because banks still dominate financial intermediation in the Middle East – we don’t have alternatives to banks if we want to do large amounts of financing.


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Large banks: the Supervisory Challenge

• When they fail, they are likely to cause a lot of disruption throughout financial markets.

• The failure of a big bank may lead to a loss of confidence in the banking system as a whole, leading to failures of other banks.

• When big banks fail, the costs of recapitalising them are big.

• Big banks are usually complex, with wide-ranging businesses, and so are more difficult to supervise than smaller banks.


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Assets of banking system % GDP(end 2014)

Banking Assets ($bn)

Banking Assets % GDP

Algeria 137.2 64

Bahrain 214.2 632

Egypt 276.1 96

Iraq 127.6 58

Jordan 63.6 177

Kuwait 189.7 108

Lebanon 177.4 388

Libya 80.6 196

Banking Assets ($bn)

Banking Assets % GDP

Morocco 126.3 118

Oman 64.7 79

Palestine 11.8 93

Qatar 276.0 130

Saudi Arabia 568.7 76

Tunisia 44.6 95

UAE 627.7 156

Yemen 13.1 36


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Assets of large banks% GDP(end 2014)

Bahrain

Ahli United 99%

Bank ABC 87%

Al Baraka Banking Group 69%

Gulf Internat. Bank 63%

Egypt

National Bank of Egypt 22%

Banque Misr 13%

C.I.B. 7%

Iraq

Rashid Bank 9%

Jordan

Arab Bank 134%

Housing Bank for Trade and Fin. 30%

Kuwait

National Bank of Kuwait 42%

Kuwait Finance House 33%

Lebanon

Banque Audi 92%

Blom Bank 61%

Libya

National Commercial Bank 32%

Morocco

AttijariwafaBank 42%

Groupe Banques Pop. 30%

BMCE26%


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Assets of large banks% GDP(end 2014)

OmanBank Muscat31%Bank Dhofar10%National Bank of Oman 9%

PalestineBank of Palestine19%

QatarQatar National Bank 63Commercial Bank of Qatar 15

Saudi ArabiaNational Commercial Bank 16Al-Rajhi 11Samba 8

TunisiaBIAT

11%Amen Bank10%BNA (end 2013)9%

UAENational Bank of Abu Dhabi 25%Emirates NBD25%First Gulf Bank14%

YemenTadamon International Isl. Bk 7%YBRD (June 2014)3%


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G-SIBs November 2015: Assets ($bn) and Assets % home country GDP (2014)

2.5%

HSBC 2,634 90%

JP Morgan Chase 2,573 15%

2%

Barclays 2,118 72%

BNP Paribas 2,522 89%

Citigroup 1,843 11%

Deutsche Bank 2,074 54%

1.5%

Bank of America 2,107 12%

Credit Suisse 932 136%

Goldman Sachs 856 5%

Mitsubishi UFJ FG 2,382 52%

Morgan Stanley 801 5%

1%

Agricultural Bank of China2,611 25%

Bank of China 2,492 24%

Bank of New York Mellon 385 2%

1%, continued

China Construction Bank 2,736 26%

Groupe BPCE 1,485 52%

Groupe Crédit Agricole 2,139 76%

Industrial & Commercial Bk China 3,368 33%

ING Bank 1,006 116%

Mizuho FG 1,579 34%

Nordea 812 142%

Royal Bank of Scotland 1,639 56%

Santander 1,537 109%

Société Générale1,588 56%

Standard Chartered 726 25%

State Street 274 2%

Sumitomo Mitsui FG 1,527 33%

UBS 1,074 157%

Unicredit Group 1,024 48%

Wells Fargo 1,687 10%


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G-SIBs November 2015: Assets ($bn); Assets % GDP; Additional Capital Requirement

JP Morgan Chase 2,573 15% 2.5%

Citigroup 1,843 11% 2%

Bank of America 2,107 12%1.5%

Goldman Sachs 856 5%1.5%

Morgan Stanley 801 5%1.5%

Bank of New York Mellon 385 2% 1%

State Street 274 2% 1%

Wells Fargo 1,687 10% 1%

HSBC 2,634 90%2.5%

Barclays 2,118 72% 2%

Royal Bank of Scotland 1,639 56% 1%

Standard Chartered 726 25% 1%

BNP Paribas 2,522 89% 2%

Groupe BPCE 1,485 52% 1%

Groupe Crédit Agriicle 2,139 76% 1%

Société Générale 1,588 56% 1%

Deutsche Bank 2,074 54% 2%

ING Bank 1,006 116% 1%

Nordea 812 142% 1%

Santander 1,537 109% 1%

Unicredit Group 1,024 48% 1%

Credit Suisse 932 136% 1.5%

UBS 1,074 157% 1%

Agricultural Bank of China2,611 25% 1%

Bank of China 2,492 24% 1%

China Construction Bank 2,736 26% 1%

Industrial & Comm. Bk China 3,368 33% 1%

Mitsubishi UFJ FG 2,382 52% 1.5%

Mizuho FG 1,579 34% 1%

Sumitomo Mitsui FG 1,527 33% 1%


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Approaches to dealing with D-SIBs

Higher loss absorbency (HLA)

Key document:

• A framework for dealing with domestic systemically important banks (BCBS October 2012)

• Note also FSB’s final standard on Total Loss-Absorbing Capacity for G-SIBs (November 2015)

More intensive supervision

Key documents:

• Supplemental Pillar 2 Guidance in Enhancements to the Basel II Framework (‘Basel 2.5’), BCBS July 2009

• Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (FSB, April 2014)

• Supervisory Intensity and Effectiveness: (FSB, April 2014)


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Development of a D-SIB Regime in Middle Eastern Countries

Criteria: How will you decide which

banks are D-SIBS?

DesignationNaming the D-SIBS

Regulations and

Enhanced Supervisory Regime


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Central Bank of Oman: D-SIB FrameworkCriteria

The Central Bank of Oman designates D-SIBs based on five criteria with equal weighting

Size: bank’s share of i, system assets, ii, deposits, iii, Credit. iv, off balance sheet exposures. Equally weighted.

Interconnectedness: banks share of i, interbank assets, ii, interbank liabilities, iii, deposits from / debt securities issued to non-bank financial corporations, iv, credit to / investment in non-bank financial corporations. Equally weighted.

Substitutability: share of payments received and made by a bank.

Complexity: share of i, notional amount of OTC derivatives, ii, investments in trading and available-for-sale securities, iii, cross border assets, iv, cross border liabilities.

Domestic sentiment: share of deposits by householders.


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Central Bank of Oman: D-SIB FrameworkDesignation

• Banks scoring more than a certain number of points overall, or a certain number of points in one particular category are defined as systemic a priori.

• Based on the scoring system, five banks could be judged systemic, the Central Bank of Oman says.

• The Central Bank of Oman decided to designate only one bank as systemic ‘for the time being’. (Decision based partly on the extra resources needed to supervise SIBs.


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Central Bank of Oman: D-SIB FrameworkRegulations and Enhanced Supervision

The enhanced capital surcharge for any bank identified as a D-SIB is 1%

This surcharge may be increased if the Central Bank believes that the bank’s risk management is not strong enough.

Enhanced regulatory regime includes:

Strong risk governance: quality of risk governance considered as important as managing financial assets and liabilities

Stress Testing Portfolios: D-SIBs should going beyond ICAAP and conduct additional stress tests

Early Warning System: warning indicators and trigger points should be identified

Crisis Management Mechanism: D-SIBs should have a Crisis Management Document, and a Crisis Management Group

Recovery and Resolution Plan: D-SIBs should have a Plan (‘living will’) and disclose its existence in its Annual Report


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Saudi Arabian Monetary Agency: D-SIB FrameworkCriteria

SAMA designates D-SIBs based on four criteria with un-equal weighting

Size (30%): bank’s total exposures, as defined under Basel III leverage ratio

Interconnectedness (30%): • Intra financial system assets (10%)• Intra financial system liabilities (10%)• Total marketable securities (10%)

Complexity (10%): notional amount of OTC derivatives

Substitutability (30%): payments cleared and settled through payment system


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Saudi Arabian Monetary Agency: D-SIB FrameworkDesignation

Banks scoring more than a certain level (the ‘cut-off’ score) will automatically be classified as D-SIBs. SAMA may at its discretion add other banks below the cut-off score.


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Saudi Arabian Monetary Agency: D-SIB FrameworkRegulations and Enhanced Supervision

The enhanced capital surcharge for D-SIB’s ranges from 0.5% to 2.5%

In addition to the capital surcharge, SAMA may put in place additional requirements such as Recovery and Resolution Plans.


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Central Bank of Qatar: D-SIB FrameworkCriteria

QCB designates D-SIBs based on four criteria with un-equal weighting

Size (40%): bank’s total exposures (consolidated), as defined under Basel III leverage ratio

Interconnectedness (30%): • Intra financial system domestic assets • Intra financial system domestic liabilities

Complexity (15%):• Notional amount of OTC derivatives• Total unlisted non-government securities• Size of overseas branches and subsidiaries• Investments in Associates

Substitutability (15%):

• Total Islamic financing in Qatar

• Total credit facilities to PSEs in Qatar


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Qatar Central Bank: D-SIB FrameworkDesignation

Banks scoring more than a certain level (the ‘cut-off’ score) will be classified as D-SIBs.

D-SIBs must disclose that they are D-SIB in their 2015 Annual Reports.


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Qatar Central Bank: D-SIB FrameworkRegulations and Enhanced Supervision

Additional capital requirement ranges from 0.5% to 3.5%

Additional requirement is treated as an extension of the capital conservation buffer

Other regulatory requirements for D-SIBs are:

Capital planning: D-SIBs must develop detailed capital plans that are proportionate to the D-SIB’s profile and complexity.

Recovery planning: complete list of recovery options available to restore financial strength when the viability of the bank is threatened; banks should not rely on public funding.

Increased supervisory scrutiny: QCB may require additional qualitative or quantitative reporting.


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Central Bank of Bahrain: D-SIB Approach

• Assessments were made by the CBB. Banks that the CBB designated as D-SIBs were informed. The CBB has not published its framework.

• D-SIBs are subject to the following enhanced supervision/regulation

• Two prudential meetings per year• Annual inspection• Required to have more resources in their compliance function• Higher capital adequacy ratio


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Responses to Big Bank Insolvency in the Middle East

Historically, there have been two approaches taken when big banks are insolvent:

• Government bail-out (e.g. by Sovereign Wealth Funds, National Pension Funds, etc)

• Individual insolvency: direct capital injection into a bank (e.g. GIB 2009)

• Systemic insolvency: asset purchases (e.g. Qatar 2009)

• Forbearance

• Provisioning policy not enforced (by supervisors and by auditors) and capital ratios not enforced (by supervisors).

• Banks survive because counterparties believe (correctly) that banks will remain liquid and that forbearance will continue.


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Changing international approach to insolvency

• Higher prudential standards• capital (including TLAC), liquidity, credit concentration, governance;

enhanced supervision, etc)

• Bail-in provisions• e.g. co-co bonds (bonds that convert to equity in certain circumstances)• Bailing in of junior debt (e.g. SNS Bank, Anglo Irish Bank)

• Recovery and resolution plans• ‘living wills’

The objectives of this approach are that 1. banks are less likely to fail and 2. if they do fail the losses will be absorbed internally (by shareholders, bondholders and

perhaps others) and not by governments/tax payers.


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Enhancing Risk Management in the Middle East:The supervisors’ perspective

• Enforcement of regulations and supervisory guidance• But capital ratios are already high

• Focus on supervisory oversight rather than on financial ratios

• You will have to have difficult discussions with big banks!• Quality of directors?

• Viability of long-term strategy

• Ability to manage economic swings

• Willingness to reject government business/ ability to find good private sector alternatives

• Ability to ‘think the impossible’


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Appendix: Notes on sources for statistics

• Figures for asset size of Middle East banking systems are taken from Central Bank reports of the relevant county.

• Figures for GDP of Middle Eastern countries and other countries are taken from the World Bank ranking of country GDP (current $) for 2014. A few figures refer to earlier years.

• Figures for assets sizes of individual Middle Eastern banks are taken either from their Annual Reports for 2014 or from ‘The Banker’ magazine’s July 2015 ranking of the world’s top 1000 banks.

• Figures for asset sizes of G-SIBs are taken from ‘The Banker’ magazine’s July 2015 ranking of the world’s top 1000 banks.

regional seminar on the supervision of large banks organised by the arab monetary fund and the...

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