Escolar Documentos
Profissional Documentos
Cultura Documentos
April 2011
Pieter Fyfer Managing Director, European Credit Sector Strategy +44 20 7883 4279, pieter.fyfer@credit-suisse.com Stphane Suchet Vice President, European Credit Sector Strategy +44 20 7883 4278, stephane.suchet@credit-suisse.com
PLEASE REFER TO THE DISCLAIMER SECTION FOR IMPORTANT DISCLAIMERS AND CONTACT YOUR CREDIT SUISSE REPRESENTATIVE FOR MORE INFORMATION.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 2
European Banks
European Banks: Implications from Regulatory & Legislative changes
Summary
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
Systemically important Financial Institution (SIFI) capital surcharge More conservative calculation of Common/Core Equity Changes in definitions of Non Common Equity Regulatory capital instruments
Liquidity Requirements
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 4
Transfer Powers
Haircut/Bail in tool
EU likely to review the equal ranking of depositors relative to senior unsecured debt
Certain countries could require ring fencing of retail banking operations (in separate legal entity) from other banking operations
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 5
Increased incentive to dispose of Insurance operations Increased incentives to dispose of significant stakes in other financial companies Increased appetite for disposal of positions with unrealised losses (assuming all other factors support disposal) Reduction of excess capital in non wholly owned subsidiaries to ensure maximum utilization of minority interest in regulatory capital
Banks like to have between 3.5% and 10% in non CET1 capital in our view Non common equity capital will be in CoCos (in broad definition of the term) CoCos will consist of Low Trigger CoCo (Tier 2 instruments), Tier 1 hybrids (Medium trigger CoCos) and High Trigger Cocos (for systematically important banks) Cost of non CET1 capital will be materially higher than before given increased loss absorbency outside a liquidation, further increasing WACC compared to existing stock of Non CET1 regulatory capital Tax deductibility of Non CET 1 capital (in most countries) reduce the impact of increased spreads
Reducing of Proprietary Trading risk Increased to Central Clearing Counterparties (CCPs) Reduction of Counterparty exposure through structured solutions Disposal of capital intensive asset like ABS Residuals
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 6
Funding Requirements
Leverage Ratio
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Business Model Implications from Key Legislation related changes (Resolution Regimes & beyond)
Resolution Regime Related Legislation ( and introduction of Transfer Powers and Haircut/Bail in Tool) Increased funding costs on senior unsecured Reducing issuance of senior unsecured debt; increasing issuance of covered bonds and other forms of secured debt Increase in asset margins
Reduced taxation flexibility Improved ability to attract deposits and compete against other savings product providers Increased funding costs for groups with large IB units
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 8
Drivers
(1) Covered bond issuance is likely to increase as banks reduce reliance on short-term funding
ASW + 97bps
Senior Debt
(1) Issuance would be likely to increase as banks reduce reliance on short-term funding. (2) Banks would reduce holdings of other banks senior debt in Treasury portfolios under Basel III liquidity proposals
Fair to Attractive
(1) Shrinking asset class. ( 2) Less compelling than perpetuals as a result of relative valuation but also downward ratings risk Fair to Unattractive on potential removal of state support given implementation of resolution regimes Attractive
Max 15% of T1
Bench.+1,030 to call/+402 to mat. (1) Category does not exist under Basel III proposals. YTC 12.6% (median: 6.2%)/ YTM 7.1% (2)Grandfathered to call date only. (3) Shrinking asset class with zero supply going forward (median: 6.2%) Bench.+854 to call/+421 to mat. (1) Non-compliant with new regulatory capital YTC 11.0% (median: 8.3%)/ YTM 8.0% proposals. (2)Grandfathered to call date (median: 7.3%) Bench.+588 to call /+435 to mat. YTC 8.4% (median: 8.3%)/ YTM 7.9% (median: 7.8%) (1) Non-compliant with new regulatory capital proposals; likely redemption sooner than implied in pricing. (2) Shrinking asset class; future supply largely hybrids that comply with Basel III proposals with loss absorbency in going concern
Attractive
8% of RWA
Attractive
Min 50% of T1
Regulatory changes should be positive developments from a risk-profile standpoint for bondholders as the quantum and quality of capital rise while the liquidity metrics of the banking sector are enhanced. However, this needs to be weighed against the negative of a resolution regime reform, which will expose bondholders to loss absorption outside a liquidation
Source: Credit Suisse, the BLOOMBERG PROFESSIONALTM service, pricing as at 4 April 2011. *See Global Equity Strategys 9 March report, European Banks: downgrading to benchmark at http://doc.research-and-analytics.csfb.com/doc?language=ENG&format=PDF&document_section=1&document_id=869623271
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 9
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 10
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
Systemically important Financial Institution (SIFI) capital surcharge More conservative calculation of Common/Core Equity Changes in definitions of Non Common Equity Regulatory capital instruments
Liquidity Requirements
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 12
Basel III
Minimum + Conservation Buffer 7.0% 8.5% 10.5%
An additional countercyclical buffer of 0 to 2.5% should be met with common equity or other fully loss-absorbing capital. However, there is no explicit limit on Tier 1 hybrids above the minimum requirements, and some banks could still issue a higher amount of hybrids than the implied c.18% at the minimum level (8.5%) to meet Pillar II requirements, for instance.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 13
Transition Period
?% ?% TBTF Buffer X% 12.375% Countercyclical Buffer 0-2.5%
9.875%
Full Basel
?%
III
TBTF Buffer X% 13% Countercyclical Buffer 0-2.5% 10.5% Max T2 2.0%
12%
10%
Max T2 2.0%
8.5% 7.875%
8%
8%
8%
8%
8%
6%
Max T2 4.0%
Max T2 3.5
Max T2 2.5%
5.5%
Max T2 2.0%
6%
4.5%
4%
CCB 0.625%
CCB 1.25%
CCB 1.875%
CCB 2.5%
4%
Max HT1 1%
3.5%
Max HT1 2%
2%
2%
0% Before 2013 1.1.2013* 1.1.2014* 1.1.2015* 1.1.2016 1.1.2018 1.1.2017 * Assumes all buffers apply only from 1/2016 . 1.1.2019
Hybrid Tier 1
CET1/HT1/Coco (TBD)
Tier 2
CET1/HT1/CoCo?
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 14
Swedish Banks
Countercyclical Buffer 0-2.5%
15-16%
Progressive Component
Basel III
Tier 2 AT1
10-12%
Basel II
8%
CET1 3-5%
7% CCB CET1 2.5%
Buffer
AT1 1.5%
CCB CET1 2.5%
CET1 5.5%
4.0% Tier 2
4%
Minimum Capital
2% HT1
2%
2% CET1
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 15
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 16
PRUDENTIAL FILTERS Exclusions from Common Equity Non-Common stock surplus (share premium): share premium on common shares is included in Common Equity, but on other shares is not Minority interests (in the form of common equity): In non-bank subsidiaries: MI is not counted in consolidated Common Equity In bank subsidiaries: MI is not counted to the extent the bank is over-capitalised (multiplied by the parents proportional shareholding) Gains/losses on FV liabilities due to changes in own credit risk: filtered out of Common Equity. Extends to all FV liabilities, not just those arising by election of the FV option Cash flow hedge reserve: filtered out of Common Equity where it relates to hedging projected cashflows not recognised in the financial accounts No adjustment to financial accounts Unrealised gains and losses (e.g. AFS): these increase/decrease equity per financial accounts although treatment of unrealised gains remains under review Employee pension fund liability: reduces equity per financial accounts Included as RWA Deferred tax assets (DTA) which do not rely on future profitability: will be assigned the risk weighting of the relevant sovereign Other capital deductions (currently deducted 50% from Tier 1 and Tier 2): will be assigned a 1250% risk weighting i.e.
Certain
Holdings of capital as part of a reciprocal cross-holding agreement and investments in affiliated companies (no threshold) All other holdings of capital instruments (subject to threshold for financial institutions as above)
securitisation exposures (e.g. First loss) equity exposures under the PD/LGD approach Non-payment/delivery on non-DVP and non-PVP transactions Significant investments in commercial entities
Certain
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 17
2. COUNTERPARTY RISK EXPOSURE MEASURE More conservative exposure measures to be used for counterparty risk for both derivative and secured financing positions to address perceived risks: General wrong-way risk: Banks using Expected Positive Exposure (EPE) measures must estimate exposure used in calculating RWAs based on a data set that includes a period of stress (consistent with new stressed VaR for market risk) Specific wrong-way risk: Additional requirements to identify, monitor and control potential sources of higher general wrong-way risk Banking book-style capital charges for counterparty risk CDS purchased from a counterparty that is related to the referenced/guaranteed party Higher capital charges for single-stock equity derivatives where the counterparty is related to the reference company/stock Margining and Collateral: Increase in minimum holding period used to calculate counterparty exposure for large netting sets, where collateral is illiquid, where positions are difficult to replace or where margin call disputes have been experienced Apply regulatory haircuts to non-cash OTC collateral Higher haircuts for securitisation collateral and disallowing re-securitisations as eligible financial collateral Not permitted to reflect in exposure measure any benefit of collateral agreements that require collateral to be posted on counterparty rating downgrades
-
% In crease in R W
BB
CCC
Revised short-cut method for EPE estimation for margined transactions Additional operational and control requirements for collateral management including greater stress-testing and back-testing
Applies to all banking book and counterparty risk RWAs to financial institutions
Rating
. THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 18
OTHER RWA CHANGES New RWA calculations for certain assets: Deferred tax assets (DTA) which do not rely on future profitability: will be assigned the risk weighting of the relevant sovereign Capital deductions currently deducted 50% from Tier 1 and Tier 2: will be assigned a 1250% risk weighting. This represents a material increase in effective Tier 1 requirement from 50% T1 requirement to 100% T1 requirement for a bank with 8% T1 ratio proposals as drafted do not cap at book value/notional (i.e. if > 8% T1 ratio) or allow alternative option to deduct 100% from Common Equity although this may be allowed given lobbying Certain securitisation exposures (e.g. First loss). Impact is expected to be especially material for securitisation positions Certain equity exposures under the PD/LGD approach Non-payment/delivery on non-DVP and non-PVP transactions Significant investments in commercial entities
Continues existing treatment for clearing houses, but applies only to CCPs complying with new and stricter CPSS/IOSCO definition of CCPs. Non-zero RW will apply to exposures to other CCPs Serves to increase the RWA benefit (reduction) from purchasing CDS protection from CCPs on banking book assets, for example hedging loan books Equity investments in CCPs will continue to receive current Basel II equity treatment
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 19
In the EU proposals are being implemented via an amendment to the CRD (CRD3) and implementation is expected by 31/12/2011
July 2009 proposal for capital charge for trading book assets is calculated as:
New model, based on 99% 10-day VaR calculated on a 1-year dataset from period of significant financial stress
New model capturing specific risks, e.g. default risk and migration risk on credit products
Stressed VaR Charge is calculated using historical data from a period of market stress (e.g. 2008). Charge is intended to be broadly constant overtime, to reduce procyclicality. The bank can reassess whether the stressed market period remains relevant Specific Risk Charge is dependent on the nature of the relevant asset, as follows:
Bank calculates an Incremental Risk Charge (IRC), i.e. 99% 1-year charge capturing default risk and migration risk Internal models must capture at least the following parameters: correlation, concentration/diversification, risk mitigation effects, optionality, liquidity IRC covers credit-risk related positions except securitisation positions and correlation trading assets (see below). Does not include equities, FX, commodities or general IR risk Bank calculates a specific risk charge applying banking book capital requirements to net securitisation positions in trading book (long or short). RW varies between 7% (for AAA-tranches) and a capital deduction (for positions rated B+ or worse) Applies to securitisations broadly i.e. all tranched credit positions unless covered by the correlation trading carve-out. Does not allow netting of non-securitisation hedges (e.g. tranche CDS) Resecuritisation exposures (2) (e.g. CDO-squared) are subject to higher capital charges, up to 3.5x higher than securitisations Bank calculates a specific risk charge based either (i) on standard rules, slightly less onerous than securitisation rules, or (ii) an internal model, subject to strict qualitative minimum requirements as well as regulatory stress-testing requirements Covers securitisations or nth-to-default derivatives whose reference entities are liquid single-name products. Excludes resecuritisations
Securitisation Positions
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 20
Leverage Ratio
BIS is proposing to introduce a leverage ratio as a supplemental measure to the risk-based ratio with the following ostensible objectives: to monitor and constrain the build-up of simple leverage in the banking sector, and to reinforce the risk-based requirements with a simple, non-risk-based backstop measure based on gross exposure Although initially a backstop metric, the leverage ratio will be enshrined in Pillar 1 regulation (in 2018) after a period of assessment and calibration Tables below show the baseline BIS proposal including amendments published in July 2010 The revised proposal remains materially more conservative than leverage ratio measures currently in operation in the US, Switzerland and Canada It takes a more conservative view of exposure e.g. inclusion of some Off-Balance Sheet exposures; partial gross-up of derivative exposures; ignores collateral and netting (except for derivatives), and It also uses a more conservative Capital Measure new Basel III definition of Tier 1 (net of deductions)
Leverage Ratio = EXPOSURE MEASURE Generally follows total assets per accounting balance sheet with adjustments intended to bridge differences between IFRS and GAAP in particular with relation to netting of derivative positions Based on average exposure (and average capital) over quarter All assets, including cash and high quality liquid assets (1) Valuations are net of provisions and valuation adjustments Does NOT allow offset of collateral or on-balance sheet netting - except for derivs For derivatives (inc. credit derivatives) banks to apply Basel II netting plus a simple measure of potential future exposure based on CEM factors (2) converting derivatives to a loan-equivalent amount Includes repos & securities financing (disallowing netting) Includes certain off-balance sheet (OBS) items: 10% CCF may be used for unconditionally cancellable OBS 100% CCF for other commitments (lending cmtmts, guarantees, etc.) Securitisations follow accounting valuations Items deducted from capital are also deducted from this exposure measure Capital Measure Exposure Measure CAPITAL MEASURE Tier 1 Capital to be used as the Capital Measure for the leverage ratio Tier 1 Capital measured net of capital deductions and prudential filters Regulators and BIS will also track leverage based on Total Capital and Tangible Common Equity CALIBRATION AND IMPLEMENTATION TIMETABLE Original proposals from December 2009 were materially relaxed via amendments published in July 2010 Proposals nevertheless remain draft until BIS publishes more detailed guidelines Implementation includes transition provisions with the following milestones: 1/1/2011: Supervisory monitoring begins 1/1/2013 to 1/1/2017: Parallel run tracking by supervisors and potential adjustments to definition and calibration
-
3%
1/1/2015: Bank-level disclosure begins H1 2017: Final adjustments to leverage ratio 1/1/2018: Included in Pillar 1 minimum capital requirements
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 21
Liquidity Regulations
The BIS III proposals aim to introduce quantitative liquidity requirements to complement the qualitative principles already developed by Basel in September 2008
The BIS III proposals aim for an internationally uniform quantitative framework to measure and monitor liquidity risk The proposed standards and monitoring tools should be applied to all internationally active banks on a consolidated basis. It may also be used for other banks and on any subset of entities of internationally active banks to ensure greater consistency and a level playing field between domestic and cross-border bank entities BIS defined two measure of liquidity developed to achieve two separate but complimentary objectives:
Liquidity Coverage Ratio (LCR): to ensure a bank has sufficient high quality liquid resources such that it can survive an acute stress scenario lasting one month Net Stable Funding Ratio (NSFR): to promote longer term stability by incentivising banks to access longer term stable funding sources and limit reliance on wholesale funding. NSFR aims at capturing funding instabilities over a minimum 1-year period in securities trading inventories, off-balance sheet exposures and securitisation transactions Proposed implementation timeline:
(per December 2009 proposals plus releases in July and September 2010)
LCR: Implementation 1 Jan 2015. Observation period prior to 2015 NSFR: Implementation 1 Jan 2018. Observation period prior to 2018, resulting in possible refinements to NSFR definitions In addition, BIS identifies four monitoring metrics to further aid supervisors in assessing the liquidity risk of a bank: Contractual Maturity Mismatch: banks are required to group assets and liabilities in buckets depending on contractual maturities to identify material mismatches. Suggested buckets are O/N, 1W, 2W, 1M, 2M, 3M, 6M, 1Y, 3Y, 5Y and over 5Y Concentration of Funding: banks are required to examine each significant counterparty and funding instrument as a percentage of total bank balance sheet, to identify funding exposures greater than 1% of total funding needs Available Unencumbered Assets: banks must identify the amount of assets that are marketable as collateral in secondary markets and/or eligible for central banks standing facilities Market-related Monitoring Tools: national supervisors may rely on real-time market metrics which can be used as early warning indicators in monitoring potential liquidity difficulties at banks
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 22
Stock of High Quality Liquid Assets LCR = 100% Net Cash Outflow over a 30-day period
Stock of High Quality Liquid Assets: assets satisfying the highest liquidity requirements, i.e. high credit standing, low duration, easy to value, low correlation with risky assets (i.e. financial institutions) and listed on a developed exchange e.g. Cash, central bank reserves, government bonds, at full book value Corporate and covered bonds subject to certain criteria and 20-40% haircut to book value Up to 40% of the liquidity requirements can comprise Sovereign and Public Sector Securities qualifying for the 20% risk weightings under Basel 2 (Level 2 assets) Net Cash Outflow: net cumulative liquidity mismatch position arising in the specific stress scenario over a 30-day period
Undrawn Commitments:
Sovereign, Public Sector, credit facilities - Non-Fin Corp, Sovereign, Public Sector, liquidity facilities - Other
Additional requirements for derivatives collateral; Additional requirements for liabilities from maturing ABCP, SIVs and conduits.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 23
100%
NSFR =
100%
Stable retail and small business client deposits with maturity <1yr Less Stable retail and small business client deposits with maturity <1yr Wholesale funding (non-financial corp or maturity <1yr) Other liabilities
90%
5%
Available Stable Funding: each liability of the bank multiplied by a conversion factor (0% to 100%, imposed by regulator) and summed. 100% CF for equity and borrowings > 1 year; lower factors for less stable funding (e.g. retail deposits, nonmaturing wholesale deposits, standby facilities) Required Stable Funding: each asset that supervisors consider should be supported with stable funding, multiplied by a factor and summed. Includes off balance sheet commitments (OBS) such as credit and liquidity facilities, guarantees, trade finance and other non-contractual obligations (subject to regulatory discretion)
80%
20%
50%
- Gold - Liquid equities - Liquid corp bonds rated AA- to A- with mat > 1yr Loans to non-financials < 1yr
50%
0%
Residential mortgages and other loans qualifying for the 35% or better risk weight under Basel IIs standardised approach Retail loans with maturity < 1yr Other
65%
85% 100%
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 24
Transition Periods
As of 1 January 2019
2011
2012
2013
2014
2015
2016
2017
Leverage Ratio Minimum Common Equity Capital Ratio Capital Conservation Buffer Minimum common equity plus capital conservation buffer Phase-in of deductions from CET1 (including amounts exceeding the limit for DTAs, MSRs and financials) Minimum Tier 1 Capital Minimum Total Capital Minimum Total Capital plus conservation buffer Capital instruments that no longer qualify as non-core Tier 1 capital or Tier 2 Capital
Parallel run 1 Jan 2013 - 1 Jan 2017 Disclosure starts 1 Jan 2015 4.0% 4.5% 4.0% 20% 4.5% 40% 6.0% 8.0% 8.0%
Phased out over 10 year horizon beginning 2013 Observation period begins Observation period begins Introduce minimum standard Introduce minimum standard
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 25
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
Debt security that converts into equity at the occurrence of a defined trigger event Equity conversion can be achieved through principal write-down or exchange into ordinary shares
Future Tier 1 Hybrids and Tier 2 Instruments are effectively CoCos as well
All Tier 1 hybrids will require loss absorbency at the principal level outside a liquidation under Basel III All Tier 2 instruments of internationally active banks will require loss absorbency at the point of nonviability under Basel III
Almost all types of non common equity of banks will be a form of Coco in the wider interpretation of the
term given the requirement for permanent loss absorbency requirement outside a liquidation in both future Tier 1 and Tier 2 (of systemically important banks) capital instruments under the current Basel III proposals
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 27
Large Swiss banks will face substantially higher capital requirements The requirements comprise the minimum capital requirements under Basel III, a buffer to absorb losses without falling below the minimum, and a progressive component to improve the solvency of systemically important banks.
Component
III. Progressive Component
Description
Additional solvency for systemically important banks Creates incentives for banks to restrict their systemic importance Banks exceeding the minimum organisational requirements to improve resolvability will receive a capital rebate Enables banks to absorb losses without falling below minimum Takes into account risk profile and the loss potential of the bank
Proposed Calibration
6% Low Trigger CoCos (trigger at 5% CET1) Size of progressive component dependant on market share and
total assets1
13%
High Trigger CoCos (trigger at 7% CET1) Up to 3% of RWA
10% Buffer
Additional CET1 Buffer > 5.5% of RWA
II. Buffer
Total 8.5%, comprising: At least 5.5% CET1 Up to 3% high trigger CoCos (trigger at 7% CET1)
7%
Capital Conservation Buffer CET1 2.5%
+120%
7%
4.5%
5%
I. Minimum Capital
Essential to maintaining normal operations Corresponds to Pillar 1 requirements under Basel III
4.5% common equity (CET1) from January 2015 BIS minimum requirements concerning total capital (8%) and Tier 1 (6%) must also be met All ratios are net of B3 capital adjustments (filters and deductions)
Minimum Capital
+/-0%
In addition to the capital requirements, the big Swiss banks also have to satisfy the requirements in respect of liquidity, risk diversification and organisation Source: Credit Suisse
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 28
Although BIS recommendations do not have the force of law, BIS Committee members are expected to implement them. Europe will
likely adopt the BIS recommendations where they are more restrictive than the proposed European approach, subject to limitations imposed by national laws
Proposed Basel Capital Elements
2% of RWA (net of deductions)
Tier 2 Capital
Min 5-year subordinated debt; with loss absorbency language Instruments that are subordinated have fully discretionary noncumulative dividends, no maturity or incentives to redeem and loss absorption on a goingconcern basis Common Equity common shares or the equivalent for non-joint stock companies plus retained earnings and comprehensive income net of deductions)
Min 50% of T1
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 29
Viable
Non-viable
Insolvent
Monitoring
Resolution
Liquidation
Tier 1 Perpetual, no step up Optional coupon cancellation (no pusher but ord div stopper is allowed) Non-cumulative Deeply subordinated Loss absorption through conversion into equity or principal write-down upon breach of a predefined capital ratio Trigger: Local Regulator discretion
Tier 2 Dated with minimum maturity of 5 years Capital amortised over the last 5 years No coupon deferral Subordinated None (unless if used as a host for going concern contingent capital)
Key Features
Going Concern
Gone Concern
Loss absorbing through conversion to equity or principal write down when an institution is judged by its regulator to have reached the point of nonviability, or the public sector provides capital or equivalent support to restore a failing bank, without which the bank would not be viable Requirement to have this additional loss absorption feature maybe fulfilled by adding a contractual provision in the terms of the instrument, or as a result of an equivalent mechanism provided by the laws on resolution regime in effect in the issuers jurisdiction
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 30
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
Transfer Powers
Haircut/Bail in tool
EU likely to review the equal ranking of depositors relative to senior unsecured debt
Certain countries could require ring fencing of retail banking operations (in separate legal entity) from other banking operations
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 32
Changes in insolvency law Increasing loss given distress Bondholder losses, including senior
+
Improved liquidity positions Reduction in probability of distress Higher quantum and quality of capital
Bank Credit
Resolution Regime is a negative development for bondholders, partly offsetting the positives from the proposed Basel III capital & funding requirements
Source: Credit Suisse
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 33
Currently, bank bondholders in most European countries can only absorb principal losses in a liquidation
Should Resolution Regimes be implemented, bank bondholders will be exposed to principal losses outside liquidation c
*
b
Loss Given Default in Liquidation
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 34
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 35
If the power is statutory, the classes of debt that should be covered and the impact that the scope of application would have on the
The impact on the cost of financing, the risk of driving funding to short term or secured debt, the need to regulate the liabilities side The complexities of applying this tool to a cross-border group and the need to ensure recognition of any write-down or conversion by
foreign courts where the debt is booked in or governed by the law of a non-EU jurisdiction
The Commission notes the range of initiatives with similar objectives, including the Basel Committee consultation paper of 19 August 2010. The Committee will consult further on its implementation of any rules on contingent convertible capital that may be adopted, and will ensure that the development of any proposal on debt write-down as a resolution tool is coordinated with this
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 36
Resolution
The general rule should be that failing credit institutions should be liquidated under ordinary insolvency proceedings. However, it will not always be feasible to liquidate a bank under ordinary insolvency proceedings. In some cases, an orderly winding down through resolution will be necessary in the public interest for reasons of financial stability Measures aimed at maintaining the entity as a going concern, such as the power to write down debt or convert it to equity should be a last resort and only used in duly justified cases
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 37
Resolution Regime: Several Countries have introduced Legislation in this regard already
Germany (Restructuring & Orderly Liquidation of Credit Institutions Act) Ireland Credit Institutions (Stabilisation) Act 2010 UK (Banking Act 2009) Denmark Draft EU directive is planned for Summer 2011 More countries will likely implement legislation in this regard, becoming compulsory for EU member countries post the planned EU directive in this regard
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 38
PLEASE REFER TO THE DISCLAIMER SECTION FOR IMPORTANT DISCLAIMERS AND CONTACT YOUR CREDIT SUISSE REPRESENTATIVE FOR MORE INFORMATION.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
Increased incentive to dispose of Insurance operations Increased incentives to dispose of significant stakes in financial companies Increased appetite for disposal of positions with unrealised losses (assuming all other factors support disposal) Reduction of excess capital in non wholly owned subsidiaries to ensure maximum utilization of minority interest in regulatory capital
Banks like to have between 3.5% and 10% in non CET1 capital in our view Non common equity capital will be in CoCos (in broad definition of the term) CoCos will consist of Low Trigger CoCo (Tier 2 instruments), Tier 1 hybrids (Medium trigger CoCos) and High Trigger Cocos (for systematically important banks) Cost of non CET1 capital will be materially higher than before given increased loss absorbency outside a liquidation, further increasing WACC compared to existing stock of Non CET1 regulatory capital Tax deductibility of Non CET 1 capital (in most countries) reduce the impact of increased spreads
Reducing of Proprietary Trading risk Increased to central clearing counterparties (CCPs) Reduction of Counterparty exposure through structured solutions Disposal of capital intensive asset like ABS residuals
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 40
Funding Requirements
Leverage Ratio
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Business Model Implications from Key Legislation related changes (Resolution Regimes & beyond)
Resolution Regime Related Legislation ( and introduction of Transfer Powers and Haircut/Bail in Tool) Increased funding costs on senior unsecured Reducing issuance of senior unsecured debt; increasing issuance of covered bonds and other forms of secured debt Increase in asset margins
Reduced taxation flexibility Improved ability to attract deposits and compete against other savings product providers Increased funding costs for groups with large IB units
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 42
Business Model: Second order implications from Regulatory, Legislative and Political changes
Asset margin widening/Repricing of bank product to compensate for increased funding costs and capital requirements Consolidation of banking industry
Scale Structural (Germany, Denmark) Regulatory driven (Spanish Cajas) Leveraging strengths (Santander, BNP) Funding focused (DB/Deutsche Postbank)
Demutualisation Disposal of Non Core businesses & Portfolios Shifts in business mix/portfolio composition Cost base reductions/Focus on scale & technology Central Banks Access (Scope for fundamental review of charging of funded and unfunded access to differentiate between banks based on credit quality) Risk transfer solutions to Non-Bank Industry (Warehousing, equity & Mezzanine tranches in Synthetic securitisation of Counterparty risk) Expansion in growth markets Unlevel playing field based on potential differential in minimum capitalisation levels by country could drive transferring of operations across borders Focused equity investments/ partial dilution
Third party capital injections into business units Third party interest in specific subsidiary focusing on specific geography Third party interest in good bank post separation from bad bank
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 43
PLEASE REFER TO THE DISCLAIMER SECTION FOR IMPORTANT DISCLAIMERS AND CONTACT YOUR CREDIT SUISSE REPRESENTATIVE FOR MORE INFORMATION.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
Drivers
(1) Covered bond issuance is likely to increase as banks reduce reliance on short-term funding
ASW + 97bps
Senior Debt
(1) Issuance would be likely to increase as banks reduce reliance on short-term funding. (2) Banks would reduce holdings of other banks senior debt in Treasury portfolios under Basel III liquidity proposals
Fair to Attractive
(1) Shrinking asset class. ( 2) Less compelling than perpetuals as a result of relative valuation but also downward ratings risk Fair to Unattractive on potential removal of state support given implementation of resolution regimes Attractive
Max 15% of T1
Bench.+1,030 to call/+402 to mat. (1) Category does not exist under Basel III proposals. YTC 12.6% (median: 6.2%)/ YTM 7.1% (2)Grandfathered to call date only. (3) Shrinking asset class with zero supply going forward (median: 6.2%) Bench.+854 to call/+421 to mat. (1) Non-compliant with new regulatory capital YTC 11.0% (median: 8.3%)/ YTM 8.0% proposals. (2)Grandfathered to call date (median: 7.3%) Bench.+588 to call /+435 to mat. YTC 8.4% (median: 8.3%)/ YTM 7.9% (median: 7.8%) (1) Non-compliant with new regulatory capital proposals; likely redemption sooner than implied in pricing. (2) Shrinking asset class; future supply largely hybrids that comply with Basel III proposals with loss absorbency in going concern
Attractive
8% of RWA
Attractive
Min 50% of T1
Regulatory changes should be positive developments from a risk-profile standpoint for bondholders as the quantum and quality of capital rise while the liquidity metrics of the banking sector are enhanced. However, this needs to be weighed against the negative of a resolution regime reform, which will expose bondholders to loss absorption outside a liquidation
Source: Credit Suisse, the BLOOMBERG PROFESSIONALTM service, pricing as at 4 April 2011. *See Global Equity Strategys 9 March report, European Banks: downgrading to benchmark at http://doc.research-and-analytics.csfb.com/doc?language=ENG&format=PDF&document_section=1&document_id=869623271
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PLEASE REFER TO THE DISCLAIMER SECTION FOR IMPORTANT DISCLAIMERS AND CONTACT YOUR CREDIT SUISSE REPRESENTATIVE FOR MORE INFORMATION.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY 47
European Insurers
PLEASE REFER TO THE DISCLAIMER SECTION FOR IMPORTANT DISCLAIMERS AND CONTACT YOUR CREDIT SUISSE REPRESENTATIVE FOR MORE INFORMATION.
THIS REPORT IS NOT RESEARCH AND IS INTENDED FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
2 2 2 2 Where all risks are perfectly correlated: TCR = SCRequity + SCRcredit + SCRproperty + SCRint erest, completely uncorrelated risks: TCR = SCRequity + SCRcredit + SCRproperty + SCRinterest
rxc
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Equities
Stress of 45% (QIS 5: 39%) for global equities (equities listed in EEA and OECD countries) as per EIOPA, which is supported by the majority of EIOPAs members
Source: EIOPA, Credit Suisse
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*We have constructed the table using the QIS5 calibrations, published on 5th July 2010. The modified duration calculations are based on a 5% coupon bond trading at par. Under current proposals government bonds issued by OECD countries are not going to incur a capital charge. Source: EIOPA, Credit Suisse
Credit Capital Charge based on QIS 5: Mktspbonds = Modified Duration * F (Ratingi) Example: For a 10m holding in A bond with a 5-year modified duration, the capital charge would be 5 x 1.4% = 7.0% (or 7.0% x 10m = 0.70m)
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Solvency II: QIS 5 Implications from the revised credit capital requirements
Given the multiple changes we have seen to the Solvency 2 proposals to date, it is highly likely that these rules can change again. However, assuming the rules remain largely unchanged and where internal modules are used, they do not result in capital charges materially different to the standard model, we would see the following potential implications on the back of the new credit related capital module: Insures preference for front end of credit curve : Given the progressive nature of the credit capital requirement as duration is added, insurers are incentivised to take credit risk at the front end under the credit risk model. For instance, on an A rated exposure with a mod dur of 1, the capital charge is 1.4% while for an A-rated security with a mod dur of 7, the capital charge is 9.8% (1.4% * 7 as per table on previous page). Credit curves are not nearly steep enough to compensate insurers for such incremental capital requirements on additional duration which could attract insurers to shorter credit products. (Interest rate risk can still be managed by swaps to ensure overall duration mismatch of assets to liabilities is reduced as such mismatch will attract a capital charge) Lower demand for credit by insurers than under previous version of the specifications due to the higher net capital requirement than under the previous version of the specifications. For instance, certain government exposures might be much more attractive to hold than credit. There will be no capital requirement for government risk of any EEA state which was also the case under the previous version. However, the relative difference in capital requirement compared to other credit has increased meaningfully under the latest specifications due to the loss of the discount rate benefit in the credit stress test. For instance, an exposure to a Greek government bond with a 10 mod duration will result in a zero percent capital charge while a 10 mod dur exposure to a AA rated corporate bond is 11%. (The latter would have been much lower on a portfolio basis for an average insurer under the previous module given the inclusion of the wider illiquidity premium in the credit stress discount rate) Increased incentive for insurers to hold covered bonds: Covered bonds rated AAA have received preferential treatment, with 0.6% spread widening factor compared to 0.9% widening factor for other AAA corporate bonds Long duration BB (and lower rated bonds) will remain of very low interest to insurers: Although this has not changed that materially compared to previous version based on the investment grade index used in calculating the widening of the discount rate in the credit stress scenario, it is still important to reiterate. In BIG credit, insurers might potentially exclusively only take short term risk based on current curves given the extent of additional capital required to add duration. (A BB corporate bond with mod dur of 1 will have a 4.5% capital charge while a BB corporate bond with mod dur of 5 will have a 22.5% capital requirement for instance)
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European Banks
Appendices
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Disclaimer
This information has been issued by Credit Suisse Securities (Europe) Ltd. ("CS"), which is authorised and regulated by the Financial Services Authority for the conduct of investment business in the United Kingdom. These materials have been prepared by a Credit Sector Strategist (Strategists). Strategists are employees of CSs Trading Desk and are supervised by Trading Desk managers. Their primary responsibility is to support the trading desk. To that end, Strategists prepare trade commentary, trade ideas, and other analysis (analysis) in support of CSs trading desks. The information in these materials has been obtained or derived from publicly available sources believed to be reliable, but CS makes no representations as to its accuracy or completeness. Strategists may receive additional or different information subsequent to your receipt of these materials. The analysis of Strategists is subject to change, and subsequent analysis may be inconsistent with information previously provided to you. CS does not undertake a duty to update these materials or to notify you when or whether the Strategists analysis has changed. These materials and other written and oral communications from Strategists are provided for information purposes only, do not constitute a recommendation and are not a sufficient basis for an investment decision. Strategists are not part of CSs Fixed Income Research Department, and the written analyses disseminated by Strategists are not research reports. The views of CSs Trading Desks, including Strategists, may differ materially from the views of the Research Department and other divisions at CS. CS has a number of policies in place designed to ensure the independence of CSs Fixed Income Research Department including policies relating to trading securities prior to distribution of research reports. These policies do not apply to the analysis provided by Strategists. CS may have accumulated, be in the process of accumulating, or accumulate long or short positions in the subject security or related securities on the basis of Strategists analysis. Trading desks may have, or take, positions inconsistent with analysis provided by Strategists.
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