Roma Giugno 2011 Convegno ABI Basile ilea III e M Modelli lli di i Busin iness: : C cos C osa abbi bbiamo a o appr ppreso o da dalla c crisi? Prof of. Gianl nluc uca Oricchi hio, o, PhD hD, CPA CB CBM Un University, Ro Rome
Age genda nda Banking Business Models CRO, CFO, CBU: Pricing discipline at origination Business Case: Internal Capital Generation Annexes: I. Business Case Credit Pricing & IT Logical Architectur e II. Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
BUSIN SINESS ESS MOD ODEL ELS S AND C CRED EDIT IT POR PORTFOL OLIO IO MGM GMT + - Cap apital al Tur urnov nover Driver ers to b be e cons onside dered: d: 1. O 1. Originat ate e & Hold Basel 3 Impact + IAS Impact 2. Originat 2. O ate e & Hed edge Risk & Capital Credit Risk Management - Instruments Risk, Return and 3. O 3. Originat ate e & Growth by Distribut bute Segment Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 2 Busin siness M ss Models ls
BUSIN SINESS ESS MOD ODEL ELS S AND C CRED EDIT IT POR PORTFOL OLIO IO MGM GMT - A Histor ory Of Credi dit Cycle Tur urni ning ng Poi oint nts - Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 3 Busin siness M ss Models ls
BUSIN SINESS ESS MOD ODEL ELS S AND C CRED EDIT IT POR PORTFOL OLIO IO MGM GMT Originate Originate To And Distribute Hold Basel I III Cos ost of of Risk on on Balanc nce Basel I II Cos ost of of Risk on on Balanc nce Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
Procic iclic licit ità dei i requis isit iti i e vola latilit ilità F Fair ir Va Value IAS S 1. La volatilità dei Tier Ratio è aumentata: x5 x5 Total Tier 2. I “ “ tem empi di r reazi eazione” e” si Basilea II sono ono ridot dotti ( (Le Lezi zione one #1) Fair Value 3. Riorganizzare le relazioni Basilea I fra CRO CRO, CF CFO e CB CBU Costo storico tempo Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
Age genda nda Banking Business Models CRO, CFO, CBU: Pricing discipline at origination Business Case: generazione interna di capitale Annexes: I. Business Case Credit Pricing & IT Logical Architectur e II. Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
CRO, CF CRO CFO, CB CBU: U: Pric icin ing dis iscip iplin line a at or origi gina nation on Il CRO stima e valuta il rischio (Markowitz X-axis) Il CFO stima e valuta l’EVA (Markowitz Y-axis) Lezi ezione #2: e #2: CRO-CFO cons onsistenc ncy (pr pricing di ng discipl pline ne!) (i) (i)Spread ead r risk ad adjusted ed (ii)EVA b (ii) break eak ev even en spread ead Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
CRO, CF CRO CFO, CB CBU: U: Pric icin ing dis iscip iplin line a at or origi gina nation on Various components contribute to define commercial price Illustrative - Transfer Price components - Expected loss facing Unexpected loss facing Risk Free Operating Cost of Forward Commercial Commercial Cost funding Looking Credit Price Mark-up Spread* Transfer Spread (non-binding opinion applied to Client) Transfer Spread can be used as a benchmark of Credit Risk and Cost of Funding RM is responsible for the definition of the final price (*) Credit risk spread defined by internal and external ratings models (Risk Calc Italy di Moody’s Kmw ) Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
CRO, CF CRO CFO, CB CBU: U: Pric icin ing dis iscip iplin line a at or origi gina nation on Lezi ezione e # # 3: 3: l la g a gen ener erazi azione e inter erna d a di cap apital ale i e in Bas asilea ea III è p è più importan ante e che i e in Bas asilea I ea II (La a prima a lev eva è “ a è “ commer ercial ale” e” !) Il CRO deve saper “comunicare” con il CBU Il CBU deve poter disporre di una “to do list” chiara Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
AWAREN AW ENESS ESS OF OF MISPR ISPRIC ICIN ING G MANAGEM GEMEN ENT “Risk Adjusted Spread” is is non non bi bindi ding for final price but it is binding for Relationship Managers performance ILLUSTRATIVE - Exampl ples of of P Pricing ng repor ports - Loans Loa ns are or origi gina nated w d with h a cons onsistent nt r risk/retur urn n pr prof ofile Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 10 Busin siness M ss Models ls (**) Risk Adjusted Spread is equivalent to Market spread Point in Time + Cost of Funding (March 2008) (***) Risk Adjusted Spread Mid Term Average as best proxy to calculate “through the cycle” spreads, Cost of Funding included
CRO, CF CRO CFO, CB CBU: U: Pric icin ing dis iscip iplin line a at or origi gina nation on ~ 20% del totale sono rischi di tasso/funding ~ 70% del totale sono rischi di credito Rischi hio di o di Tasso/ o/fundi unding ng Ris ischio io d di i Credito ito CREDIT ALM TREASURY ..the he m missi ssing ng ring… ng… Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 11 Busin siness M ss Models ls
Age genda nda Banking Business Models CRO, CFO, CBU: Pricing discipline at origination Business Case: generazione interna di capitale Annexes: I. Business Case Credit Pricing & IT Logical Architectur e II. Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
Busines ess Cas ase: e: Inter ernal al C Cap apital al Gen ener erat ation Risk adjusted spread settlement will impact on Origination phase of the Credit Process; real time calculation makes RMs aware of the credit risk impact - Impacts on Credit Process - Credit Credit Non Origination Policies Mgmt Performing Proposal and Underwriting/ Loan Credit Request Evaluation Decision Activation Open Credit Request Opening Client/ Group Loan proposal (amount, risk Loan activation dossier adjusted spread , commercial Documents Acceptance Collateral perfection spread) Activities Opening Facility/ Collateral Load Credit Request Contract Underwriting dossier (focus on “ fidi Loan dossier sent to entitled promiscui”) credit structure Rating calculation Loan Decision (amount, risk adjusted spread , commercial Risk Adjusted spread (*) spread) settlement Synthesis judgment As Is Impact on Relationship Manager MBO Pricing discipline (*) Risk Adjusted Spread = insurance spread + cost of funding = Transfer spread Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
Why hy is r relevant nt pr pricing ng di discipl pline ne at or origi gina nation? on? - Fixed Income Market (bps) - - Domestic Lending Market view (bps) - 800 CDS median 4,0% 4,0% Commercial spread CDS median + 2 σ 700 CDS median + 2 σ 3,5% 3,5% CDS median - 2 σ CDS median - 2 σ 600 3,0% 3,0% Insurance Price + Cost of Funding 500 2,5% 2,5% 400 2,0% 2,0% 300 1,5% 1,5% 200 1,0% 1,0% 100 0,5% 0,5% 0 0,0% 0,0% AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 External Ratings Internal Ratings Commercial spreads on non-liquid portfolios are more volatile than market spreads High commercial spreads are lower than market spreads for high-risky counterparties Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
Inter ernal al Cap apital al G Gen ener erat ation: > 300 300 bps… Short term loans (Capitalia Banking Group) M/L term loans (Capitalia Banking Group) EVA: +80 bps RWA: - 35 % Positive correlation between risk Spreads are applied basically irrespective (rating classes) and return (interest of counterparty risk for new mid to long- margin on average volume) for clients term issues with new short term loan until class 19 The commercial spread/ insurance Positive margins between commercial spread differential is negative above risk spread and risk adjusted spread, on class 14 exception of high risk classes Bas asilea 3 ea 3 e B e Ban anking Conv onvegno gno ABI I – 20 20 Giugno ugno 201 2011 Busin siness M ss Models ls
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