Implementing Basel II and Beyond Michael Barak SVP, Basel Capital Manager October 16, 2012 *Views expressed here are my own and do not represent those of Union Bank
Agenda • Union Bank Overview • Current Status • Union Bank Solution • Risk Management: Basel II End-to-End Controls • Current Challenges • What Worked – Applicability for Basel III 1 |
Union Bank Overview: Financial Highlights • Headquartered in San Francisco, CA • Financial Highlights • Total assets: $90B • Total loans held for investment: $54B • Core deposits: $53B • Tier 1 common capital ratio: 13.78% • 407 Branches • Key Markets • Consumer • Small Business • Middle Market • Real Estate • Corporate • Union Bank is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group 2 | Source: SNL, 2Q12, end of period
Union Bank Overview: Risk Management Framework 3 |
Union Bank Overview: Basel II Capital Accord Basel II Capital Accord Pillar 1 – Capital Requirement Pillar 2 – Capital Adequacy Calculate capital for: •Validate capital calculated in Pillar 1 • Credit Risk •Consider risks not valued in Pillar 1 Capital Requirement – Establish Rating Philosophy •Establish Risk Appetite Market Discipline Capital Adequacy – Advanced Internal Ratings Based •Challenge capital calculation through: Approach – Stress Testing Pillar 3 Pillar 1 – Retail exposure segmentation Pillar 2 – Concentration Analysis – Wholesale scorecards – Economic Capital • Market Risk – Value at Risk modeling Pillar 3 – Market Discipline • Operational Risk – Advanced Measurements Approach – Internal and External Loss Data Public disclosure of capital requirement for – Business Environment & Internal publicly traded companies and additional Control Factors regulatory schedules for all – Scenario Analysis Basel II companies Data Integrity and Management Validation, Oversight and Governance 4 |
Current Status •Union Bank entered parallel on April 1, 2011 • Leading up to the parallel run entry, UB conducted three self assessment exercises which served as the basis for entering parallel • Parallel entry has triggered Regulatory Reviews and increased scrutiny • Submitted 5 quarters of Basel II results to the Supervisors •Regulatory Changes • CCAR • Basel III • Basel Standardized & Advanced •Union Bank Changes • Acquisitions • New Products • Supervisory Recommendations 5 |
Union Bank Solution: Objectives & Key Deliverables Objectives Deliverables Using the Basel II Pillar I Advanced Approach, Deliverable calculate the Bank’s RWA across all exposures Deliverable Data Requirements Business Documentation Requirements Documentation Implement a vendor supported risk-weighted asset and economic capital engine and data model Deliverable Regulatory Integrate the risk-weighted assets results with the Deliverable Gap required Regulatory Reports Documentation Policies and Procedures Integrate the economic capital results within Performance Reporting Deliverable Deliverable Key Data Elements Business Define and execute a monthly process where the Solution results are timely and accurate (Attestation) Documentation 6 |
Union Bank Solution: Basel II RWA Overview • The RWA calculation is an integrated process encompassing attributes from multiple sources. A vendor tool from Moody’s is used for the RWA calculation, FFIEC 101 reports and the electronic submission. Systems and Data Sources Data Warehouse Data Quality, Data Management, Data Governance Program Wholesale excl . ARC Trading Moody’s Counterparty Retail excl . SAS Impairment Wholesale General Ledger Impairment Electronic Basel II Reporting Acquired Loan Data Mart SAS Submission FDIC Retail Acquisitions RWA FFIEC 101 FFIEC 101 Limits Management System Calculator Trading ( Credit ) Excel Fronting Committed Securitized Assets Unissued LC’s Wholesale Equities / Funds Impairment Total Return Wholesale Swaps (TRS) Securities Other Reporting FDIC Indem. Credit Default Asset Swaps (CDS) FFIEC 031 & Direct Input FR Y - 9 C Operational GL Risk Adjustments Management Reporting Acquisition Market Risk Source: Basel II FP&A Process Documentation 7 |
Union Bank Solution: Use Test - Basel II QoQ Changes A B C D E F Exposure at Wt Avg Wt Avg Wt Avg RWA RWA / Exposure Category Default PD (%) LGD (%) Maturity ($M) EAD ($M) (Years) (%) Higher PDs due to integration of acquired assets; otherwise lower. Wholesale Exposures 1,463 0.2 (0.6) (0.3) 554 -1% Corporate / Bank / Sovereign June sales of securities drive decrease in 299 1.8 (0.9) (0.0) (146) -5% Real Estate: IPRE & HVCRE wholesale borrowings; proceeds fund (3,880) 0.0 (0.1) 0.1 (389) 0% repayment of short-term debt Securities Counterparty (Derivatives) (2) 0.1 (1.6) 0.4 93 6% HPI decrease results in lower LTVs, and Retail Exposures thus decreased PD and LGD 751 (0.2) (0.8) (486) -3% Mortgage - First Lien (1) 0.1 (1.6) (41) -1% Mortgage - Junior Lien 513 0.0 (6.4) 188 -3% Other Retail Exposures 123 (0.0) (71) -3% Securitization Exposures Decrease in Equity RWA driven mainly by (15) (315) -15% Equity Exposures continued fund sales due to Volcker Rule (1,801) (32) 13% Other Assets Completed integration of acquired (2,041) (529) 38% Acquisition exposures into Basel II AIRB (25) Excess Credit Reserves 41 Market Risk Assets Annual scenario analysis resulted in (781) Operational Risk increased alignment with AMA model, thus (4,592) (1,889) 1% less additional capital required TOTAL >10% change, benefit to RWA 5%-10% change, benefit to RWA Legend >10% change, detriment to RWA 5%-10% change, detriment to RWA <5% change, minimal RWA impact 8 |
Union Bank Solution: Use Test – Capital Allocation Allocable Capital Pool (Basel I Based) GAAP Shareholder’s Equity Strategic Capital •Represents UB capital, the base upon which a return is expected •Determined by Basel I as constraint •Undeployed capital reserved for strategic purposes •Segments not expected to earn a return on Strategic Capital Segment Capital Consumption (Basel II, Pillar 2) Risk Based Capital Other EC Components Minimum 5% TCE floor applied Goodwill •Economic Capital on •Ops Risk (8.5% x RWA), market risk, •Tangible floor of 5% is less than 7% •Including segment assets pension risk, business risk, management bank-wide hurdle privatization buffer, less diversification benefit •Basel II Credit EC (8.5% x •Represents some diversification RWA) •No ALM Market Risk benefit Allocated Capital Total of Business Unit Capital Consumption is greater than Allocable Capital Pool. •“Residual” credited back reduces Business Unit Capital Consumption. Pro rata based on Consumption Management Reporting 9 |
Risk Management: Basel II End-to-End Controls Utilize for key decisions, policy Process for testing Basel II as a and procedures, executive whole covering key functionality, milestones and result review IT infrastructure, data sets and complete data 1. Governance 2. Testing Examines completeness, validity, Basel II End-to- Defining business and data 3. End consistency, timeliness and requirements; defining solution 6. Attestation Documentation Controls accuracy of data as it moves design and desktop procedures Framework from source to target 5. Operational 4. Data Integrity Process Ensures on-going security, Process that requires business integrity and continuity of users to sign-off completeness, systems and data; incorporates accuracy and timeliness of data; change management overall ownership & approval 10 |
Risk Management: Governance Overview • Utilize governance for key decisions, executive milestones, budget approval and project execution. Executive Steering Committee Board of Directors • CRO-Chair / CFO • Corporate & Retail • Risk Committee Co-Chair Banking Vice Chair • CEO • CIO Basel II PMO • Project Managers • Regulatory Liaison • Budget Analysts • BTMU Liaison Workstream Leads • Counterparty Risk • Risk-Weighted RWA Steering Committee Assets • Market Risk • EVP, Controllers • Data Integrity • Basel PMO • Operational Risk • SVP, Internal Audit • EVP, FP&A • Pillar II / ICAAP • Wholesale Credit • SVP, IT • CFO, Treasury • Regulatory Risk • Retail Credit Risk Reporting • EVP, Risk Mgt. • Other Credit Risk 11 |
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