New liquidity and capital requirements New liquidity and capital requirements
Kristin Gulbrandsen
Equity Certificates Seminar, 15 September 2010
Somewhat tighter regulation would
h t i l b fit
have net social benefits
Costs from stricter regulation will likely be modest
M it l d li idit i b k l th
More capital and liquidity in banks lower the probability of new crises
Source: Analysis published by the Basel Committee 18 August 2010
Strong growth in banks’ balance sheets g g
Total assets. 31 December 1995 =100
600 600
Norway Denmark Sweden Switzerland
400 500 400
500
Norway Denmark Sweden Switzerland
Germany France Canada US
300 400 300
400
200 200
0 100 0
100
1995 1997 1999 2001 2003 2005 2007 2009
Source: OECD Bank Profitability Statistics
Market funding has grown in importance
Funding sources for Norwegian banks and covered bond mortgage companies 100 100
Funding sources for Norwegian banks and covered bond mortgage companies.
Percentage of total assets
70 80 90 70
80 90
Customer deposits
50 60 50
60
20 30 40 20
30 40
Market funding and other liabilities
0 10 20 0
10 20
1995 1997 1999 2001 2003 2005 2007 2009
Equity
1995 1997 1999 2001 2003 2005 2007 2009
Source: Norges Bank
Equity and Tier 1 capital
12 12
Equity and Tier 1 capital
Per cent. Norwegian banks and covered bond mortgage companies
10 12 10
12
6 8 6
8
4 6 4
6
0 2 0
2 Tier 1 capital Equity as percentage of total assets
0 0
1995 1997 1999 2001 2003 2005 2007 2009
Sources: Norges Bank and Finanstilsynet (Financial Supervisory Authority of Norway)
High cost of financial crises
20 20
US
High cost of financial crises
GDP. 4-quarter change. Per cent
10 15 10
15 Euro zone
Japan China
5 10 5
10
0 0
-10 -5 -10
-5
1995 1997 1999 2001 2003 2005 2007 2009
Source: Thomson Reuters
The process The process
Dec 09: Proposal from the Basel Committee
F b 10 P l f th EU C i i
Feb 10: Proposal from the EU Commission
April: Response to consultations
May: Bank data for quantitative impact studies
May: Bank data for quantitative impact studies
July: Revised proposal from the Basel Committee
Aug: g Macroeconomic impact p
Sep: Calibration and phase-in arrangements
Nov: G20 Summit in Seoul
Target: Nearly all parts of the reform package ready by year end
year end
P l f it l d li idit Proposals for more capital and liquidity
Higher capital adequacy requirement and new non-risk-based leverage ratio requirement
non risk based leverage ratio requirement
Strengthen quality of Tier 1 capital
Build up buffers in good times that can be drawn p g on in periods of stress
Regulation of systemically important banks more stringent than for other banks
More liquid assets and more stable funding
Timetable Timetable
Gradual phase-in 1 Jan 2013 – 31 Dec 2018Gradual phase in 1 Jan 2013 31 Dec 2018
Quicker phase-in possible in NorwayQuicker phase in possible in Norway
Some countries are already aheadSome countries are already ahead
Proposals for quantitative liquidity Proposals for quantitative liquidity
requirements
1. Liquidity coverage ratio ≥ 100 % - requiring liquid assets
- requiring liquid assets
2. Net stable funding ratio > 100 % - requiring stable fundingq g g
“ Liquidity Coverage Ratio”:
B k t ith t d 30 d f li idit t
Banks must withstand 30 days of liquidity stress
December 2009 proposal:
December 2009 proposal:
o Narrow or broad definition of liquid assets o Substantial deposit run-off
o Substantial deposit run off
Revised proposal July 2010:
o Broad definition of liquid assets o Broad definition of liquid assets o Less deposit run-off
o Announcing separate rules for jurisdictions with small g p j government securities markets
September 2010:
o Requirement effective as of 2015
Many Norwegian banks have limited liquidity
80 80
Many Norwegian banks have limited liquidity
Banks’ liquid assets as a percentage of required liquid assets Number of banks. 31 December 2009
60 70 80
60 70 80
Proposal December 2009 Revised proposal July 2010
40 50 60
40 50 60
20 30 20
30
0 10 0
10
Below 25 % 25-50 % 50-75 % 75-100 % Over 100 %
Source: Norges Bank
Small savings banks have limited liquidity
125 125
Proposal December 2009
Banks’ liquid assets as a percentage of required liquid assets Average for the group. 31 December 2009
75 100 75
100
Proposal December 2009 Revised proposal July 2010
50 75 50
75
0 25 0
25
0 0
All banks Savings banks Savings banks Assets >
NOK 20bn
Savings banks Assets <
NOK 20bn
Source: Norges Bank
“Net stable funding ratio”:
Stable funding of illiquid assets
Proposal December 2009
o Stability means long maturities ( ≥ 1 year) or expected to be stable in periods of stress
to be stable in periods of stress
Revised proposal July 2010
Revised proposal July 2010
o Less deposit run-off
o Secure residential mortgages need less stable fundingg g g o To be introduced in 2018
Most banks meet revised proposal
140 140
Proposal December 2009
Banks’ stable funding as a percentage of required stable funding Number of banks. 31 December 2009
100 120 100
120
Proposal December 2009 Revised proposal July 2010
80 100 80
100
40 60 40
60
0 20 0
20
0 0
Below 70 % 70-80 % 80-90 % 90-100 % Over 100 %
Source: Norges Bank
Savings banks in a strong position
B k ’ t bl f di t f i d t bl f di
125 125
Banks’ stable funding as a percentage of required stable funding Average for the group. 31 December 2009
100 125 100
125
Proposal December 2009 Revised proposal July 2010
50 75 50
75
0 25 0
25
0 0
All banks Savings banks Savings banks Assets >
NOK 20bn
Savings banks Assets <
NOK 20bn
Source: Norges Bank
Possible adaptations to liquidity requirements p q y q
Hold more government securities: Norwegian and foreign
More long-term market funding D it ith fi d t iti
Deposits with fixed maturities
Securitise loans (covered bonds) More liq id co ered bond markets
More liquid covered bond markets
Sell illiquid assets
Shorten loan maturities
Shorten loan maturities
Lower loan-to-value ratios for residential mortgages
mortgages
Other factors posing challenges to banks’
Other factors posing challenges to banks liquidity and funding
Refinancing swap arrangement and longer-term F- loans
New collateral requirements for loans from Norges Bank
Bank
Changes in rules for money market funds
Changes in rules for money market funds
Solvency 2 for insurance undertakings
Solvency 2 for insurance undertakings
Maturity profile of the swap arrangement and longer term F loans
60 60
and longer-term F-loans
In billions of NOK
50 50
Swap arrangement 2-year F-loan 3-year F-loan
30 40 30
40
20 20
0 10 0
10
10 Q3 11 Q3 12 Q3 13 Q3 14 Q3
Source: Norges Bank
Swap arrangement has supplied liquid assets
N i b k ’ t li id t P t f t t l t
15 15
Norwegian banks’ most liquid assets. Percentage of total assets
Deposits held at central banks
Government and government-guaranteed bonds in foreign currency Government and government-guaranteed bonds in NOK
10 10
g g
Government certificates in foreign currency Government certificates in NOK
5 5
0
0 0
0
jun-07 des-07 jun-08 des-08 jun-09 des-09 jun-10
Source: Norges Bank
The capital proposals: Overview The capital proposals: Overview
1 Capital base 1. Capital base
2 Higher capital requirements 2. Higher capital requirements 3. Counteract procyclicality
3. Counteract procyclicality 4. Leverage ratiog
5. Systemically important institutions
Capital base - Tier 1 capital requirement Capital base Tier 1 capital requirement
December 2009 proposal
o Tighten deductions in Tier 1 capital
o Increase loss absorption for hybrid capital
Revised proposal July/September 2010
o Ease tightening of deductions
o Deductions to be phased in later: 2014
Relatively modest effect on Norwegian
banks as Norwegian rules are already strict
More Tier 1 capital
Ti 1 it l i t i t f i k i ht d t
Tier 1 capital requirement in percentage of risk-weighted assets
12
Countercyclical buffer 0 – 2.5
10
Conservation buffer
2.5 H b id
6 8
Common equity Hybrids
2.0
Hybrids 1.5
4
6
Common equity 2.0
Common equity 4.5
2.0
0
2 4
Old New
Capital buffers beyond minimum requirement p y q
Fixed capital buffer (conservation buffer) C t li l b ff t f fi d b ff
Countercyclical buffer on top of fixed buffer
o Build up when credit growth high
Cross border banks appl eighted a erage of
Cross-border banks apply weighted average of national buffer requirements
o Bank subsidiary in host country holds local buffer o Bank subsidiary in host country holds local buffer o Branch in host country holds buffer in home country
National authorities decide when to reduce or
remove countercyclical buffer
Leverage ratio Leverage ratio
Proposal December 2009: Proposal December 2009:
o Numerator: Tier 1 capital or common equity
o Denominator: Total assets + off-balance sheet exposure
Revised proposal July/September 2010:
o Consider 3% as of 2018. Calculated as average over a quarter o Numerator: Tier 1 capital
Banks to start disclosing leverage ratio in 2015 o Banks to start disclosing leverage ratio in 2015
Impact of a 3% leverage ratio Impact of a 3% leverage ratio
Number of financial institutions in Norway by equity ratio (equity as a
percentage of non-risk weighted assets, including items not recognised on balance sheet) 2009 Q1
7 8 7
8
Savings banks Commercial banks
balance sheet). 2009 Q1
4 5 6
4 5
6 Commercial banks
Mortgage companies Finance companies
2 3 4
2 3 4
0 1 2
0 1 2
Below 2 % 2 - 2.5 % 2.5 - 3 % 3 - 3.5 % 3.5 - 4 %
Source: Finanstilsynet (Financial Supervisory Authority of Norway)
Systemically important financial institutions
Basel proposal December 2009 – not very specific
o Higher risk weights for exposure to large institutions o Higher risk weights for exposure to large institutions o Develop methods for measuring systemic importance
o Consider strengthening capital and liquidity requirements
FSB June 2010: General principles (interim)
Basel proposal July 2010
o Develop approach for setting more strict requirements for systemically important banks
A good regime for crisis resolution is vital
A good regime for crisis resolution is vital
o Increased risk of loss for equity holders and creditors o In particular a challenge for cross-border institutionsp g
Conclusion Conclusion
No doubt requirements will be more stringent than existing ones, but harsh enough to prevent future financial crises?
Norwegian banks have a good basis and should adjust early to the new requirements
N l k i b k h t
New rules may make running a bank somewhat more expensive
Better reg lation ill ndo btedl benefit the
Better regulation will undoubtedly benefit the
economy’s stability and long-term growth
New liquidity and capital requirements New liquidity and capital requirements
Kristin Gulbrandsen
Equity Certificates Seminar, 15 September 2010
