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Peru Basel II implementation . Setiembre 2009. APEC. Experience in Basel II implementation. The SBS has reinforced a regulatory framework to enable firms making an appropriate identification, evaluation, treatment and control of risks.

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experience in basel ii implementation
Experience in Basel II implementation
  • The SBS has reinforced a regulatory framework to enable firms making an appropriate identification, evaluation, treatment and control of risks.
  • Basel II implementation process is progressing quite well in Peru:
    • Changes in the General Law allow the application of capital requirements to credit, market and operational risk according to Basel II.
    • A regulatory framework for the implementation of Basel II has been made available to the public (publications and pre announcing of new rules)
main changes in banking law dl 1028
Main changes in Banking LawDL 1028
  • Minimum capital requirements for credit, market and operational risks (Pillar I of Basel II)
  • Increase of the minimum capital ratio and maintenance of suitable additional buffer, according to entities’ risk profile and the business cycle (Pillar II of Basel II)
  • Definition of capital structure and proposal of limits on its composition (Basel)
  • Information transparency (Pillar 3 of Basel II)
  • Transparency: Obligation to pre announce new rulesregardingcapital requirement and loan loss reserves.
slide4
Implementation Schedule

July 2010

July 2009

April 2009

Capital requirement:

CR: standardized approach

Capital requirement: CR: no change MR: Standardized approach

OR: Basic approach

Opening application to advance models: VaR, IRB, AMA

Opening application to Operational risk (OR) - ASA

slide10
Sovereign exposures

Sovereign exposures referred only to Central Banks and Central Government exposures. The rest of public institutions will be treated as corporates.

Peruvian local currency sovereign exposures, as well as local and foreign currency reserves and other Peruvian Central Bank operations have a weight factor of 0%.

Peruvian foreign currency sovereign exposures (except reserves), will have a weight factor according to the following formula:

Weight factors of Sovereign exposures of foreign countries are found in the Accord according to international risk rating agencies.

internal models irb
Internal Models (IRB)
  • The regulation considers fundamental IRB (FIRB) and advanced IRB (AIRB)
  • Parameters are required to be calculated taking into account a complete business cycle (independently of the minimum period of observations)
definition of default
Definition of Default
  • Past due loan for more than 90 days
    • Retail debtors: by operation
    • Non retail debtors: by debtor
  • Debt instruments are considered in default since the first day of delay after the settlement period.
  • Change to a restructuring situation
  • In the last 5 years, the debtor or the operation has registered more than one change in contract conditions (unless the firm can make a better estimation of its change to a default situation)
  • The firm considers that the debtor is unable to partially or totally fulfill its obligations according to the agreement .
leaving default
Leaving default
  • From the moment of non default, punctually fulfillment of liabilities for 12 consecutive months. During this period, the debtor will be able to register a maximum delay of 7 consecutive days and a maximum accumulated delay of 25 days (unless the firm can make a better estimation of the change to a non default situation)
  • The firm considers that the debtor is able to fulfill all its obligations. This condition will be valid only when the reason of non fulfillment is due to qualitative criteria.
current methodology
Current Methodology
  • Firmswill be able to calculate capital requirement for market risks through one of the following ways:
    • Standardized Method
    • Internal Models
    • Combination of standardized method and internal models.

It must be considered that each type of risk should be evaluated using only one method.

Changes in regulation

  • Inclusion of interest rate risk measurement in trading book and commodities risk measurement, as part of the standardized method.
  • Use of internal models with previous authorization of the SBS.
trading book for market risk capital requirement
Trading book for market risk capital requirement

SBS will consider the following instruments as part of trading book:

a) Instruments registered in trading book

b) The following instruments registered in available-for sale category:

    • Debt
      • CDBCRP
      • Sovereign bonds (VAC-bonds not included)
      • Global bonds
      • Brady bonds
    • Equity:
      • IGBVL shares
      • Mutual funds (at least 70% of the fund in shares)
  • Speculative derivatives
  • Derivatives that hedge a and b investments
  • Commodities
capital requirement for operational risk
Capital requirement for operational risk
  • Firms must use one of the following methods.

a. Basic indicator approach – BIA (function of net income)

    • Alternative Standardized approach - ASA (function of net income by business lines, except retail and commercial banking lines)
    • Advanced measurement approaches – AMA (probabilistic calculations)
  • The use of ASA or AMA requires express authorization of the SBS
  • Basel II established methodologies are followed.
operational risk
Operational Risk
  • Gradual implementation of operational risk requirement:
  • SBS would expect that during the implementation, entities are able to meet the requirements to apply to ASA, and thus avoid the application of 100% according to BIA.
how does accumulation rule work
How does Accumulation Rule work?
  • The variable component of procyclical loan loss reserves will be activated in the following situation:
    • The average GDP growth rate YoY of the last 30 months passes from less than 5% to 5% or more.
    • When the average GDP growth rate YoY of the last 30 months is over 5%, and the average GDP growth rate YoY of the last 12 months is higher by 200 basic points to this same indicator calculated a year earlier.
    • When the average GDP growth rate YoY of the last 30 months is over 5%, and 18 months had elapsed since the procyclical rule was deactivated
how does decumulation rule work
How does Decumulation Rule work?
  • The accumulation rule will be deactivated in the following situations:
  • The average GDP growth rate YoY of the last 30 months passes from a level equal or greater than 5% to one less than this threshold.
    • The average GDP growth rate YoY of the last 12 months is lower by 400 basic points to this same indicator calculated a year earlier.
slide26
Procyclical rule evolution

30 months

Average GDP growth rate 30 months

Threshold 5%

slide27
Procyclical rule evolution

12 months

-3.98%

Average GDP growth rate 12 months

Threshold -4%

Threshold 2%

slide28
The Banking System has S/. 916 millions of loan loss reserve buffer and S/. 4 134 millions of capital buffer
additional capital buffer
Additional capital buffer
  • In Peru, the additional buffer is a function of the type of institution (10.5% for commercial banks, 14% for microfinance institutions). This indicator is not very sensitive to risk.
  • Regulatory capital should consist of:
    • Minimum capital : Pillar I
    • Additional capital: Should be determined based on the institution's risk and business cycle .
    • Additional capital according to ICAAP

Accumulates

Business cycle indicator

Decumulates

slide31
How should the additional capital requirement be calculated in terms of risk profile and economic cycle?

Total indicator

slide32
How should the additional capital requirement be calculated in terms of risk profile and economic cycle?

αi = weight adjustment according to ICAAP evaluation

evolution of capital ratio banking sector
Rop ajustado

Adjusted OR

Rop

OR

Ajuste APR

RWA adjustment

Minimum ratio

Prudential requirement

Scheduled adjustment

Capital ratio

Evolution of Capital Ratio (Banking sector)
evolution of capital ratio microfinance institutions
Rop ajustado

Adjusted OR

Rop

OR

Ajuste APR

RWA adjustment

Minimum ratio

Prudential requirement

Scheduled adjustment

Capital ratio

Evolution of Capital ratio (microfinance institutions)
banking sector capital s mm december 2008
Banking sector capital (S/. MM)December 2008

Initial Situation

Final Situation

Additional Req.

864,188

Additional req.

1,380,510

Prudential req. 1,552,389

Prudential req.

1,438,003

Minimum req.

9,831,794

Minimum req.

9,313,961

Required capital

regulatory capital

microfinance institutions capital s mm december 2008
Microfinance institutions capital (S/. MM)December 2008

(December 2008)

Initial Situation

Final Situation

Additional req.

362,824

Additional req.

398,212

Prudential req.

438,042

Prudential req.

417,284

Minimum req.

825,874

Minimum req.

766,574

Required capital

regulatory capital

capital ratio according to portfolio growth scenarios banking sector
Minimum ratio

Prudential requirement

Capital ratio

Capital ratio according to portfolio growth scenarios: banking sector

RWA (+ OR, +growth)

Capital Ratio=----------

Reg. capital (+ earnings capitalization +reserves of standard credits (+growth) )

Portfolio

growth

0%

15%

42.63%

capital ratio according to portfolio growth scenarios microfinance institutions
Minimum ratio

Prudential requirement

Capital ratio

Capital ratio according to portfolio growth scenarios: microfinance institutions

RWA (+ OR, +growth)

Capital Ratio=----------

Reg. capital (+ earnings capitalization +reserves of standard credits (+growth) )

Portfolio

growth

0%

20%

43.83%

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