Handbook of Basel III Capital: Enhancing Bank Capital in Practice

ISBN-13: 9781119330820 / Angielski / Twarda / 2017 / 560 str.

J Ramirez

Opis

A deeper examination of Basel III for more effective capital enhancement The Handbook of Basel III Capital - Enhancing Bank Capital in Practice delves deep into the principles underpinning the capital dimension of Basel III to provide a more advanced understanding of real-world implementation. Going beyond the simple overview or model, this book merges theory with practice to help practitioners work more effectively within the regulatory framework, and utilise the complex rules to more effectively allocate and enhance capital. A European perspective covers the CRD IV directive and associated guidance, but practitioners across all jurisdictions will find value in the strategic approach to decisions surrounding business lines and assets; an emphasis on analysis urges banks to shed unattractive positions and channel capital toward opportunities that actually fit their risk and return profile. Real-world cases demonstrate successful capital initiatives as models for implementation, and in-depth guidance on Basel III rules equips practitioners to more effectively utilise this complex regulatory treatment. The specifics of Basel III implementation vary, but the underlying principles are effective around the world. This book expands upon existing guidance to provide a deeper working knowledge of Basel III utility, and the insight to use it effectively.

• Improve asset quality and risk and return profiles
• Adopt a strategic approach to capital allocation
• Compare Basel III implementation varies across jurisdictions
• Examine successful capital enhancement initiatives from around the world

There is a popular misconception about Basel III being extremely conservative and a deterrent to investors seeking attractive returns. In reality, Basel III presents both the opportunity and a framework for banks to improve their assets and enhance overall capital - the key factor is a true, comprehensive understanding of the regulatory mechanisms. The Handbook of Basel III Capital - Enhancing Bank Capital in Practice provides advanced guidance for advanced practitioners, and real-world implementation insight.

Spis treści

Preface xiii

About the Author xv

CHAPTER 1 Overview of Basel III 1

1.1 Introduction to Basel III 1

1.2 Expected and Unexpected Credit Losses and Bank Capital 3

1.3 The Three–Pillar Approach to Bank Capital 4

1.4 Risk–Weighted Assets (RWAs) 8

CHAPTER 2 Minimum Capital Requirements 11

2.1 Components and Minimum Requirements of Bank Capital 11

2.2 Components and Minimum Requirements of Capital Buffers 12

2.3 Capital Conservation Buffer 13

2.4 Countercyclical Buffer 14

2.5 Systemic Risk Buffers 19

2.6 Going Concern vs. Gone Concern Capital 23

2.7 Case Study: UBS vs. JP Morgan Chase G–SIB Strategies 25

2.8 Transitional Provisions 36

CHAPTER 3 Common Equity 1 (CET1) Capital 39

3.1 CET1 Minimum Requirements 39

3.2 Eligibility Requirements of CET1 Instruments 39

3.3 Case Study: UBS Dividend Policy and Its Impact on CET1 48

3.4 Case Study: Santander Dividend Policy and Its Impact in CET1 54

3.5 Accumulated Other Comprehensive Income 58

3.6 Case Study: Banco BPI s Partial Disposal of Portfolio of Portuguese and Italian Government Bonds 69

3.7 Other Items Eligible for CET1 Capital 74

3.8 CET1 Prudential Filters 75

3.9 Additional Valuation Adjustments 76

3.10 Intangible Assets (Including Goodwill) 76

3.11 Case Study: Danske Bank s Goodwill Impairment 84

3.12 Case Study: Barclays Badwill Resulting From Its Acquisition of Lehman Brothers N.A. 85

3.13 Deferred Tax Assets 87

3.14 Fair Value Reserves Related to Gains or Losses on Cash Flow Hedges 87

3.15 Negative Amounts Resulting From the Calculation of Expected Loss Amounts 97

3.16 Equity Increases Resulting from Securitised Assets 98

3.17 Gains or Losses on Liabilities Valued at Fair Value Resulting from Changes in Own Credit Standing 99

3.18 Defined–Benefit Pension Plans 110

3.19 Case Study: Lloyds De–Risking of its Defined Benefit Pension Plans 119

3.20 Holdings by a Bank of Own CET1 Instruments 121

3.21 Case Study: Danske Bank s Share Buyback Programme 124

3.22 Case Study: Deutsche Bank s Treasury Shares Strategy 125

3.23 Holdings of the CET1 Instruments of Financial Sector Entities 140

3.24 Deduction Election of 1,250% RW Assets 140

3.25 Amount Exceeding the 17.65% Threshold 141

3.26 Foreseeable Tax Charges Relating To CET1 Items 142

3.27 Excess of Qualifying AT1 Deductions 142

3.28 Temporary Filter on Unrealised Gains and Losses on Available for–Sale Instruments 142

CHAPTER 4 Additional Tier 1 (AT1) Capital 144

4.1 AT1 Minimum Capital Requirements 144

4.2 Criteria Governing Instruments Inclusion in AT1 Capital 144

4.3 Deductions from AT1 Capital 151

4.4 Holdings of AT1 Instruments of Other Financial Institutions 154

4.5 Case Study: Lloyds Banking Group Exchange Offer of Tier 2 for AT1 Securities 158

CHAPTER 5 Tier 2 Capital 172

5.1 Tier 2 Capital Calculation and Requirements for Inclusion 172

5.2 Negative Amounts Resulting from the Calculation of Expected Loss Amounts 177

5.3 Deductions from Tier 2 Capital 178

5.4 Holdings of Tier 2 Instruments of Other Financial Institutions 179

5.5 Case Study: Deutsche Bank s Tier 2 Issue 183

CHAPTER 6 Contingent Convertibles (CoCos) 187

6.1 Types of CoCos 187

6.2 Trigger Levels 189

6.3 CoCos Statutory Conversion or Write–Down Point of Non–Viability 190

6.4 CoCo s Coupon Suspension Maximum Distributable Amount 195

6.5 Adding Pillar 2 Capital Requirements to the MDA Calculation 200

6.6 Case Study: Barclays Equity Convertible CoCo 200

6.7 Case Study: Deutsche Bank s Write–Down CoCo 210

6.8 CoCos from an Investor s Perspective 226

CHAPTER 7 Additional Valuation Adjustments (AVAs) 228

7.1 Fair Valuation Accounting Framework (IFRS 13) 229

7.2 Case Study: Goldman Sachs Investment in Industrial and Commercial Bank of China 241

7.3 Prudent Valuation vs. Fair Valuation 243

7.4 Additional Valuation Adjustments (AVAs) Under the Core Approach 248

7.5 Market Price Uncertainty AVA 250

7.6 Close–Out Costs AVA 266

7.7 Model Risk AVA 267

7.8 Unearned Credit Spreads AVA 268

7.9 Investing and Funding Costs AVA 269

7.10 Concentrated Positions AVA 269

7.11 Future Administrative Costs AVA 271

7.12 Early Terminations Costs AVA 272

7.13 Operational Risk AVA 272

CHAPTER 8 Accounting vs. Regulatory Consolidation 275

8.1 Accounting Recognition of Investments in Non–Structured Entities 275

8.2 Accounting for Full Consolidation 276

8.3 Working Example on Consolidation 283

8.4 Loss of Control 294

8.5 The Equity Method Associates 295

8.6 Case Study: Deutsche Bank s Acquisition of Postbank 298

8.7 IFRS Consolidation vs. Regulatory Consolidation 309

CHAPTER 9 Treatment of Minority Interests in Consolidated Regulatory Capital 312

9.1 Minority Interests Included in Consolidated CET1 312

9.2 Minority Interests Included in Consolidated AT1, Tier 1, Tier 2 and Qualifying Total Capital 316

9.3 Illustrative Example 1: Calculation of the Impact of Minority Interests on Consolidated Capital 319

9.4 Illustrative Example 2: Calculation of the Impact of Minority Interests on Consolidated Capital 322

9.5 Case Study: Artificial Creation of Minority Interests 325

9.6 Case Study: Banco Santander Repurchase of Minority Interests in Santander Brasil 326

CHAPTER 10 Investments in Capital Instruments of Financial Institutions 334

10.1 Basel III Treatment of Investments in Capital Instruments of Financial Institutions 335

10.2 Worked Examples of Investments in Capital Instruments of Unconsolidated Financial Institutions 347

10.3 Case Study: BBVA s Acquisition of Garanti 354

CHAPTER 11 Investments in Capital Instruments of Insurance Entities 370

11.1 The Concept of Double Leverage 370

11.2 Case Study: ING s Double Leverage 371

11.3 Regulatory Peculiarities of Investments in Insurance Entities 377

11.4 Case Study: Lloyds Banking Group s Capital Enhancement Initiatives Related to its Insurance Subsidiaries 379

CHAPTER 12 Equity Investments in Non–financial Entities 384

12.1 Basel III and Equity Exposures to Non–Financial Entities in the Banking Book 384

12.2 Equity Exposures Under the Standardised Approach 385

12.3 Equity Exposures Under the IRB Approach 386

12.4 Expected Losses from Equity Exposures Under the IRB Approach 392

12.5 Qualified Holdings Outside the Financial Sector Exceeding the 15% Threshold 393

12.6 Temporary Exemption from the IRB Treatment of Certain Equity Exposures 394

12.7 Case Study: CaixaBank s Mandatory Exchangeable on Repsol 395

12.8 Case Study: Mitsubishi UFJ Financial Group s Corporate Stakes 405

CHAPTER 13 Deferred Tax Assets (DTAs) 411

13.1 Taxes from an Accounting Perspective 411

13.2 Accounting for Deferred Taxes Arising from Temporary Differences Application to Equity Investments at Either FVTPL or FVTOCI 415

13.3 Worked Example: Temporary Differences Stemming from Debt Instruments Recognised at Fair Value 428

13.4 Case Study: UBS s Deferred Tax Assets 435

13.5 Deferred Tax Assets from a Regulatory Capital Perspective 442

13.6 Case Study: Spanish Banks Conversion of DTAs Into Tax Credits Improving Their CET1 Positions 449

13.7 Case Study: Lloyds Banking Group s Expected Utilisation of Deferred Tax Assets 452

13.8 Initiatives to Reduce Impacts of Deferred Tax Assets on Bank Capital 459

CHAPTER 14 Asset Protection Schemes and Bad Banks 469

14.1 ING s Illiquid Asset Back–Up Facility With the Dutch State 469

14.2 Royal Bank of Scotland s Asset Protection Scheme 476

14.3 Case Study: SAREB, The Spanish Bad Bank 486

14.4 Case Study: NAMA, The Irish Bad Bank 489

14.5 Asset Protection Schemes Versus Bad Banks 493

CHAPTER 15 Approaching Capital Enhancement Initiatives 495

15.1 Initial Thoughts 495

15.2 Overview of Main CET1 Capital Ratio Enhancement Initiatives 497

15.3 Case Study: Deutsche Bank s Rights Issue 501

15.4 Case Study: Structuring the Disposal of a Portfolio of NPLs 502

15.5 Case Study: Banco Popular Joint Venture with Verde Partners and Kennedy Wilson 508

15.6 Case Study: Co–Operative Bank s Liability Management Exercise 516

GLOSSARY 523

BIBLIOGRAPHY 531

INDEX 533

O autorze

JUAN RAMIREZ is a senior professional at Deloitte in London, assessing the regulatory capital impact, accounting treatment, and risk management of complex transactions. He has a strong expertise in providing advice on the design of specific complex financial instruments and transactions to enhance regulatory capital. During his career mostly in London, he has worked for BNP Paribas, JP Morgan, Lehman Brothers, Barclays Capital, and Banco Santander. He has devoted more than twenty years to marketing structured derivatives solutions, including commodity, credit, equity, fixed income, and FX. He is the author of Accounting for Derivatives and Handbook of Corporate Derivatives and Equity Capital Markets, both published by Wiley. Juan holds a BSc in Electrical Engineering from ICAI in Spain and an MBA from University of Chicago.

Blurb

PRAISE FOR HANDBOOK OF BASEL III CAPITAL

"Handbook of Basel III Capital is a vital guide for professionals in the regulatory bank capital arena. The meticulous approach of Juan Ramirez and his unique blend of regulatory capital, capital markets and accounting analysis of real–life transactions results in a peerless book to help devise initiatives to heighten bank capital."
Luis Blanc, Director of Capital Structure and Capital Optimization, Banco Santander Group

"This book presents a thorough understanding of the elements that comprise bank capital. The use of real–life illustrations of capital enhancement initiatives makes the book an excellent resource for bankers and regulatory capital management specialists, but the real value–added is in the author′s writing style: Mr Ramirez makes the most arcane topics instantly accessible. Highly recommended."
Moorad Choudhry, CEO, City of London Capital Ltd; Visiting Professor, Kent University Business School

"Ramirez′s Handbook of Basel III Capital provides a deep analysis of the key elements that comprise a bank′s capital base. The coverage is comprehensive and includes key prudential filters, valuation adjustments and deductions. The real–life case studies presented provide regulatory, accounting and strategic insights and make this book an essential resource for regulatory capital professionals."
Enrique Benito, Senior Manager – Banking & Capital Markets, Deloitte