Pandemic Stress Testing Scenario | Banks | Operational Resilience | COVID-19

Sunday, March 22, 2020

ChartAcc.com - In the wake of Corona virus (COVID-19) and especially the impact of this pandemic on the global economy, certainly there needs to be not only the Operational Resiliance planning but the preparedness under Pandemic Stresst Testing Scenarios as well by the financial institutions.

In the financial / banking world, there exist various Stress Testing scenarios which are required to be reported to the regulators of respective country like APRA (AU), FRB (US), PRA (UK), EBA (EU) etc.

Banks / financial entities are required to submit the reports under different Stress Testing scenarios as below:
  1. Baseline Scenario
  2. Adverse Scenario 
  3. Severely Adverse Scenarios.


These Scenarios are based on various Macroeconomic Variables (MeVs) like interest rate, employment index, inflation index, GDP, forex rates, housing price etc.

The stress testing of a bank shows the regulators that how a bank will sustain and how the earnings and capital of a bank is impacted in different scenarios, in respose to the fluctuating MeVs ranging from Adverse to worst case (Severeally Adverse) scenarios.

Stress Testing is performed spreading the scearios anywhere from 5 yeasrs to 8 years depecting the Loand and Deposits of a bank and related Interest earnings and expenses. The reports can be presented monthly or on quarterly basis.

If PANDEMIC is also considered as a scenario then it's nothing different from the scenarios mentioned above that banks are required to report to the regulators.

A bank should submit the impact of Epidemic not only in terms of Stress Testing as far as financials are concerned but also in terms of Operational Resilience that how the BAU (Business as usual) is planned to be carried out in this scenario.

The factors that might need to be considered by banks for the Stress Testing Projections under PANDEMIC scenario may range as follows:
  • Concentration risk of counterparties / clients which belong to medical and aviation industry,
  • Drop in the customer earning power due to isolations,
  • Interest rates might drop resulting in huge decrease in revenue,
  • Fixed expenses might shoot up for operational lags,
  • Credit recovery may be hit due to inoperational markets,
  • Share Market flucuations might impact the NAVs of portfolios.
Non-financial risks that might impact the bank may be as follows: 
  • Key stakeholders may not be readily available for major decisions, 
  • Key systems might be lagged,
  • Cyber attacks can emerge in absence of resilience security.

Recently, PRA (UK) released guidance on inclusion of "Climate Change" as a Stress Testing Scenario for the Banks.
Similarly, the regulators should also include the "Pandemic Stress Testing" as well in the reporting requirements.

Written originally and Posted by Vikrmn: Author CA Vikram Verma, www.vikrmn.com
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Resolution Planning | Living Will | 1 Aug 2019 | PRA | UK

Thursday, August 8, 2019

ChartAcc.com - Given below are the recent updates on from PRA on regulatory reporting as of July 2019:

Resolution assessment and public disclosure by firms

Applicability:
It is relevant to UK banks and building societies with retail deposits equal to or greater than £50 billion on an individual or consolidated basis, as at the date of their most recent annual accounts (‘in-scope firms’).


Commencement:
The instrument comes into effect from 1st Aug 2019 and is named as PRA Rulebook RESOLUTION ASSESSMENT INSTRUMENT 2019.


Definitions:

Deposit: It has the meaning given in 30, Part 1, Annex V (Reporting on financial information) of the European Banking Authority’s Implementing Technical Standards amending the Commission’s Implementing Regulation (EU) No 680/2014 on supervisory reporting under Regulation (EU) No 575/2013 of the European Parliament and of the Council.

Retail Deposit: It means deposits from “households” as defined in 35(f), Part 1, Annex V (Reporting on financial information) of the European Banking Authority’s Implementing Technical Standards amending the Commission’s Implementing Regulation (EU) No 680/2014 on supervisory rep

Assessment:
A firm must carry out an adequate assessment of its preparations for resolution which should:
1.       be realistic;
2.       include analysis of how the firm understands it would be resolved, any risks to its resolution and steps the firm is taking or plans to take to remove or reduce those risks; and
3.       be reviewed by the firm if there is reason to suspect it is no longer accurate and updated if there has been a change in any of the matters to which it relates that impacts its assessment.


Report required:
A firm must submit to the PRA a report in writing of the assessment in 2.1 by:
1.       the first Friday in October 2020; and
2.       biennially thereafter, by the first Friday in October of the relevant calendar year. PRA2019/14 Page 4 of 4 3.2 A firm must submit to the PRA an updated version of the report within 20 working days.

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PRA | EU | Pillar 2 Capital Buffer | Credit amigration

Tuesday, March 19, 2019

ChartAcc.com - The below are the recent updates from PRA on regulatory reporting:


1. Pillar 2 capital
(Feedback on CP closes on Thursday 13 June 2019; To be implemented  from  Tuesday 1 October 2019)
Update to the framework – Calculation of PRA buffer to reflect continued refinements and developments in setting the PRA buffer (also referred to as Pillar 2B).
The purpose of these proposals is to:
a.       bring greater clarity, consistency and transparency to the PRA’s capital setting approach;
b.      to promote financial stability, the safety and soundness of PRA-authorised firms; and
c.       facilitate more informed and effective capital planning for banks.

2. ICAAP and SREP
(applicable from Friday 13 September 2019)
The updates on the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP).
Following consideration of responses, the PRA has made three significant changes to the proposals consulted on in the CP. These changes are as follows:
a.       the removal of the proposal relating to the meaning of pay out in a timely manner;
b.      a new expectation around risks arising from eligible guarantee arrangements; and
c.       a new expectation around recognising any residual risks.

3. Credit risk mitigation
(comes into effect from Friday 13 September 2019)
a.       It is used in  the calculation of certain risk-weighted exposure amounts.
b.      This supervisory statement covers elements of the following topics:
                                                               i.      eligibility of financial institutions as protection providers;
                                                             ii.      recognised exchanges;
                                                            iii.      conditions for applying a 0% volatility adjustment under the Financial Collateral Comprehensive Method (FCCM);
                                                           iv.      permission to use 'own estimates of volatility adjustments' under the FCCM; and
                                                             v.      netting of liabilities that may be subject to bail-in.

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Letter from PRA on IFRS 9 ECL to Systemically Important banks

Friday, January 18, 2019

ChartAcc.com - Victoria Saporta, Executive Director, Prudential Policy, Prudential Regulation Authority, recently sent a letter to major banks for disclosures on Expected Credit Loss under IFRS 9.


The letter was addressed on two concerns as follows:
  • Measurement uncertainty and sensitivity:
    • To enable and produce the quantitative information about that sensitivity internally
    • To report quantitative measurement uncertainty and sensitivity information from their 2018 (or 2018/2019) annual reports and accounts
  • The use of Monte Carlo approaches:
    • Firms' concern was the difficult of using above mentioned approach
    • PRA concluded that few other firms are using so all are expected to provide comprehensive and appropriately focused way and at an appropriate level of granularity.
The 7 banks were addressed this letter which are as follows:

  • Barclays plc, 
  • HSBC Holdings plc, 
  • Lloyds Banking Group plc, 
  • Nationwide Building Society,
  • Santander UK plc, 
  • Standard Chartered PLC and 
  • The Royal Bank of Scotland Group plc.

Courtsey: PRA

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LIBOR to SONIA Transition | What, Why, How, When | PRA UK updates

Thursday, January 17, 2019

ChartAcc.com - LIBOR will be replaced by SONIA. Here is a quick walk of basics and latest updates:

LIBOR (London Inter-bank Offered Rate) will soon be replaced by new rate called SONIA (Sterling Overnight Index Average).

What is LIBOR?
Banks in London estimate their respective interest rate at which they would lend to other banks. LIBOR is an average of these rates. 

Why it is being replaced?
LIBOR is prone to manipulations by the submitters. In 2012, traders and rate-setters manipulated the submitted rates that reaped huge profits to the trading position.

How SONIA will help?
SONIA is not calculated by average rates of submitter but through an index that tracks the rates of actual overnight funding deals on the unsecured wholesale money markets. This is risk free as compared to LIBOR.

When will this shift happen?
Regulators planned to switch from LIBOR to SONIA completely by 2021 post which LIBOR won't be guaranteed by FCA. 

As of now, SONIA for the previous London business day is published by authorised distributors at 9am.



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