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Deloitte ALM Survey of European Banks Practices 2019 Asset and Liability Management in banks Results of 2019 Deloitte Survey Agenda Introduction and context 3 Executive summary 5 Regulatory background 7 Results of Deloitte Survey 10 Survey participants Risk estimation and measurement • Division of responsibilities concerning planning • Approaches applied in relation to interest rate risk • Approaches applied in relation to liquidity risk • ALM model validation • xVA models and adjustments The role of ALM units in banks Other related Deloitte publications 33 How can we help you? 35 Contact 37 © 2019 Deloitte Polska Asset and Liability Management in banksu 2 Introduction and context © 2019 Deloitte Polska Asset and Liability Management in banks 3 Introduction About the survey There were In 2019 Deloitte asked Central and Eastern European 33 banks to participate in a survey regarding ALM solutions applied. institutions participating in the survey. The survey consisted of open and closed 53 questions aimed survey participants at evaluation of current ALM practices adopted on the A large number of Polish market. The questions focused on the following areas: banks participated due to The survey included banks high involvement of from Central and Eastern Polish Deloitte team. European countries 01 Risk estimation and measurement: Division of responsibilities concerning planning The number of participants totalled 33 leading banks Approaches applied in relation to interest rate risk varying in terms of size and business models Approaches applied in relation to liquidity risk Definition of current ALM model validation ALM practices xVA models and adjustments 02 The role of ALM units in banks The survey consisted of 53 questions regarding ALM practices © 2019 Deloitte4 Polska AssetAssetand and Liability liabilityManagement management in in banksu banks 4 Executive summary © 2019 Deloitte Polska Asset and Liability Management in banks 5 Executive summary Material regulatory changes introduced in recent years, along with Bearing in mind the changes in the regulatory environment, The role of the ALM function in banks growing in importance ones projected for near future, shall substantially affect the Deloitte surveyed the existing market practices regarding asset under the new regulations is another interesting observation derived management of assets and liabilities in banks. Key challenges and liability management in banks, as well as the role of ALM from the survey. Based on the comparison to former Deloitte facing the banking sector in this respect include: units. The purpose of the survey was to indicate leading practices surveys and individual meetings with bank representatives in the and to attempt to compare solutions applied by various CEE course of the survey, we have noticed the growing role of the institutions. finance function, related to the responsibility for ALM. Quite • INTEREST RATE RISK IN THE BANKING BOOK frequently, the finance function is in charge of both setting strategic The results of the survey indicate that banks are still facing (IRRBB): new guidance of the European Banking Authority, directions for balance sheet remodelling, analytical/operational certain compliance challenges related to IRRBB management introduced in 2018 and effective as of support and of planning. From the long-term financial planning requirements as presented by EBA in July 2018. The 1 July 2019. perspective, situating ALM in finance allows recognising business implementation status as presented in the report results from three development and aligning the growth and structure of equity and • BENCHMARK REQUIREMENTS regard the manner of factors: the substantial changes caused by the new regulations; the liabilities with the planned growth of business operations. Out of 33 quoting benchmarks and calculating the reference interest rate approach to the supervised banks in relation to IRRBB survey participants, in 21 the ALM function was located in indexes (LIBOR/EURIBOR, etc.) by banks. management, adopted by local regulators; the survey date falling finance or reported to CFO. soon after the effective date of the new regulations. The above changes posed substantial challenges for banks and required more effort from units in charge of ALM and market risk management. © 2019 Deloitte6 Polska Asset and Liability Management in banksu 6 Regulatory background © 2019 Deloitte Polska Asset and Liability Management in banks 7 Regulatory background EBA IRRBB 2018 BCBS IRRBB, EBA/GL/2015/08, 05/2015 BCBS IRRBB, EBA/GL/2018/02, 07/2018 G Recommendation, 2Q Implementation of 07/2004 04/2016 2019 requirements: 06-12/2019 Requirements regarding interest risk rate management Competent bodies should make sure and internal risk measurement framework. that financial institutions use the guidelines as of Solutions to be implemented by 30 June 2019 In July 2018 institutions to identify, assess and measure and have them reflected in EBA published updated the interest rate risk resulting from the ICAAP 2019 cycle. guidelines on the non-trading book activities. management of interest rate risk arising from non-trading book activities. General expectations for the identification and management of credit spread risk in the non-trading book (CSRBB). The guidelines specify among others: The scope of IRRBB is extended by the credit spread risk, non- performing and off-balance sheet exposures. Apart from parallel +/- 200 bps shocks, banks have to calculate the effects of six additional, initially defined scenarios that reflect non-parallel risks. © 2019 Deloitte8 Polska Asset and Liability Management in banksu 8 Regulatory background EBA IRRBB for financial institutions as per SREP CATEGORY 1 CATEGORY 2 CATEGORY 3 CATEGORY 4 Conditional cash flow modelling Conditional cash flow modelling Unconditional cash flow modelling Unconditional cash flow modelling Dynamic balance sheet assumed Dynamic balance sheet assumed Static balance sheet assumed Static balance sheet assumed with simple projections Appropriate timeframes Appropriate timeframes Timeframes recommended by BIS Timeframes recommended by BIS Measuring net interest income under Measuring net interest income under Measuring net interest income under Measuring net interest income under standard standard standard shock standard shock and stress shocks, considering client and stress shocks, considering margin behaviour projections Economic value measure Economic value measure Economic value measure Economic value measure based on a set of scenarios and using based on a set of scenarios, using using recommended shocks using recommended shocks option valuation and historical/Monte option valuation Carlo simulations Daily risk factor update © 2019 Deloitte9 Polska Asset and Liability Management in banksu 9 Results of Deloitte Survey © 2019 Deloitte Polska Asset and Liability Management in banks 10 Introduction Survey participants In which country is the bank located? How big are the bank’s total assets and what is the The total number of 33 CEE banks of various sizes and using different business models participated in the bank’s SREP category? survey, including 15 Polish banks. The participants included both banks operating in the EU member states (CEE EU) and outside the EU. Therefore, in order to ensure comparability of information, for 11 out of the 33 participants, the 20 declared SREP category was not considered. This applies to banks operating in Albania, Bosnia- Herzegovina, Macedonia and Serbia. Poland |15 15 Depending on classification to an EU SREP category, banks undergo a variety of requirements, but the approach adopted by national oversight bodies with Czech Republic |1 #BANKS regard to this classification may vary by country. Most of the surveyed banks in Poland are classified as Slovakia | 10 2 1 SREP. We assume this is the result of the prudent Hungary |3 approach adopted by the Polish regulator. Bosnia and Herzegovina |4 5 Serbia |5 Macedonia |1 Bulgaria |1 Albania |1 0 0 1 2 3 4 5 6 7 EU SREP CATEGORY The size of the field reflects the sum of assets in the ranges: EUR 0-1 bn, EUR 1-5 bn, EUR 5-20 bn, EUR 20-45 bn, above EUR 45 bn © 2019 Deloitte11 Polska Asset and Liability Management in banksu 11 Introduction Survey participants TOP EU Non TOP EU Top universal banks from Other universal banks from EU member states with the EU member states with the total assets above EUR 20 total assets below EUR 20 billion billion 7 banks were included in this 8 banks were included in this category category 0 1 2 3 4 5 0 1 2 3 4 5 EU SREP CATEGORY EU SREP CATEGORY Spec EU Non EU Specialised banks (mortgage, Banks operating outside the cooperative, mono-product) EU (in non-member states) from EU member states 11 banks were included in 7 banks were included in this this category category 0 1 2 3 4 5 1 2 3 EU SREP CATEGORY NO EU SREP CATEGORY © 2019 Deloitte12 Polska Asset and Liability Management in banksu 12 Risk estimation and measurement CEE Division of responsibilities concerning planning What is the source of data for the Chief External Finance Risk ALM Business Units Other For the purposes of balance sheet development scenarios, most purpose of balance sheet forecasts? economist data banks use data prepared by their business units (in particular new sales value and planned margins in all bank groups, Market scenarios – or advance payments and client options interest rate risk 3 7 8 11 0 4 in non-EU banks). In all groups of banks risk is the key factor modelling risk Market scenarios – related costs. Planning advance payments and client options liquidity risk 8
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