Deloitte WS FCAB Agenda

Workshop on risk management practices
and upcoming trends

26 July 2018, Turin
Agenda
Timing Topic Speaker
Introduction
14:00–14:15 A. Paiola
• Agenda of the workshop and main purposes
Basel III Ratios

• Leverage Ratio
14:15–14:45 E. Tisato
• LCR
• NSFR
Securitisation Framework
• Securitisation Directive
14:45–15:15 O. Lascala
• New risk weights
• STS Transactions
15:15–15:30 Coffee break
Capital Requirements for Counterparty Credit Risk and Central Counterparty Exposures C. Santospagnuolo
15:30–16:00 • Overview of changes in the regulatory framework C. Ceriani
• Main challenges for Banks E. Palombini
Standardized Approach for Credit Risk

• Exposure Class segmentation G. Di Anna
16:00–16:30
• New risk weights D’Anchise
• Modified Credit Conversion Factors
Exchange of views on other hot topics in financial risk management

16:30–17:00 • Overview of changes in the regulatory framework Various speakers
• Main challenges for Banks
17:00–17:30 Q&A and Conclusion
1
Basel III Ratios
2
© 2017 Deloitte
Basel III Ratios – What is liquidity risk?
Liquidity risk is the risk that a financial institution will be perceived as being unable to
meet present and anticipated cash-flow needs without affecting daily operations
... the risk on the bank’s balance sheet due to the mismatch between their
Mismatch or obligations and their maturing assets. On a contractual basis, banks’ obligations
Structural that are due on demand or within a very short time frame outstrip their maturing
Liquidity Risk assets . Maturity transformation is, after all, one of the primary economic functions
that banks provide
... the risk of not having sufficient funds to meet sudden and unexpected s.t.
obligations. Unexpected obligations can arise due to unusual deviations in the
Contingent timing of cash flows (term liquidity risk); non-contractual prolongation of loans;
Liquidity Risk unexpected calls on cash or collateral (call liquidity risk); large draws on committed
loan facilities; collateral calls on derivative contracts following large, adverse
market movements; or deposit withdrawals
... refers to the inability of banks to sell assets - either at all or without large
Market Liquidity discounts versus a mark-to-model price. It arises when a market disruption keeps
Risk banks from trading certain assets classes - e.g., ABCPs, CDOs, money market loans
- due to loss in confidence, reputation, or asset quality
Intraday Liquidity risk is present in cash and payments and settlement services, where
intraday credit risk is taken on the wholesale financial institutions to grease the
Liquidity
financial system. It can turn into overnight credit risk, and hence also funding
Risk liquidity risk
3
Basel III Ratios – Multidimensional approach
Liquidity risk analysis implies “multidimensional” approach
IMPACT AREAS
ECONOMIC CONTEST
Asset vs. Funding Liquidity Risk
Going Concern vs. Contingency
Liquidity Risk • Asset Liquidity Risk: risk originated by
selling tangible assets or assets
 Going Concern Risk: risk related to the different from cash and other cash
usual course of business, when the equivalents
bank fulfills its liquidity needs through
ordinary funding means • Funding Liquidity Risk: risk originating
from a change in funding conditions
 Contingency Risk: crisis-related (roll–over of financial needs)
scenario referring to cases when the
bank has to use extraordinary means
in order to meet its liquidity needs
TIME HORIZON
Operational vs. Structural Liquidity
ORIGIN Risk
Idiosyncratic vs. Systemic Liquidity • Short Term Risk: ability to meet
Risk payment solvency in the short term
 Corporate Risk: liquidity risk originated • Structural Risk: liquidity risk as
by internal factors financial equilibrium in the medium-
• Systemic Risk: liquidity risk originated long term (maturity transformation)
by market conditions and
contingent factors
4
Basel III Ratios – Introduction and regulatory background
Liquidity is being established as a second regulatory pillar in addition to capital. The liquidity
pillar consists of two key cornerstones that complement each other.
Liquidity on an equal standing with capital,
no regulatory capital requirements for funding liquidity risk
Sound Principles
 Best Practice guidelines for the governance, International
measurement and management of liquidity risk Regulatory Framework
 Principles-based framework for an integrated,

Capital Liquidity
bank-wide liquidity risk management
 Binding in Europe through CRD II from
Risk
1st January 2011 onwards
Credit Risk Liquidity Risk

International Framework
Market Risk Sound
 Liquidity framework is part of comprehensive Principles**
reform package proposed by BIS (“Basel III”) Op. Risk
 First internationally harmonized and binding International
minimum (!) standards for liquidity risk Framework
 Liquidity on an equal standing with capital, but no

regulatory capital requirements for liquidity risk
 Rules-based regulatory approach like Basel II
 Scope of application – international active bank on * “International framework for liquidity risk
measurement, standards and monitoring“ of the
a consolidated basis with opening clause BIS, December 2010
** “Principles for Sound Liquidity Risk Management
and Supervision” of the BIS, September 2008
5
Basel III Ratios – Introduction and regulatory background
Starting from the beginning, CEBS LRM Best Practice Guidelines represent the “big picture” of
liquidity management
Sound Principles
1. Liquidity risk strategy / risk appetite
Framework
2. Internal liquidity cost allocation
for new
3. Segregation of duties Liquidity Risk Management (LRM)
4. Awareness of liquidity risk
5. IT systems and processes
Liquidity Management Governance
The 30 CEBS Principles
Liquidity
6. Liquidity-generating capacity of Liquidity
Management
7. Factors for netting arrangements Risk
8. Liquidity risk due to documentation risk
9. Collateral management
10. Cash and collateral intraday management
11. Intraday liquidity management
12. Short-term liquidity within structural
liquidity RISK
Liquidity risk Management Public Liquidity
Disclosure RISK
13.Cash flow planning
Management
14. Liquidity stress tests
15. Liquidity Contingency Plans
16. Liquidity buffers/Counterbalancing Capacity
17. Monitoring of funding sources Overarching Principle of Proportionality
Public Disclosure
18.Disclosure of adequate information
6
Basel III Ratios – Liquidity Risk Governance
Board of Directors
Liquidity Crisis Committee
 Approval of liquidity strategy and liquidity risk
 Crisis management and communication management framework
 Determination of actions and measures  Regular review of the LRM framework through
“liquidity reporting” by the CEO
 Timely initiation of measures
Senior Management
Risk Management
Board of
 Development and Implementation
 Day-to-day monitoring of limits and early Directors of a liquidity strategy
warning indicators
 Definition of risk appetite
 Modelling of “behavioural maturity“ for Liquidity
Committee  Provision of adequate support
preparation of a funding matrix
resources (personnel, IT, control
 Stress-testing & scenario analyses systems, policies)
(Conception and Implementation) – Senior
Mgt.  Enhanced risk awareness through
design of CFPs
regular risk reporting
 Risk reporting and documentation
Risk Mgt.
 Validation of models
Treasury
Treasury/
Internal Audit  Management of short-term liquidity
Finance
and funding
 Regular review of the LRM framework
Internal  Development of a funding strategy,
Audit implementation of funding measures
Finance  Adherence to liquidity risk limits
 (Extended) regulatory reporting  Market access, monitoring of markets
and refinancing terms
7
Basel III Ratios – BIS Liquidity Framework
The liquidity framework is to be implemented into national law after final calibration of the framework
by BIS
EU Feb 2010:
Implementatio
n of BIS Liquidity
Framework in BIS 2010 Final
BIS Dec 2009: CRD IV (Draft) BIS July 2010: BIS Sep 2010: Document:
Consultative Amendments to Press release „International
Document: the capital and regarding Framework for
„International Framework Consultation liquidity reform transitional Liquidity Risk
for Liquidity Risk phase: BIS & EU package (Basel III) arrangements Measurement,
Measurement, Standards Standards and
and Monitoring“ Quantitative Impact Study und calibration: BIS & EU Monitoring“
Sep 08 … Sep 09 Dec 09 Feb 10 … Jul 10 Sep 10 Dec 10
EU Sep 2009:
CEBS Sep 2008: Best
Implementation of
Practice Paper on Sound
CEBS Sound Principles
Liquidity Risk Mgt.
in Directive
2009/111/EC (CRD II)
EU 2011: From 2015: Application From 2018: Application
CRD IV/CRR Draft EU 2012/2013: National of the BIS „Liquidity of the BIS „Net Stable
implementation CRD IV Coverage Ratio“ Funding Ratio “
2010 2011 2012 2013 2014 2015 2016 2017 2018
Today
From end of 2010: National

application of CRD II
8
Basel III Ratios – Liquidity Ratios
The Committee has proposed two new measurements to monitor liquidity adequacy that will
establish a minimum level of regulation
Metrics Purpose Structure
• Aims to strengthen short-term liquidity profile
Stock of high quality
• Defines level of liquidity buffer to be held to cover
Liquidity short-term funding gaps under severe liquidity stress
liquid assets
Coverage LCR
• Cash flow perspective Net cash outflows
Ratio • Predefined stress scenario over 30-day horizon
• Time horizon: 30 days
• Aims to strengthen medium - to long - term

liquidity profile
Available amount of
Net Stable • Defines minimum acceptable amount of stable stable funding
Funding
funding in an extended firm-specific stress scenario NSFR
• Balance sheet perspective Required amount of
Ratio stable funding
• Predefined stress scenario
• Time horizon: 1 year
Additional Liquidity Monitoring Tools

Concentration of
Concentration of Concentration of Rollover
Maturity counterbalancing Prices for various
funding by funding by product
Ladder capacity by issuer lengths of funding of funding
counterparty type
/ counterparty
Monitoring Tools for Intraday Liquidity Management (Draft proposal)

9
Basel III Ratios – LCR
Banks must maintain an adequate level of unencumbered*, high quality assets to meet their liquidity
needs for a 30-day time horizon under an acute stress scenario
Market value L1 Market value L2* • Three-notch credit

Stock of high quality
∑ +∑ rating downgrade
STRESS SCENARIO
liquid assets
• Partial run-off of
Asset factor L1 Asset factor L2 deposits
* Cap: Level 2 max. 40% of the total buffer • Partial loss of wholesale
LCR funding capacity ≥ 100%
Cash Outflows
∑ Cash Outflows ∑ • Increased market
volatility – higher
Net cash outflows Runoff Factor
collateral haircuts
over 30-day horizon Cash Inflows • Unscheduled draws on
∑ Cash Inflows** ∑ committed facilities
Runoff Factor
** Cap: max. 75%
• ‘Net cumulative liquidity mismatch position under stress scenario’ based on contractual maturities
• Survival period of 30 days – funding gaps < 30 days are neglected
• Stress scenario is a combination of idiosyncratic and systematic factors, defined through asset and
runoff factors specified by regulators
• ‘One size fits all’ philosophy reduces risk sensitivity for the sake of harmonisation – internal stress
tests at banks based on BIS sound principles are required to complement ratio
*) Unencumbered Assets - free from debt, and clear of any legal defect in its title and, therefore, can be easily sold or mortgaged
10
Basel III Ratios – NSFR
This metric establishes a minimum acceptable amount of stable funding based on the liquidity characteristics
of an institution’s assets and activities over a one year horizon
Carrying Value • Significant decline in

profitability
Available amount of stable
∑
STRESS SCENARIO
funding (ASF) • Significant decline in
solvency
ASF Factor
• Potential downgrade by
NSFR any nationally recognised ≥ 100%
credit rating organisation
∑ Carrying Value
• Material event which
Required amount of stable
calls into question the
funding (RSF) reputation or credit
∑ RSF Factor quality of the institution
 NSFR promotes medium to long-term funding thus reducing incentives for short-term wholesale funding and
supplements the LCR (by also counterbalancing “cliff-effects”)
 The stress scenario is defined differently from the one underlying the LCR – idiosyncratic stress over 1 yr
 “Stable funding” is defined as those types of equity and liabilities expected to be reliable sources of funds
under an extended stress scenario of one year
 For determination of the required funding amount accounting and regulatory treatment is irrelevant –
required funding amount depends solely on the respective instrument‘s liquidity characteristics
11
Basel III Ratios – Additional Liquidity Monitoring Tools
 To better support Regulatory Authorities in their supervisory activities and monitor liquidity risk and banks’ capacity to deal with
their payment obligations in an effective ways under both normal and stressed conditions, together also with LCR and NSFR ratios,
EBA proposed to adopt a set of additional liquidity monitoring tools defined in coherence with BCBS prescriptions (*)
 The 5 additional liquidity monitoring tools have the objective to measure relevant additional information connected to cash flows,
balance sheet structures, available uncommitted guarantees and market indicators
Tool Definition Purpose
• It monitors residual maturity of funding sources of the

• To monitor the measure / level of maturity
Maturity bank, with the hypothesis that outflows will be based
Ladder
transformation of the bank on existing balance
on the first contractual maturity available
sheet structure
• The template include a 10 year bucket structure
• It monitors the 10 counterparties which contribute to

Concentration of • To identify the sources of wholesale and retail
more than 1% of total liabilities, together with general
funding by funding sources whose withdrawal could activate a
counterparty information, products, currency, amounts received,
liquidity crisis
average volumes and residual maturity
Concentration of • To monitor the concentration of funding sources,

• It monitors the total volume of funding received,
funding by product organized by products and split between retail and
type organized by products, when exceeding 1% of liabilities
wholesale funding
Concentration of
• It monitors the concentration of counterbalancing
counterbalancing • To monitor the concentration of the
capacity by
capacity of 10 main portfolios or liquidity facilities
counterbalancing capacity by counterparty / issuer
issuer/ctp provided to each institution for this purpose
• To monitor the average volumes and prices of

Prices for various • It monitors the average volumes and prices of funding
lengths of funding
funding sources differentiated by residual maturity
sources, split by residual maturity from ON to 10 years
from ON to 10 years
• It monitors the volume of funding rollover (funding at • To monitor the volumes of funding at maturity and
Rollover of funding
maturity vs. new funding sources) the volumes of new sources of funding
12
Basel III Ratios - Monitoring Tools for Intraday Liquidity
Management
Proposed Indicator Requirement Purpose: enable supervisors to…
The recommended indicators can be calculated
after close of the business day and does not Calculate the largest net balance of all Monitor a bank’s intraday liquidity usage in
require real-time monitoring throughout the day Daily maximum payments made and received during the day normal conditions
over their settlement account and report the
intraday liquidity three largest negative value of the reporting
usage period, the largest positive one and the
respective daily average
Available intraday Calculate the amount of intraday Monitor the amount of intraday liquidity a
All reporting
liquidity available at the start of each day bank has available at the start of each day
liquidity at the and report the three smallest sums and the to meet its intraday liquidity requirements
start of the daily average amount, breaking down the in normal conditions
banks
constituent elements
business day
Calculate the total of their gross payments Monitor the overall scale of a bank’s
Available
Daily maximum sent and received in the LVPS* and/or payment activity
intraday
intraday across any account held with correspondent
liquidity Total payments
liquidity usage banks and report the three largest daily
Time-specific values and the average daily figure of the
Total payments obligations reporting period
Payments made Intraday credit

on behalf of lines extended Calculate the total value of time-specific Gain a better understanding of a bank’s
correspondent to customers obligations that they settle each day and time specific obligations
banking Time-specific report three largest daily total values and
customers Intraday the average daily total value in the reporting
obligations
throughput period
Calculate the total value of payments they Monitor the proportion of a correspondent
Value of payments make on behalf of all customers of their bank’s payment flows that arise from its
Correspondent
correspondent banking services each day provision of correspondent banking services

made on behalf of and report the three largest daily total
correspondent values and the daily average total value of
banks
banking customers these payments in the reporting period
Report three largest intraday credit lines Monitor the scale of a correspondent bank’s
Intraday credit extended to their customers in the reporting provision of intraday credit to its customers
period, including whether these lines are
lines extended to secured or committed and the use of those
These flows may have a significant impact on the customers lines at peak usage
correspondent bank’s own intraday liquidity
management.
Participants
Calculate the percentage of their outgoing Monitor the throughput of a direct

Paragraph 79 of the Sound Principles states that: payments (relative to total payments) that participant’s daily payments activity across
Direct
“[T]he level of a bank’s gross cash inflows and settle by specific times during the day, by its settlement account and identify any
outflows may be uncertain, in part because those Intraday value within each hour of the business day changes in a bank’s payment and
flows may reflect the activities of its customers, throughput and report the daily average in the reporting settlement behavior
period
especially where the bank provides correspondent or
custodian services.”
* Note: An Large Value Payments System (LVPS) is a funds transfer system that typically handles large-value and high-priority
payments. In contrast to retail payment systems, many LVPSs are operated by central banks, using an RTGS or equivalent mechanism
13
Basel III Ratios – Leverage Ratio
The BIS introduces a non-risk based leverage ratio as a measure against the build-up of
excessive leverage in the banking system
2011 2012 2013 2014 2015 2016 2017 2018
Capital
Monitoring Parallel Run Compliance
Leverage Ratio = = > 3% from 01.01.2013-01.01.2017 01.01.2018
01.01.2011
Exposure
Disclosure Final calibration
from 01.07.2017
01.01.2015
• Excessively levered banks before the financial crisis

• Regulatory arbitrage under the existing Basel II-rules enabled banks to show strong risk-
Background
based capital ratios while being highly levered at the same time
• Risk of destabilizing deleveraging-processes that can amplify a crisis
• Introduction of an additional ratio as a „backstop“ in addition to solvency ratios

Purpose
• Constraint to building-up of excessive leverage
• Easily computable, transparent gross measure

Details
• No risk weighting  less sophisticated than Basel II
• Initial implementation under Pillar II

• A „view to migrating to a Pillar I treatment“: leverage ratio as a binding additional capital
ratio
Implementation
• Low-Risk business models are disadvantages (e.g. mortgage banks, building societies)
• 4 years „parallel running“ period from 2013 for further calibration of the ratio and in order to
analyze its impact on different business models
14
The BIS proposal is highly conservative. This could reduce the effectiveness of the measure.
Arguments for a Leverage Ratio Goals for a well-calibrated Leverage Ratio

• Existing solvency framework not sufficient – • International comparability (requires
leverage ratio as additional security buffer adjustments for material differences in
• Reduces opportunities for regulatory arbitrage as accounting standards)
ratio is not based upon risk weights • Level playing field
• Less vulnerable to model errors due to simple • Limiting balance sheet growth
computation • No distortion of the effectiveness of the
• Easy to implement, as data should be readily solvency regime in place
available • No negative interactions with other regulatory
• Additional source of information for regulators measures
and investors that can point out structural • No disincentives to sound risk management
problems • Adequate transition period
Leverage Ratio proposed by BIS
• Full international harmonization through • High quality capital measure (Tier 1)

adjustments for differences in accounting standards
• Simple gross measure – exposure included with
• Calibration of the leverage ratio as a „backstop“  carrying values to hamper manipulation
Solvency rules supposed to be limiting factor
• Off-balance sheet exposures to be included with
• Initial implementation under Pillar II a credit conversion factor of 100% (only one
• Subsequent migration of the leverage ratio to Pillar exception)
I planned – further heavy lobbying of banking • No allowance for credit risk mitigation, no
industry against migration to be expected netting of derivatives, no netting of repos
15
The BIS proposal is highly conservative. This could reduce the effectiveness of the measure.
Capital Baseline Proposal Additional Option
Capital measure Tier 1 or Core Tier 1 Total regulatory capital
Exposure Baseline Proposal
Deductions from capital Corresponding deduction from exposure
Valuation adjustments
Reduce exposure
and provisions
Highly-liquid assets Included
Securitisations Derecognized assets excluded
Off-balance sheet items* Included with CCF** of 100%
Derivatives Use fair value
Netting of derivatives and

No netting
repos
Credit risk mitigation Not applicable

16
Basel III Ratios – Basel III challenges and impacts
 With the advent of the new Basel III regulatory framework the Liquidity management will become a
strategic topic that should be assessed at the highest level of Bank structure
― Daily Operations and Tactics could dramatically affect Group profitability (ROE, EVA, …)
 The interconnections among phenomena become even more complex leading to a pressing need of an
holistic and uniform view of the business along the whole value chain and with always more fundamental
IT relevance
 Among the others, some Group functions are called
― to an evolutionary effort at their internal, and external
― to increase the level of coordination becoming the key structures leading the management
■ Funding Plan ■ Analysis of segments

■ Liquidity Strategy profitability
1 ■ Liquidity Safeguards ■ Evaluation of funding mix
■ Product Pricing ■ Evaluation commercial lines
Performance
Planning management
and ALM and
IT measurement IT
BUSINESS INDUSTRIAL
MODEL MODEL
IT IT
Treasury / Risk
Markets management
■ Processes Structuring
■ Limits Monitoring
■ Portfolios Redefinition
■ Redefinition of Provisioning
■ Modeling 2
logics ■ Regulatory Reporting
17
Basel III Ratios – Basel III challenges and impacts
 The Basel III proposal is far more comprehensive and conservative than earlier instances
Methodology Data Source

 Evaluation of the stable vs not stable  Data Mining
amount of retail and wholesale current  Data Consistency among different
accounts and deposits sources and systems
 Identification of the underlying security on  Integration with CRM and Business Data
Repurchase Agreement contracts  Reconciliation with accounting figures
 Global Counterbalance Capacity Evaluation  Preparation of a detailed cash flow-based
Methodology liquidity gap profile including categorization
of cash outflows/inflows
Reporting Engine
 Strong consolidation issue, both from a  No greater calculation technicality required

methodological and technical points of view  Main focus on proper feeding and technical
 FSA requirement on UK branch and Global loading from different data sources
Liquidity Concession for foreign branches  Extension of existing IT systems in order to
(Stand Alone vs Modification) ensure the required granularity of data
 Possible integration of the supervisory
reporting standards into the internal liquidity
risk management system
18
19
© 2017 Deloitte
Securitisation in the banking business
Impacts on Risk Management and Finance
Bank role in securitization
ORIGINATION INVESTMENT
Securitization of originated assets is exploited for: Securitization as an asset class involves the bank trading
• alternative way of funding, through the true sale of desks in investment activities and market making on
assets or retained tranches repo transactions with ECB secondary market. CRR prescribes mandatory due
diligence requirements for investment in
• regulatory capital relief, the RWAs of the securitization
securitizations, compared to other assets classes
are lower than the RWAs of originated assets due to the risk
transfer
Securitization related activities Issues and impacts
• Advisory support for trading desks and • RWA calculation process and methodology must be
structuring departments for the contribution of updated in the light of new securitization framework
the capital requirement to the economic • The set of securitization second level controls shall include
assessment of the deal assessment of STS requirements
• Risk analysis of the securitization portfolio, • RWAs impacts shall be analysed in depth given the
monitoring of the RWAs trends, stress test different regulatory treatment of trading and banking
Risk performing book securitizations
Management
• Given the greater complexity of risk weight calculation,

• Approval of transactions requires the front desks shall be supported with RWA real time
assessment of the economic value added, which calculation tools
includes the regulatory risk weight as well
• The Treasury and the NPL departments shall develop
• Cost of funding analysis of the securitization and update their EVA internal models to account for
Finance program, compared to other transactions (e.g. securitization regulatory impacts
covered bonds)
• STS assessment shall be included in the
securitization origination and investment processes
20
Regulatory Background
EU legislative institutions have agreed on:

• a proposal for a Regulation amending the Capital Requirements Regulation (CRR), which
includes a new hierarchy of approaches for calculating securitization capital requirements
and a preferential treatment for STS securitisations (the “CRR Amendment Regulation”)
• a proposal for a Regulation laying down common rules on securitisation and creating a
European framework for simple, transparent and standardised (“STS”) securitisation (the
“Securitisation Regulation”)
CRR Amendment Regulation
January 1st, 2019
• The CRR Amendment Regulation takes into account:
• the revisions to the securitisation framework published by the Basel Committee for Banking
Supervision in December 2014
• the amendments to include alternative capital treatment for STS securitisations
• The CRR Amendment Regulation will apply to both securitisations issued on or after January 1st 2019 and
securitisations outstanding on that date. However, grandfathering of outstanding securitisations, using current
CRR rules, will be permitted until end-2019
Securitization Regulation
January 1st, 2019
• The Securitisation Regulation sets out the criteria for “simplicity”, “transparency” and
“standardisation” that must be fulfilled in order to obtain the “STS” classification
• RTS detailing various aspects of the new regime are to be published before the application date
• EBA will develop guidelines to ensure a common and consistent understanding of STS requirements, in
order to address potential interpretation issues
CRRII - FRTB
2022 (expected)
• In November 2016 the EC issued the CRRII proposal which includes FRTB provisions for TB securitizations
• With FRTB securitization capital requirements will reflect both default risk and additional risk components
21
Trading and Banking Book Capital Requirements
CURRENT FRAMEWORK (TB & BB) NEW REGULATORY FRAMEWORK
Two approaches with differente hierarchies: • Securitization Internal Rating-Based Approach (SEC-
IRBA) is at the top of the hierarchy, followed by the
• Standard Approach (SA) used by banks that apply Standardised Approach (SEC-SA)
the SA credit risk framework for the asset class
which comprises the underlying pool of securitized • If neither of above approaches is available, capital
exposures requirements can be based on external ratings (SEC-
ERBA)
• Internal Rating-Based (IRB) approach used by
banks that apply an IRB approach to credit risk for • SEC-ERBA has to be applied berfore SEC-SA in specific
the asset class which comprises the underlying pool cases, or if the institution explicitly exercise such option
of securitized exposures
Banking Book & Trading Book Banking Book Trading Book
Standard Approach IRB Approach 1

11 RATING BASED RATING BASED
SEC-IRBA - Internal
Rating-Based Approach
APPROACH (RBA) & APPROACH (RBA)
Default Risk
Inferred Internal rating-based approach
Standard approach based on Risk based on RW – rating classes 2
Weight – rating classes matrices matrices & IAA SEC-SA - Standardised
Approach
22 LOOK-THROUGH
SUPERVISORY FORMULA
APPROACH 3
APPROACH (SFA) SEC-ERBA - External General Interest Rate Risk (GIRR)
Weighted average of RWs of
(Key drivers are PD, LGD, Granu- Rating-Based Approach &
underlying assets calculated
larity, Thickness, Attachment)
according to standard credit risk IAA Credit Spread Risk (CSR)
33 4
1250% 1250% Residual Add-On
1250%
22
Focus on SEC-ERBA
Institutions shall use SEC-ERBA instead of SEC-SA in each of the following cases:
STS SA - RW > 25%

Where the application of the SEC-SA would result in a risk-weight higher than 25 %
NO-STS SA - RW > 25%
SEC-ERBA
or
ERBA - RW > 75%
Where the application of the SEC-SA would result in a risk weight higher than 25 % or the
application of the SEC-ERBA would result in a risk-weight higher than 75 %
AUTO/EQUIP.
For securitization transactions backed by pools of auto loans, auto leases and equipment leases.
23
SEC-ERBA risk weight analysis
Senior STS Vs Non STS
Delta
SEC- Senior 1 Year Senior 5 Year
Non STS vs
ERBA Maturity Maturity
STS
RW Senior 1 Year Maturity - Investment Grade
Non Non
Rating STS STS
STS STS 1 Y Mat 5 Y Mat 140%
ECAI 1Y Mat 5Y Mat 120%
1Y Mat 5Y Mat 100%
AAA 10% 15% 10% 20% 5% 10% 80%
60%
AA+ 10% 15% 15% 30% 5% 15% 40%
20%
AA 15% 25% 20% 40% 10% 20% 0%
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-
AA- 15% 30% 25% 45% 15% 20% STS Senior - 1Y Mat 10% 10% 15% 15% 20% 30% 35% 45% 55% 70%
A+ 20% 40% 30% 50% 20% 20% Non STS Senior - 1Y Mat 15% 15% 25% 30% 40% 50% 60% 75% 90% 120%
A 30% 50% 40% 65% 20% 25%

A- 35% 60% 40% 70% 25% 30%
BBB+ 45% 75% 55% 90% 30% 35%
BBB 55% 90% 65% 105% 35% 40%
RW Senior 5 Years Maturity - Investment Grade
BBB- 70% 120% 85% 140% 50% 55%
140%
BB+ 120% 140% 135% 160% 20% 25% 120%
100%
BB 135% 160% 155% 180% 25% 25% 80%
60%
BB- 170% 200% 195% 225% 30% 30% 40%
20%
B+ 225% 250% 250% 280% 25% 30%
0%
B 280% 310% 305% 340% 30% 35% STS Senior - 5Y Mat 10% 15% 20% 25% 30% 40% 40% 55% 65% 85%
B- 340% 380% 380% 420% 40% 40% Non STS Senior - 5Y Mat 20% 30% 40% 45% 50% 65% 70% 90% 105% 140%
CCC 415% 460% 455% 505% 45% 50%
24
SEC-ERBA risk weight analysis
Non Senior STS Vs Non STS
Delta
SEC- Non Senior 1 Non Senior 5
Non STS vs
ERBA Year Maturity Year Maturity RW Non Senior 1 Year Maturity - Investment Grade
STS
Non Non 400%
Rating STS STS
STS STS 1 Y Mat 5 Y Mat 320%
ECAI 1Y Mat 5Y Mat
1Y Mat 5Y Mat 240%
AAA 15% 15% 40% 70% 0% 30% 160%
AA+ 15% 15% 55% 90% 0% 35% 80%

0%
AA 15% 30% 70% 120% 15% 50% AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-
STS - 1Y Mat 15% 15% 15% 25% 35% 60% 95% 150% 180% 270%
AA- 25% 40% 80% 140% 15% 60% Non STS - 1Y Mat 15% 15% 30% 40% 60% 80% 120% 170% 220% 330%
A+ 35% 60% 95% 160% 25% 65%
A 60% 80% 135% 180% 20% 45%
A- 95% 120% 170% 210% 25% 40%
BBB+ 150% 170% 225% 260% 20% 35%
BBB 180% 220% 255% 310% 40% 55% RW Non Senior 5 Year Maturity - Investment Grade
BBB- 270% 330% 345% 420% 60% 75%
400%
BB+ 405% 470% 500% 580% 65% 80% 320%
BB 535% 620% 655% 760% 85% 105% 240%
160%
BB- 645% 750% 740% 860% 105% 120%
80%
B+ 810% 900% 855% 950% 90% 95% 0%
B 945% 1050% 945% 1050% 105% 105% STS - 5Y Mat 40% 55% 70% 80% 95% 135% 170% 225% 255% 345%
B- 1015% 1130% 1015% 1130% 115% 115% Non STS - 5Y Mat 70% 90% 120% 140% 160% 180% 210% 260% 310% 420%
CCC 1250% 1250% 1250% 1250% 0% 0%
25
STS regulation
Impact of the new framework
The periodic assessment of STS criteria shall require a quite heavy effort, due to several criteria to be checked on one-
by-one basis, involving both originator and investor banks:
Treasury department of originator banks shall include the STS assessment in the securitization
origination and monitoring process and some STS criteria shall be addressed at loan granting level, too
Front desks of investor banks should include the STS assessment in the due diligence activities already
performed, even if STS information will be potentially provided by public info providers
Risk management, both for originated and investment securitizations, shall include the STS assessment in
the set of second level controls, checking each criteria at origination and on-going basis
The impact, both organizational and methodological, will be given mainly by the assessment of following criteria:
1 Comparability between securitized exposures and assets originated in the ordinary course of business of the
originator in order to demonstrate alignment in performances and the absence of a originate to distribute
model
2 Cash flow model implementation for each securitization issued in order to disclose to investors structure
features and collections diversion to the notes
3
Loan by loan disclosure for investors analysis and due diligence
4
Verification of the presence of active portfolio management activities (e.g. Active management of the
Residual Value)
5 Verification of the presence of provision related to market value disposal of the underlying assets
(e.g. Auto Loan with Residual Value)
26
STS regulation
Criteria overview
• The criteria for STS securitizations in the Proposed Regulation are based on the criteria developed by the EBA in its 2015 Report of Qualifying
Securitization
• In order to qualify as STS a securitisation transaction should meet a list of criteria ensuring simplicity, standardization and
transparency
• Moreover underlying exposures should meet criteria of minimum credit quality
• STS Securitizations will benefit more favorable parametrizations in risk weight calculation (e.g. lower risk weight floor, 10%, for senior
tranches)
Simplicity Standardization Transparency

• Performing at origination • Retention rules • Investor disclosure (art. 409
• Legal true sale (no synthetic • Interest rate and currency CRR)
securitization) risk mitigation • Loan-by-loan data
Simple Mitigation of risk
Standard & • Homogeneous asset • Docs clearly specifies rules, • Static and dynamic default & arising from
(typology, currency etc.) processes and obl. loss 5y series
Transparent securitization
Transactions • At least one payment made • Triggers not reverting • Cash Flow Model of the process
seniority transaction
Underlying credit risk criteria

• The underlying exposures are originated in accordance with sound and prudent credit granting criteria
as required under Article 79 of Directive 2013/36/EU Mitigation of
Minimum credit
• Granularity criteria (maximum concentration of 1% for each borrower)* underlying credit
quality
• Maximum Risk Weights on underlying assets (both for IRB and STD): (i) 40% residential mortgages risk
(and LTV < 100%) (ii) 50% commercial mortgages (iii) 75% retail exposures (iv) 100% other
exposures
* Loans or leases to a group of connected clients, as referred to in point (39) of Article 4(1), shall be considered as exposures to a single obligor
(homogeneity could be viewed in coherence with that application) 27
STS regulation
Simple Standard and Transparent
• The criteria for STS securitizations will be treated with second level regulation by the EBA that will provide details on each of the criteria
reported in the 2017/2402 Regulation
Simple (Art. 20) Standard (Art. 21) Transparent (Art. 22)

A. The underlying exposures shall be acquired by a SSPE by A. The originator, sponsor or the original lender shall satisfy the risk A. The originator and sponsor shall
means of a sale (‘‘true sales”) and shall not be subject to retention requirement - Art. 21.1 provide access to data on static and
any severe clawback provisions - Art. 20.1 – 20.2 – 20.3 – dynamic historical default and loss
20.4 – 20.5 B. The underlying exposures shall not include derivatives, unless for performance - Art. 22.1
the purpose of hedging currency risk and interest rate risk - Art.
B. The seller shall provide representations and warranties that, 21.2 B. A sample of the underlying
to the best of its knowledge, the underlying exposures exposures shall be subject to
included in the securitisation are not encumbered - Art. 20.5 C. Any referenced interest payments under the securitisation assets external verification prior to issuance
and liabilities shall be based on generally used market interest of the securities resulting from the
C. Assenza di vincoli sugli asset sottostanti - Art. 20.6 rates and shall not reference formulae or derivatives - Art. 21.3 securitisation - Art. 22.2
D. The underlying exposures transferred from the seller to the D. In the event of enforcement or acceleration it should not be C. The originator or sponsor make
SSPE shall meet predetermined and clearly defined eligibility available funds trapped in the SPV, the waterfall have to be available a clearly documented
criteria which do not allow for active portfolio management - sequential and There shall be no provisions requiring automatic liability cash flow model to investors
Art. 20.7 liquidation of the underlying exposures at market value - Art. 21.4 - Art. 22.3
E. The securitisation shall be backed by a pool of underlying E. Whether the waterfall is not sequential, the transaction have to D. The originator and sponsor shall
exposures that are homogeneous - Art. 20.8 provide for trigger related to the credit quality, in order to switch publish information on the long-
the waterfall to a sequential order - Art. 21.5 term, sustainable nature of the
F. The underlying exposures shall not include securitisations
(‘‘re-securitisation’’) - Art. 20.9 F. Purchase termination event’ have to be provided in the events of securitisation for the investors, using
credit deterioration, originator or servicer insolvency, lack of environmental, social and
G. The underlying exposures shall be originated in the ordinary assets to be sold in the revolving period - Art. 21.6 governance criteria to describe how
course of the originator’s or the original lender's business the securitisation contributed to real
pursuant to underwriting standards that are no less G. The transaction documentation shall include appropriate economy investments and in which
stringent than those that the originator or the original obligations, responsability and trigger events for the substitution way the original lender used the
lender applies to origination of similar exposures that are of servicer. trustee, swap counterparty and liquidity provider - Art. freed-up capital - Art. 22.4
not securitised - Art. 20.10 21.7
E. The originator and sponsor shall be
H. The contractual obligations, duties and responsibilities of the jointly responsible for compliance
H. The underlying exposures, at the time of selection, that are
servicer and its management team, who shall have expertise in with Article 5 of this Regulation and
transferred to the SSPE without undue delay, shall not
servicing the underlying exposures, and, where applicable, of the shall be responsible for ensuring that
include exposures in default - Art. 20.11
trustee and other ancillary service providers - Art. 21.8 all information required by Article
5(1) (a) is made available to
I. The debtors or the guarantors shall have, at the time of I. The transaction documentation shall include clear provisions that
potential investors before pricing -
transfer of the exposures, have made at least one payment, facilitate the timely resolution of conflicts between different classes
Art. 22.5
except in the case of revolving securitisations - Art. 20.12 of investors - Art. 21.9 – 21.10
J. The repayment of the holders of the securitisation positions

shall not have been structured to depend, predominantly,
on the sale of assets securing the underlying exposures -
Art. 20.13
Rules that could reduce the application for FCA Bank to issue STS compliant transactions 28
STS regulation
Art 20.8 Homogeneity
• On December 2017 EBA provided a consultation paper that aims to introduce Regulatory Technical Standard (RTS) in order to define the
eligibility criteria for STS transactions
• These criteria regards a list of risk factors that are currently subject to consultation between the regulator and the other involved
counterparties
Risk Factor Descrizione The orientation of the Regulator will be

Type of exposure: Retail, SME, Corporate, clarified only in July 2018.
A. Debtor type
Financial institutions, Public entities
Only then will it be possible to assess
B. Asset type Asset typology posted as collateral
the impacts of second-level regulation
Priority in receiving the cash flows coming from in applying the criteria of homogeneity
C. Priority on the
the sale of the property compared to other expressed in Article 20.8
asset liquidation
creditors
D. Facility type e.g. loan, lease, revolving credit card, … Article that, with reference to a
homogeneity of the credit risk profile of
E. Collateral type e.g. auto, trains, aircrafts, fleets, real estate, … the underlying, requires to explicit:
• Any differences in customer
F. Estate type Capacity of the property sold to generate income contractual obligations;
• Changes in the disbursement policies
G. Amortization type e.g. ballon, bullet, … over time, such as to change the
historical performance provided to
H. Seller sector Soundness of the seller’ industry the investors in the due diligence
phase.
Legal protections provided by the jurisdiction in
I. Estate jurisdiction
which the property is located
29
Capital Requirements for
Counterparty Credit Risk and
Central Counterparty Exposures
30
© 2017 Deloitte
European Market Infrastructure Regulation (EMIR)
General principle
 EU Regulation n. 648/2012, also known as European Market Infrastructure Regulation (EMIR),

entered into force on August 16, 2012 in order to reduce systemic counterparty and operational risk and
help the prevention of future financial system collapses. Its provisions include requirements related to the
setting of common rules for over-the-counter derivatives, in particular concerning central counterparties
and trade repositories
 The following are the most important requirements of the Regulation, with focus on the Initial Margin (IM)
exchange obligation that will arise in the next few years:
Clearing Variation  With the entry into force on January 4, 2017

Margin of the 2016/2251 Delegated Regulation,
exchange Banks have to comply with EMIR regulatory
requirements on the margin exchange
(Initial e Variation Margin), for non centrally
Reporting cleared OTC derivatives, with regard to
Initial
financial counterparties (FC) and non
EMIR Margin
financial counterparties above the clearing
exchange
Requirements threshold (NFC+)
 Requirements related to Variation Margins
Timely entered into force on March 1, 2017, while
Confirmation the ones concerning Initial Margin will take
Dispute effect following multiple phase-ins
Resolution
Portfolio
Reconciliation
This document focuses on the Initial Margin obligation under EMIR (effective in the EU).
However, this requirement is also envisaged by the Dodd Frank Act Reform (effective in the US), with many overlapping areas
31
EMIR – Initial Margin Exchange
General principle
 The multiple phase-ins are based on the aggregate average notional amount of non centrally cleared
derivatives concluded at Group level in the months of March, April and May of every year until the start of
own’s phase-in
 In particular the different Initial Margin phase-ins are:
Initial Margin Phase-in
February 4, September 1, September 1, September 1, September 1,

2017 2017 2018 2019 2020
  Aggregate
Average
> € 3.000 > € 2.250 > € 1.500
> €750 billion > €8 billion Notional
billion billion billion
Amount
“Initial Margin is the collateral collected by a counterparty to cover its current and
potential future exposure in the interval between the last collection of margin and
the liquidation of positions or hedging of market risk following a default of the
other counterparty”
32
New developments introduced
 The main Initial Margin regulatory requirements are described below:

The rule provides margin calculation, exchange and settlement specific requirements:
 the calculation and exchange must take place within the business day following specific
events* or if no calculation has been performed in the previous 10 days
Calculation  there are various calculation methods of the IM characterized by different sophistication
and collection levels:
of margins  Internal Models: ISDA has published a model proposal for the calculation of Initial Margin (SIMM)
that uses sensitivity as input
 Standardized Method: IM dependence on weighted notional assets (the set of asset risk
weights is provided by the Regulator)
The rule provides several requirements for the eligibility of collateral to be exchanged, concerning:
Eligibility and  Definition of assets eligible as collateral and related haircuts (adjustments to the collateral
collateral value) to be applied
treatment  Concentration limits of the Initial Margin in relation to assets issued by a single issuer or entities
belonging to the same Group
Risk The rule defines the obligation to have specific risk management procedures in terms of:
 In scope counterparties (FC and NFC+) and products
Management
 Threshold in terms of amount of collateral owed with respect to the latest IM exchange date
Procedures
 Segregation of collateral exchanged as IM
 Calculate the threshold to define the phase-in

Provisions at  Calculate and monitor the threshold: the IM exchanged is reduced by an amount up to EUR 50 million
(if both counterparties belong to different groups) or up to EUR 10 mln (if both counterparties belong to
Group Level
the same Group)
 Require the intra-group exemption to the National Competent Authority
(*)These events are connected with modifications of the portfolio (addition or removal of deals)
33
Main challenges for Banks
Calculation and collection of margins

 Define the IM calculation methodology and
Intra-group exemption check the data availability on the systems
 Require the intra-group exemption  Define the tool for IM calculation and data input
for the IM exchange to the National
Competent Authority (Banca
d’Italia) Target Operating Model
 Define the operative model and
adjustments of the internal workflow (front
to back) for initial margin exchange
 Review/ write the internal documentation
Agreements Adjustment (processes and procedures)
 Analyze the new ISDA CSA for IM
 Negotiate and sign new agreements Initial margin
with counterparties
 Sign agreements with custodian
impacts
banks Eligibility and collateral treatment
 Select the custodian banks and design
processes for the segregation of collateral
 Define the collateral eligibility criteria and
Risk Management Procedures review the internal risk policies
 Analyze the impacts on the pricing of  Manage and monitor the collateral
deals after starting the IM exchange concentration limits
obligation
The starting of the IM requirements needs an important review of the IT architecture and
operating model with engagement of business and control departments
34
Securities Financing Transactions Regulation (SFTR)
General principle
 EU Regulation n. 2365/2015, also known as Securities Financing Transactions Regulation (SFTR), entered into
force on January 12, 2016 aims to increase the transparency of the Securities Financing Transactions (SFT) market
and, inter alia, requires counterparties to produce a report containing detailed information for every SFT they undertake
 The transparency objective is pursued through three pillars: transparency on the re-use of financial instruments
(art.15), transparency toward investors (arts. 13-14) and reporting of SFT transactions (art.4)
 The application of the obligations related to the first two pillars has already taken place, while it is expected that
the Regulatory Technical Standards (RTS) related to the third pillar (Reporting) will enter into force by the end of
2018. The application of the RTS will take place starting 12 months after the entry into force of the RTS
Reporting
Article 4 of the SFTR Regulation provides for the reporting obligation to a Trade Repository (TR) of the SFT
transactions concluded, modified or terminated, by the next working day (T+1). The reporting obligation also applies to
outstanding positions
 Repurchase Agreement, Buy-Sell Back
 Counterparty Data – parties involved in  Securities Lending, Commodity
the transactions Lending
 Loan and Collateral Data – economic  Margin Lending
terms of the transactions and evaluation of
the collateral
 Margin Data – margins exchanged with Financial and non-financial
the central counterparty (CCP) counterparties established in the EU or in a
 Collateral Reuse Data – estimatation of third country, if the SFT transaction is
the reuse of collateral (dedicated formula) concluded in the course of the operations of a
branch in the EU
35
SFTR – Reporting
New developments introduced
 SFTR reporting requirements pose some challenges even for counterparties that have already implemented other
regulatory reporting frameworks
Group structure
 All the entities of a Group need to comply with
Reporting complex structure the SFTR requirements
 The entities can either implement the reporting
 High number of fields (153 themselves (decentralized model) or delegate it
versus 85 for EMIR and 65 for to the Head Office (centralized model)
MIFID)
 Non-native fields required
 Multiple depth reporting (trade Timing
and position level)
 UTI generation model  There are no phase-ins: the
definition (internal/ counterparty/ application date is the same for
platform) all banks
 The industry estimates the
reporting obligation to apply
starting by the end of 2019
The industry recommends that the counterparties start to analyze these key topics as soon as
possible in order to be able to respect the reporting application deadline
36
SFTR – Reporting
Main challenges for Banks
New reporting implementation New measures

 Creation of data flows, data  Introduction of a new measure (collateral reuse)
standardization, integration with TR and internalization of its management within the
 Data quality for SFT transactions on systems
front-to-back systems (data  Handling of new mandatory data (e.g. UTI code
availability, data fragmentation, for SFT transactions)
recovery time and data processing)
Integration with Trade Repository

Target Operating Model  Selection of Trade Repository (TR)
 Review and update of Operating  Stipulation of contract with TR
Guides
 Review of the activities carried out by SFTR Reporting  Integration with the TR and definition of
the reporting framework and process
the Reporting Control and Monitoring
structures
impacts
 Review of existing and definition of Registry developments
new controls
 Review and adjustment of counterparty
registrations (e.g. LEI codes, small NFCs)
Legal Adjustments
 Update of contracts with counterparties in the event of reporting delegation
 Update of SLAs between the Parent Company and the legal entities of the Group
for the handling of SFTR reporting
The implementation of SFTR requirements needs a review of the IT architecture and operating
model with the engagement of business and control departments
37
Counterparty Credit Risk Global Trends and our view
 The derivative markets have undertaken significant changes in recent years, as an effect of the financial crisis. The
post-crisis period marked a reaction form both Regulatory and Industry side
Regulatory Evolution CVA, Margins and Funding Collateral
SA-CCR
SFTR
EMIR
 The majority of OTC derivatives is  Booming of Collateral and Central  The systemic nature of CCPs requires its
forced into central counterparty Clearing profoundly changed clearing members to post:
clearing houses (CCPs) following derivative markets
initial margin in cash or govies
various Regulatory requirements

 Further evolution on Derivatives

worldwide variation margin in cash
pricing which currently accounts not

 Some OTCs will be denied entry into only for Counterparty default (CVA)  Focus of collateral is on high grade,
CCPs because they are complex or and own default (DVA) but also for highly liquid assets – both from
high-risk  These exotics will funding cost of the needed collateral counterparties and the CCPs
trade bilaterally
Mandatory Compliance and Collateral obligation introduces unavoidable management costs

that push towards the use of standardized derivatives
Major Banking Institutions proactively manage collateral obligation to pursue P&L and Cost
Effectiveness. Such objectives are typically achieved via a structured Collateral optimization process
to maximize the efficiency of inventory to meet collateral obligations
38
Collateral Optimization Strategies
Turning Compliance costs into opportunities
 Collateral Management undertakes a critical function today: it is the bridge between CCPs
and Counterparties and it offers the opportunity to acquire and manage these relationships to
improve profitability and efficiency by augmenting the numbers, the quality and the
pace of the services
 Collateral Optimization is achieved exploiting the differences in the liquidity remuneration and
the repo rates of deliverable securities under initial/ variation or CSA based collateral
agreements
 In such framework, given market repo rates and liquidity/ funding costs, the Bank defines
upfront for each CCP and CSA counterpart, which kind and quantity of collateral to deliver
 Based on the total collateral amount and market rates, the activity can save significant
collateral costs over the year
 The key issue in the Collateral Optimization model is the fragmentation of the available
and deliverable securities for CCPs
39
Standardized Approach for
Credit Risk
40
40
© 2017 Deloitte
Revisions to the Standardized Approach for Credit Risk
Agenda
REGULATORY ENVIRONMENT & PRELIMINARY

1. REMARKS
2. KEY REVISIONS BY EXPOSURE CLASS
3. MAIN IMPLICATIONS FOR BANKS
41
© 2017 Deloitte
Agenda

1. REMARKS
© 2017 Deloitte
Regulatory Environment & preliminary remarks
1 2 3
(*) BCBS, Basel III: Finalising post-crisis reforms, December 2017
43
Regulatory Environment & preliminary remarks
1 2 3
More in detail, the Basel Committee's revisions to the Standardised Approach (SA) for credit risk are
meant to enhance the regulatory framework by:
 Improving its granularity and risk sensitivity

 Reducing mechanistic reliance on credit ratings, by requiring banks to conduct sufficient due diligence,
and by developing a sufficiently granular non-rating-based approach for jurisdictions that cannot or do
not wish to rely on external credit ratings, and
44
 Providing the foundation for a revised output floor to internally modelled capital requirements and
related disclosure to enhance comparability across banks and restore a level playing filed
1 Jan 2022 1 Jan 2023 1 Jan 2024 1 Jan 2025 1 Jan 2026 1 Jan 2027
New SA for 55% OF 60% OF 65% OF 70% OF 72,5% OF

Credit Risk +
50% OF
44
Main principles and rationales
1 2 3
Capital charges from the SA should reflect

to a reasonable extent the risk of the
exposures through more appropriate  More granular approach for unrated exposures to banks and
corporates
calibrations  Recalibration of RWs for rated exposures
 Separate treatment for covered bonds, specialized lending and SME
exposures
 More risk-sensitive approach for RE exposures based on a LTV
The SA should reduce or remove, ratio and recognition of exposures materially dependent on cash flows
where possible, the reliance on generated by property
external ratings by providing  More granular RWs for subordinated debt and equity exposures
 Recalibration of CCFs for off-balance-sheet items
alternative risk-sensitive measures
for relevant assessment
The comparability of capital requirements between banks using the SA is enhanced by reducing national
discretions, where possible
The comparability of capital requirements under SA and IRB approaches is enhanced by aligning relevant
definitions and taxonomy. Moreover, a revised capital floor has been introduced as a risk-based backstop to limit
the extent of lowering capital requirements, relative to the SA
Introduction of sound due diligence requirements aimed at ensuring Bank’s awareness and adequate understanding
of the risk profile of counterparties/exposures on ongoing basis
45
Focus on new due diligence requirements
1 2 3
 To ensure adequate understanding, at origination and on going basis (at least annually) of the
Objectives risk profile and characteristics of counterparties
 In cases where rating are used, to assess the risk of the exposure for risk management
purposes and whether the risk weight applied is appropriate and prudent
 Required to be appropriate for the size and complexity of the Bank’s activities
Sophistication  Necessary internal credit risk analysis and/or other analytics outsourced to a third party, as appropriate
level for each counterparty with the aim of assessing the operating and financial performance levels and trends
 Access to information on counterparties on regular basis
Consolidated  Due diligence to be performed, to the extent possible, at the solo level entity to which there is
groups a credit exposure, also taking into account the support of the group and the potential for it to
be adversely impacted by problems in the group
Governance
 Required adequate internal policies, processes, systems and controls to ensure the
and internal
appropriateness of assigned RWs
controls
Supervisory  Due diligence subject to Supervisory review

controls  Supervisors should take supervisory measures in the absence of adequate due diligence
analyses
46
Agenda

1. REMARKS
43
© 2017 Deloitte
Key revisions by exposure class
1 2 3
Exposure type Current SA New framework hotspots

Introduction of a hierarchy of approaches to avoid “cherry-picking”:
• External Credit Risk Assessment Approach (ECRA): For rated exposures of

Banks incorporated in jurisdictions that allow the use of external ratings for regulatory
purposes
Banks must perform due diligence to ensure that the external rating appropriately
and conservatively reflects the credit risk of the exposure. In the case of higher
risk characteristics implied by the internal due diligence analysis, the bank must
2 options for applying assign a risk weight at least one bucket higher than the “base” risk weight
risk weights to banks determined by the external rating
• Standardised Credit Risk Assessment Approach (SCRA): For Banks
• Option 1 links a incorporated in jurisdictions that do not allow the use of external ratings for regulatory
bank’s risk weight to purposes + unrated exposures of Banks applying SCRA
Exposures to the sovereign rating Banks should be able to classify exposures into one of the three buckets provided
Banks of the country in (Grade A, B or C), depending on the output of due diligence assessment
which the bank is
incorporated
•Preferential risk weights for short-term exposures, so as not to negatively
• Option 2 applies the impact market liquidity in interbank markets
risk weight that
corresponds to a
ECRA AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B-
bank’s credit rating
Base RW 20% 30% 50% 100% 150%
RW Short -term 20% 20% 20% 50% 150%
SCRA Grade A Grade B Grade C

Regulatory hints
Base RW 40% 70% 150%
Short-term exposures: exposures
RW Short -term 20% 50% 150% with original maturity <= 3 months +
exposures arising from movements of
goods across national borders with
original maturity <=6 months
48
1 2 3

• Risk weights applied to A 0% risk weight is applied in the case of eligibility criteria fulfillment (high
claims on multilateral quality of long-term ratings, shareholder structure shareholder support level of capital
development banks (MDBs)
Exposures to are generally treated as
and liquidity, lending and financial policies), evaluated on a case-by-case basis.
Otherwise, the following RWs apply:
multilateral bank exposures, based
External rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B-
on an MDB’s external
development credit rating Base RW 20% 30% 50% 100% 150%
banks • In the case of highly rated Unrated +

MDBs which comply with Banks in
50%
jurisdictions not
strict eligibility criteria, a allowing
0% risk weight applies external ratings
• These are bonds issued by a bank or mortgage institution that are subject by law
to special public supervision designed to protect bond holders
• Rated exposures
Covered bonds • Flat RW

Issue-specific rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B-
Base RW 10% 20% 20% 50% 100%
• Unrated exposures
Issuing Bank RW 20% 30% 40% 50% 75% 100% 150%
Base RW 10% 15% 20% 25% 35% 50% 100%
Certain • Foreign exchange rate

• For unhedged retail and residential real estate exposures to
volatility is a factor external
exposures with to the borrower that affects individuals: 1.5 multiplier to the relevant RWs (max final RW:
currency its debt-servicing capacity 150%)
mismatch
and is not taken into Unhedged exposure: exposure to a borrower that has no natural or financial hedge against the foreign exchange risk resulting
from the currency mismatch between the currency of the borrower’s income and that of the loan. Such hedges are considered
account
sufficient where they cover at least 90% of the loan instalment
49
1 2 3

• Banks in jurisdictions where external ratings for regulatory purposes are
allowed:
Banks will perform due diligence to ensure that the external rating
appropriately and conservatively reflects the credit risk of the exposure. In the
case of higher risk characteristics implied by the internal due diligence analysis,
the bank must assign a risk weight at least one bucket higher than the “base”
risk weight determined by the external rating
External ctp rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below BB-
Difference between rated Base RW 20% 50% 75% 100% 150%

and unrated exposures: Unrated 100%
• Rated corporate Regulatory hints
of which: Corporate
exposures are risk- 85%
SMEs: corporate exposures where the
Exposures to
SMES reported annual sales for the consolidated
weighted by reference group of which the corporate counterparty
to their external credit
Corporates
is a part is less than or equal to Eur 50 mln
for the most recent financial year
ratings only
• For unrated allowed:
exposures, a flat risk • “Investment grade” entities: 65% RW; otherwise: 100% RW
weight is applied • Exposures to SMEs: 85% RW, unless matching the criteria to be
classified as regulatory retail SMEs (see slide 52), which are assigned
a 75% RW
Regulatory hints
An “Investment grade” corporate entity has adequate capacity to meet its financial
commitments in a timely manner and its ability to do so is assessed to be robust
against adverse changes in the economic cycle and business conditions.
To be qualified as such, banks must evaluate:
 Business model complexity
 Performance vs peers/industry
 Operating environment’s risks
 Securities outstanding on a recognized securities exchange
50
1 2 3

allowed: RWs (the same as for Corporates) are assigned based on issue-
specific external ratings, where available (issuer ratings not
admitted):
External ctp rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below BB-
Base RW 20% 50% 75% 100% 150%
• Banks in jurisdictions where external ratings for regulatory purposes are not
allowed + in the case of unavailability of issue external rating:
• Object finance: method of
• Projectfinance: method of funding the acquisition of
Exposures to funding in which the lender equipment (e.g. ships, aircraft, Regulatory hints
Corporates –
satellites, railcars, fleets) Specialised lending:
looks primarily to the
• Corporate revenues generated by a
where the repayment of the exposures either in legal form or
Specialised
economic substance related to:
framework loan is dependent on the cash - Object/ project/commodities
single project, both as the
flows generated by the specific
Lending
finance (not real estate)
source of repayment and as
assets financed and pledged or - Presence of dedicated entity
security for the loan (e.g. (e.g. SPV)
assigned to the lender
power plants, mines, - Ring fencing.
transportation infrastructure, Object finance 100%
Operational Phase: the
environment, media,
project financing entity has
telecoms) • Commodities finance: short- positive net cash flow to cover
Project finance term lending to finance contractual obligation, declining
long term- debt
reserves, inventories or
Pre-operational phase 130%
receivables of exchanged- High quality project finance
Operational phase 100% traded commodities where the exposure: the relevant entity is
loan will be repaid from the able to meet its financial
of which: obligations in a timely manner
80% proceeds of the sale of the
high quality also in adverse changes in the
commodity and the borrower economic cycle
has no independent capacity to
repay the loan
Commodities finance 100%
51
1 2 3
Exposure type
Exposure type Current
CurrentSA
SA New
Newframework
frameworkhotspots
hotspots
• Investments in equity
or regulatory capital
instruments issued by • For speculative unlisted equity exposures: 400% RW
Subordinated banks or securities • For all other equity holdings: 250% RW; if pursuant to national
firms are risk-weighted
debt, equity and at either 100% or
legislated programs implying subsidies for the investment, government
oversight and restrictions on the equity investment: 100% RW
other capital 250%, unless
• For subordinated debt (including “other TLAC liabilities” not deducted
instruments
deduction applies
• No distinct treatment from regulatory capital) and capital instruments other than equities:
in the case of equity or 150% RW
subordinated debt
issued by corporates
• For Regulatory retail: 75% RW

• For Reg. retail arising from transactors: 45% RW
• Other Retail, i.e. exposures to person(s) not belonging to «Reg. Retail»:
100% RW
Exposures to SMEs not matching to be classified as Reg. retail are treated
as Corporate SMEs (see slide 50)
Retail 75% risk weight to retail
Regulatory hints
Exposures
Regulatory hints
Transactors:
exposures that meet the • Retail exposures: exposures to person(s) or Reg. SMEs
(not secured
obligors in relation to:
regulatory retail criteria • Regulatory Retail  facilities such as
credit cards and
by real estate)  Product criterion: revolving credits and lines of credit credit cards, charge cards and
overdrafts, personal term loans and leases (e.g. instalment loans, auto loans and leases,
charge cards where
the balance has been
student and educational loans, personal finance) and small business facilities and repaid in full at each
commitments. No mortgage loans and other securities (such as bonds and equities) scheduled repayment
included date for the previous
 Low value of individual exposures: maximum aggregated exposure to one ctp cannot 12 months
exceed Eur 1mln (as absolute threshold)  Overdraft facilities
 Granularity criterion: no aggregated exposure to one ctp can exceed 0.2% of the overall without drawdowns
regulatory retail portfolio (defaulted exposures to be excluded from calculation) over the previous 12
months
Exposures to SMEs not matching these criteria shall be treated as corporate SMEs
52
1 2 3

• RRE: Exposures secured by residential real estate
Criteria
LTV bands < 50% 50%-60% 60%-80% 80%-90% 90%-100% >100%
not met
General RRE Repayment is not materially dependent on cash flows generated by property (*)
RW Whole Loan 20% 25% 30% 40% 50% 70% Ctp RW
Approach
RW Loan-Splitting
20% Ctp RW Ctp RW
Approach
• Exposures IPRRE The prospects for servicing the loan materially depend on the cash flows generated by the property securing
secured by the loan rather than on the underlying capacity of the borrower to service the debt from other sources
RW Whole Loan
residential real 30% 35% 45% 60% 75% 105% 150%
Approach
estate – Risk
weight of 35% (*) National supervisors may provide further guidance setting out criteria on how material dependence should be assessed for specific exposure
types
Regulatory hints
Real Estate
• Exposures
secured by
• CRE: Exposures secured by commercial real estate Under the loan-
splitting approach, a
exposure class commercial real General CRE Repayment is not materially dependent on cash flows generated by property supervisory specific risk
weight is applied to the
estate – Risk RW Whole Loan portion of the exposure
weight of 100% Approach Min (60%, Ctp RW) Ctp RW Ctp RW that is below 55% of
>60% Criteria not met the property value and
(with a national LTV bands <= 60%
the RW of the
discretion of 50% RW Loan-Splitting counterparty is applied
when strict Approach Min (60%, Ctp RW) Ctp RW Ctp RW to the remainder
exposure
conditions are met) LTV bands <=55% >50% Criteria not met
The prospects for servicing the loan materially depend on the cash flows generated by the property securing
IPCRE the loan rather than on the underlying capacity of the borrower to service the debt from other sources
RW Whole Loan
Approach 70% 90% 110% 150%
LTV bands <=60% >60%; <=80% >80% Criteria not met
• ADC: exposures for land acquisition for development/construction purposes

Loan to Residential ADC
150% 100%
company/SPV loan
53
1 2 3

Off-balance sheet items will be converted into credit exposure equivalents
through the use of credit conversion factors (CCF):
• 40% CCF for commitments regardless of the maturity of the

underlying facility, unless they qualify for a lower CCF
• 10% CCF for commitments which are unconditionally cancellable at any
• Foundation IRB
time by the bank without prior notice, or that effectively provide for
approach is in some automatic cancellation due to deterioration in a borrower’s creditworthiness.
cases more National supervisors will evaluate various factors in the jurisdiction, which
conservative may constrain banks’ ability to cancel the commitment in practice, and
compared to the
consider applying a higher CCF to certain commitments as appropriate
current Standardised
Off-balance Approach. In • 20% CCF for short-term self-liquidating trade letters of credit arising from
particular, it applies the movement of goods
sheet items higher CCFs for some • 50% CCF for certain transactions-related contingent items (e.g.
types of commitments, performance and bid bonds, warranties) and for note issuance facilities
and contains some
additional
(NIFs) and revolving underwriting facilities (RUFs) regardless of the
requirements, notably maturity of the underlying facility
regarding the use of • 100% CCF for direct credit substitutes and other off-balance sheet
the current 0% CCF exposures such as general guarantee of indebtness and acceptances, sale
and repurchase agreements, lending of banks’ securities, forward asset
purchases etc. Regulatory hints
Commitment:
Any contractual arrangement offered
by the bank and accepted by the
client to extent credit, purchase
assets or issue credit substitutes.
54
1 2 3
Exposure Current SA New framework hotspots

• For risk-weighting purposes under the standardized approach, a
defaulted exposure is defined as:
• past due for more than 90 days, or DoD aligned
• exposure to a defaulted borrower to IRB
framework
• Past-due loans sustain
higher losses than For retail exposures, the DoD can be applied at the level of a particular
performing ones. The credit obligation rather than at the level of the borrower
current Standardised
Approach already reflects
this rationale by means of • The unsecured or unguaranteed portion of a defaulted exposure
Defaulted risk-weighting past-due shall be risk-weighted net of specific provisions and partial write-offs:
exposures loans more heavily than
performing loans but • 150% RW when specific provisions are <20% of the loan
allowing a reduction in
the required capital when outstanding amount
the amount of specific • 100% RW when specific provisions are >=20% of the loan
provisions is deemed outstanding amount. National supervisors have discretion to
appropriate reduce the RW to 50% when specific provisions are no less
than 50%
For the purpose of defining the secured or guaranteed portion of the

defaulted exposure, eligible collateral and guarantees are as for credit risk
mitigation purposes
55
Focus on criteria for the use of ECAI’s ratings
1 2 3
Main criteria underlying the recognition of external ratings by national supervisors…

• Only rating agencies recognized as external credit assessment institutions
Recognition process (ECAIs) allowed
• On going controls by national supervisors of ECAI’s consistency with required
– ECAI eligibility
criteria: objectivity, independence, international access, transparency, disclosure,
criteria resources, credibility, no abuse of unsolicited ratings, cooperation with the
supervisor
• Chosen ECAIS to be used for both risk-weighting and risk management
Mapping process purposes in order to avoid Banks’ “cherry-picking” among ratings provided by
different ECAIs and arbitrarily change in the use of ECAIs
• If there is only one rating by the chosen ECAI  that rating determines the RW
• If there are two ratings by chosen ECAIs mapping into different RW  the higher
Multiple external RW is applied
ratings • If there are 3 or more ratings with different risk weights  the two ratings that
correspond to the lowest risk weights are considered. If these maps to the same
RW, that RW is applied. If different, the higher RW is applied
• If the issue-specific rating is available  the rating determines the RW
• If the borrower has an issuer rating, this rating typically applies to senior
Issue vs issuer unsecured claims on that issuer. Other unassessed exposures of a highly rated
ratings issuer will be treated as unrated. In the case a low-quality assessment implies a
lower (issuer/issue) rating and, as such, a higher RW, this latter should be used also
for unassessed pari passu or subordinated exposure
56
Standardized Approach for Credit Risk
Focus on Credit Risk Mitigation framework
1 2 3
Credit Risk Mitigation Techniques - Key principles

Credit exposures or potential credit exposure hedged in the whole or in part by collateral posted by a
counterparty or by a third party on behalf of the counterparty
 General requirements:  All the documentation used (on-balance sheet netting agreements,
 Legal certainty guarantees, credit derivatives) must be binding on all parties and
 Timely liquidation legally enforceable in all relevant jurisdictions
 Sufficient legal review to be performed by banks to ensure
 Operational standards continuing enforceability
 Disclosure standards
 The risk weight of the counterparty is replaced by the risk weight of the collateral
Collateralised
instrument collateralized or partially collateralized the exposure
transactions Simple
 Collateral must be pledged for at least the life of the exposure and it must be marked
approach
to market and revalued with a minimum frequency of six months. The portions of exposures
collateralized receive the risk weight applicable to the collateral instrument
 Calculate adjusted exposure to a counterparty to take account of the risk mitigating effect
 Applicable supervisory haircuts (provided for both the case of use of external ratings or not)
Comprehensive are used to adjust both the amount of the exposure to the counterparty and the value of any collateral
received in support of that counterparty in order to account for possible of possible future fluctuations in
approach the value of either
 Supervisory haircuts depending on the type of transaction, residual maturity and frequency of marking
to market and remargining
 Additional haircuts to account for currency fluctuations, where relevant
On-balance  Netting arrangements for loans and deposits to be legally enforceable and consistent with the provided requirements
sheet netting (e.g. in terms of monitoring on relevant exposures)
 Minimum operational conditions to be fulfilled

Guarantees and
 A range of guarantors and protection providers are recognized for the use of application of the substitution approach.
credit
Only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty lead to
derivatives
reduced capital charge (uncovered portion retaining the RW of underlying ctp)
57
Agenda

1. REMARKS
50
© 2017 Deloitte
Main implications for Banks
1 2 3
Implications on Capital…
• Increase comparability of capital requirements between banks
• Increased comparability under SA and IRB approaches
• Enhanced risk sensitivity for some exposure classes (real estate, bank
exposures, exposures with currency mismatch)
• Reconsideration of capital assumptions and evaluations among Bank’s
relevant business lines
… Implications on Processes and Systems
• Pricing, business model and market strategy

• Regulatory reporting
• Control framework (Risk Management, Compliance, Internal Audit)
• Reporting to the Top Management
• Infrastructure, technology, operation
59
Main implications for Banks – Additional hotspots
1 2 3
Implications on Capital…
Topic Major Implications
Enhanced risk sensitivity for • Corporate and banks exposures rating based on external ratings and due
some exposure classes diligence assessments
• Increase comparability of capital requirements between banks using the SA
by reducing national discretion
Increase comparability of capital
• Increase comparability of capital requirements under the SA and the IRB
requirements between banks
approach by introducing revised capital floors and by aligning definitions
and taxonomy
Possible changes in overall RWAs
• Search for optimal asset mix to control the level of RWAs
at overall and sub-asset classes
• Cost-benefit analysis with respect to IRB approaches
… Implications on Processes and Systems

Topic Major Implications
• Need to select appropriate and suitable info providers
Regulatory reporting
• Update of data quality control libraries
Control framework (Risk • Relevant enhancements to internal control framework, with particular
Management, Compliance and reference to new due diligence requirements in terms of internal policies,
Internal Audit) systems and controls, which will be also subject to Supervisory review
Reporting to the Top • Redesign of regulatory capital reporting templates to account for the
Management changes in the content of the information
• Need to update impacted internal processes and systems to comply with

Business, operative processes &
new relevant requirements (e.g. in terms of data collection and treatment)
Infrastructures
• Possible increase of related operative costs 60
Exchange of views on other
hot topics in financial risk
management
61
© 2017 Deloitte
Fundamental Review of the Trading Book (FRTB)
The new market risk regulatory framework
Trading Book Boundary and Trading Desk New Model Approval Framework
definition
 Banks requiring approval to Internal
 The Perimeter of the market risk is re- methodology must assess the possibility to
defined. A strict boundary is introduced via a apply Internal Model on a desk-by-desk
presumptive list basis, based quantitative tests, back-testing
 Qualitative requirements for Regulatory and P&L attribution
Trading Desk definition are more
prescriptive  The desk role is critical in the new framework
 Hedging exposure from banking book is as they must be presented and approved by
possible, but a specific internal risk regulators
transfer policy is foreseen
New Standard Approach New Internal Model
Mandatory calculation and reporting also for Introduction of Stressed Expected Shortfall to
banks adopting Internal Model, based on a measure market risk. Limits diversification
«risk sensitive approach» in order to be a benefits across asset classes introducing
fallback for, as well as a floor to internal model penalties for liquidity of risk factors introducing
JtD requirement is introduced for specific Risk. modellability requirements
Removes migration risks and adds equity
This is the solely approach allowed for perimeter for default risk calculation
Securitizations
62
Credit Valuation Adjustments
Fair value components
Fair Value of a derivative can be represented as the sum of three components:
𝛱 𝑡 = 𝛱0 𝑡 + 𝑓(𝑏𝐶𝑉𝐴 𝑡 , 𝐹𝑉𝐴 𝑡 )
Π0 t is risk-free fair value
𝑏𝐶𝑉𝐴 𝑡 is bilateral Credit Value Adjustment
𝐹𝑉𝐴 𝑡 is Funding Value Adjustment
Counterparty
risk-free Fair value assuming no counterparty risk and no funding costs
component
Bilateral CVA Fair value component that allows to consider the cost of default of one counterparty before maturity
FVA Fair value component that reflects funding costs
No market standard to compute Fair Value including credit and funding components. The most common frameworks
are:
1.CVA only: NPV = NPV0 + CVA
2.CVA + DVA: NPV = NPV0 + CVA + DVA
3.CVA + FVA: NPV = NPV0 + CVA + FVA
63
Interest Rate Risk in the Banking Book (IRRBB)
General principle
Il The Final Standards contains 12 principles:

• 9 relating to banks, including : sound methodologies, risk appetite and limits, internal reporting, identification of IRRBB,
external disclosures, data, controls and model risk managements
• 3 relating to supervisors: review of bank’s IRRBB framework, collaboration among supervisors, identification of outlier
banks
• Measure risk to earnings and economic value, taking into account a wide range of economic
shocks and scenarios, and more sophisticated customer behaviour analysis
New developments
introduced • Develop robust model risk management framework for IRRBB models
• Implement robust governance framework around limits and reporting
 Development of more sophisticated tools for risk measurement and management

 Coordination between units responsible for risk measurement and management to avoid overlapping
Main challenges for responsibilities and enhance oversight over IRRBB
Banks  Level of knowledge and expertise to manage IRRBB model risk, including need for independent
validation
 Strict disclosure requirements may result in disclosure of sensitive informatio
64
Interest Rate Risk in the Banking Book (IRRBB)
IRRBB
FRAMEWORK
66
NPL/Forborne Exposures
General principle
The complex regulatory framework and the increasing market pressures are requiring a growing need to better deal with
the Non Performing issue with the aim to:
• prevent situations of default by means of specific KRI and relevant triggers to provide effective early warning alerts
• efficiently manage situations of debtor financial difficulties through affordable forbearance measures
• adopt structured approaches to manage NPL stock based on multiannual NPL reduction plans
 ECB NPL Guidance (03/2017): supervisory expectations regarding NPL identification,

management, measurement and write-off
 Addendum ECB NPL GUIDANCE (03/2018): supervisory expectations of prudential provisioning
of non-performing exposures (i.e. 2 years for unsecured exposures, 7 years for secured
New developments
exposures)
introduced
z
 EU Council NPL Action Plan (03/2018): Commission published a proposed package of measures
to address NPLs, including a Regulation introducing a statutory prudential backstop for newly non-
performing loans; a Directive to facilitate out-of-court enforcement and enhance secondary
markets
In this context, the main banks are facing the following key challenges:
 NPL Strategy: definition of NPL Strategy in line with RAF & budgeting processes minimizing
capital impact and cost risk
Main challenges for  Operating model: a) development/update of Early Warning System (also in line with IFRS9) to
Banks prevent the deterioration of credit quality; b) industrialization of restructuring process for retail
borrowers and development of decision trees based on the analysis of historical experiences
 Decision making tool: a) tool development to support decisions about restructuring strategy vs
recovery; b) development of E2E proactive credit’s management workflow; c) innovative
technology adoption (cognitive / RPA)
66
New SREP and EBA guidelines on ICAAP are expected to be
more challenging for banks
Pillar 2 Framework
 Pillar 2 is not merely a simple capital adequacy assessment. It combines institutions’ Internal Capital Adequacy Assessment Process
(ICAAP) and supervisors’ SREP. The ICAAP is an internal risk based assessment (performed by banks) of capital requirements and
resources, whist the SREP is (performed by Regulator) is a review and challenge of the ICAAP and underlying processes. Under EBA
Guidelines, the scope of SREP has considerably widened to include many other element beyond ICAAP: including business model analysis,
Individual Liquidity Adequacy Assessment Process (ILAAP), Stress Testing, internal governance and controls
CP on the revised common procedures

and methodologies for the SREP
 In accordance with the EBA Pillar 2 Roadmap, where  Final Guidelines on "ICAAP and ILAAP information collected
the EBA’s multi-stage approach to the update of the for SREP purposes" have been issued by EBA in November 2016
EU SREP framework in 2017- 2018 and beyond is in order to facilitate a consistent approach of the ICAAP and ILAAP
outlined, the EBA has developed and published in under the SREP. In particular, these GL specify what information
October 2017 for consultation the first revisions of the on ICAAP and ILAAP CAs should collect from banks in order to
SREP framework perform their assessments
 SREP Guidelines aim to refine and introduce the  As a result of the SREP requirements and the above mentioned
following: (1) Pillar 2 capital guidance and guidelines, the ICAAP and ILAAP should have a stronger role in
supervisory stress testing, (2) supervisory decision making and management process, moving from a pure
assessment of institution’s stress testing, (3) regulatory compliance exercise (mainly focused on methodological
alignment of supervisory assessment of IRRBB descriptions) to an effective managerial tool
with the revision of the EBA Guidelines on IRRBB  Stress Testing Programme will be evaluated in the SREP by CAs
Guidelines, (4) scoring framework, (5) interaction (i.e. Supervisory Stress Testing)
between SREP elements, (6) articulation of TSCR
and overall capital requirements and
communication of supervisory capital expectations to
the institutions, and (7) consistency with recently  In January 2016, the ECB published for the first time its
published legislation on internal governance expectation on ICAAP and ILAAP, together with a description of
 SREP Guidelines set new interaction between SREP what ICAAP and ILAAP-related information banks should submit
and other supervisory processes, in particular:  In order to foster those improvements, the ECB initiated in
o Recovery Plans February 2017 a multi-year project to develop comprehensive
SSM Guides on ICAAP and ILAAP for Sis
o ICAAP & ILAAP
 In this context, ECB launched in March 2018 a public consultation
o Supervisory Stress Testing
on its Draft Guide to ICAAP and ILAAP with the aim of
developing a more detailed set of supervisory expectations
68
Specific instructions by ECB
 Key elements of ICAAP should include governance structure, documentation requirements, methodologies, LE
1.
perimeter, Risk identification and material risks;
Governance
 ICAAP shall be subject to regular review and validation
 Quantification of risks and ensuring of capital adequacy

 ICAAP outcomes used for capital allocation
2.
 Close link between risk reward system
Integration
 Consistent ICAAP approach across Group and LEs
 ICAAP and Recovery Plan to be consistent
3. Viability  Two complementary perspectives are expected:

of 1. Normative internal perspective (based on regulatory view) for baseline scenario (3 years)
institution for adverse scenarios (3 years)
(short & 2. Economic internal perspective
medium (considers all risks) corresponds to Pillar 2 view;
horizon  Determination of management buffers tailor-made for institution's specifics and market expectations
 Risk Identification for normative and economic perspective by "gross approach"

4. Risk Management Body to decide material risk types
Identificati
 Institution to define risk taxonomy
on
 Institution is responsible for determining all of its material risks and concentrations
5. Quality  Institutions expected to define internal capital for economic perspective

of Capital  Large part of internal capital to be expressed in terms of CET1 own funds
6.  Risk quantification methodologies tailored to institution

Methodolog  Comparison of Pillar 1 & 2 risk quantification
ies  Inter-risk diversification effect if present is to be highlighted
&
 Independent validation should respect principles set for Pillar 1, results to be reported to the management body
Validation
 At least annually adequate stress testing approach for normative and economic perspectives addressing key
vulnerabilities – Scenarios reconfirmed regularly (e.g. quarterly)
7. Stress
 ICAAP and ILAAP Stress tests should inform each other
Testing
 Reverse stress tests to be used and are supposed to breach TSCR/internal capital needs and to challenge ICAAP
assumptions 69
Corporate Governance and Remuneration
General principle
The financial crisis identified significant weaknesses in the functioning and composition of banks’ management bodies. ECB «Guide to
fit and proper assessments» and Bank of Italy consultation documents amending supervisory arrangements included within Circular
no. 285, as of EBA guidelines on “sound remuneration policies” (EBA/GL/2015/22) will provide a new regulation with the aim to
strengthen the supervision and assessment of banks’ board members
 Definition of common supervisory practices concerning “fit and proper” criteria assessment, with
regard to the professional experience, the skills and the adequate standing of members of the
management body, both in their management and supervisory functions.
 Redefinition of “remuneration”, through the introduction of more specific criteria aimed at
correctly distinguishing its fixed and variable components.
New developments  Review of the process for the identification of categories of staff whose professional activities have
a material impact on the institution’s risk profile (“identified staff”, falling under Bank of Italy
introduced
“personale più rilevante” definition) for remuneration purposes, which requires a direct
involvement of the management body, the remuneration committee and all group entities.
 Amendments to the discipline concerning variable remuneration deferral for the identified staff
and the duration related to financial instruments retention period, as well as with regard to
retention bonuses, long-term incentive plans (LTIPs) and severance payments related to
the early termination of a contract or an office.
 Assure an adequate periodic assessment concerning the suitability of members of the

management body, taking into consideration “fit and proper” criteria.
Main challenges for
 Update current Remuneration Policies, in order to adopt new Bank of Italy provisions to be issued
Banks
concerning overall remuneration composition, including in that framework a yearly
documented process aimed at identifying categories of staff whose professional activities have a
material impact on the Bank’s risk profile, falling under the definition of “personale più rilevante”.
69
TRIM Project
General principle
The Targeted Review of Internal Models (TRIM), is a project to assess whether the internal models currently
used by banks to determine their Pillar 1 own funds requirements (i.e. the minimum amount of capital they
must hold by law) comply with regulatory requirements, and whether their results are reliable and
comparable, and harmonize supervisory practices, thus reducing non-risk-based variability of their outcomes and
promoting a level playing field within the SSM
ECB is performing approx. 200 on-site TRIM Investigations (TRIMIs) in 2017 and 2018, possible
enlarging the project to 2019. First (and many of those) missions will start beginning of April, 2017.
The ECB’s main objectives are:
 Reduce variability in RWA due to internal models to ‘restore credibility and adequacy’
New developments  Therefore ECB will perform an in-depth review of internal capital models, including horizontal
introduced analyses between banks
 Identify best practices during horizontal analyses
 Banks are expected to update their internal model approach based on the review, especially banks
that are outliers
 Results from the TRIM might trigger further regulatory developments
 ECB has released the “ECB guide to internal models” (still under consultation) that sets out the ECB’s
view on the appropriate supervisory practices and how the relevant EU law should be applied in
particular areas. Banks should therefore consider the TRIM guidelines and the ECB findings on
Main challenges for
SIs within the project decisions
Banks
 At the conclusion of the TRIM project (2019), the ECB Supervisory Expectation on internal models
(Credit, Market, Counterparty Risks) will be released and EU Banks will have to comply with the
guidelines within the defined timeframe
70
GDPR
General principle
The Regulation (UE) n. 679 («GDPR – General Data Protection Regulation») has overall rewritten the rules regarding personal data
protection of natural persons, as well as provisions concerning the free movement of personal data.
The aforementioned Regulation, effective in all Member Countries of the European Union from the 25th of May 2018, introduced
multiple new rules and disruptive factors, even maintaining, however, unchanged European fundamental principles in subject of
personal data protection of natural persons
 Reinforcement of right to access by the data subject also thanks to the introduction of the
concept of data portability
 Data Protection Impact Assessment, namely, impact assessment of specific processing
identified by the Bank which are likely to result in a high risk to the rights and freedoms of natural
persons
 Appointment of a Data Protection Officer
New developments
 The data deletion and pseudo-anonymization in order to guarantee the right to erasure of
introduced Data subject
 Adopting adequate technical and organization measures to guarantee the principles of data
protection since the projection/ default setting of the processing system
 The notification in case of data breach or data leakage, to be carried out to the Data
Protection authority within 72 hours.
 Implementation of a “Record of processing activities”
 Identify an adequate Data Protection Organizational Model

 Provide information systems that allow a proper management of the requests of Data
Subjects
Main challenges for  Adopt adequate technical and organizational security measures
Banks  Intensify the controls on third parties identified as Processors
 Adopt measures that provide the deletion of personal data
 Be able to record the processing activities carried out by the Bank and perform the Data
Protection Impact Assessment (DPIA) in case of high risk.
71
MIFID II
General principle
The Directive 2014/65/EU (Markets in financial instruments directive - "MiFID II") and the Regulation (EU) n. 600/2014 (Markets in
financial instruments regulation - "MiFIR") updated the European regulatory framework relating to the financial instrument markets
The purpose is to develop a single market for financial services in Europe, in which transparency and investor protection are
guaranteed. The regulation contains different kind of provisions which, inspired by the duty to act in the best interests of the client,
ensure correct information for investors, deal with potential conflicts of interest between the parties and require an adequate profiling of
the investor
In addition, with the aim of strengthening confidence in the financial system, sectors previously unregulated are included within the
scope of MiFID II and a more complete system of supervision and enforcement of the rules is established.
 Obligations for detailed disclosure on the costs of products and services, charges and
incentives to customers
 Introduction of rules and requirements for the making of and distribution of financial
New developments instruments with particular reference to the definition of the Target Market
introduced  Introduction of eligibility criteria for incentives and disclosure to customers
 Introduction of independent advice and reduction of the scope of the execution only
 Certification of the skills of natural persons providing investment services
 Post-trade transparency obligations towards market and supervisory authorities
 Redesign the business model

 Guarantee greater transparency towards customers
Main challenges for  Provide tools that ensure clear identification of the target market
Banks  Build an appropriate product catalog
 Demonstrate a level of service quality that justifies the incentives received
 Be able to provide more information to the market and the authorities
72
AML (4th EU Directive)
General principle
The purpose of the IV AML Directive (EU Directive 849/2015), acknowledged in Italy by the Decree 90/2017, is to remove any
ambiguities in the previous legislation and improve consistency of anti-money laundering (AML) and counter terrorist financing
(CTF) rules across all EU Member States.
 New enhanced and simplified due diligence measures:

- Review of the current self-assessment methodology and definition of the approach for CDD
(“Simplified” and “Enhanced” in particular for PEPs) – based on risk level/factors and subsequent
New developments process review.
introduced  Strengthened third-parties due diligence:
- Review of the due diligence processes performed by third-parties, in particular with reference to
agents and dealers
 Extension of cases of suspicious transactions to be reported
 Risk Based Approach and due diligence measures:

- Check client and UBO identity on public data base (SCIPAFI list and UBO register consultation)
- Review of the current UBO identification criteria
 Data collection and reporting:
Main challenges for - Analysis on AUI maintenance or other storage database
Banks - Review of periodical flows (aggregate data) to UIF
 Other communication obligations:
- Implementation of the new periodical reporting to UIF based on objective criteria
- Razionalization of reports concerning the control bodies
 Review of AML self risk assessment methodology and process and organization measures
73
74
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Deloitte WS FCAB Agenda

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Workshop on risk management practices

and upcoming trends

Timing Topic Speaker

Basel III Ratios

15:15–15:30 Coffee break

Standardized Approach for Credit Risk

Exchange of views on other hot topics in financial risk management

17:00–17:30 Q&A and Conclusion

Liquidity risk analysis implies “multidimensional” approach

 Principles-based framework for an integrated,

Credit Risk Liquidity Risk

 Liquidity on an equal standing with capital, but no

Sep 08 … Sep 09 Dec 09 Feb 10 … Jul 10 Sep 10 Dec 10

2010 2011 2012 2013 2014 2015 2016 2017 2018

From end of 2010: National

• Time horizon: 30 days

• Aims to strengthen medium - to long - term

Additional Liquidity Monitoring Tools

Monitoring Tools for Intraday Liquidity Management (Draft proposal)

Market value L1 Market value L2* • Three-notch credit

Carrying Value • Significant decline in

Tool Definition Purpose

• It monitors residual maturity of funding sources of the

• It monitors the 10 counterparties which contribute to

Concentration of • To monitor the concentration of funding sources,

• To monitor the average volumes and prices of

Payments made Intraday credit

correspondent banking services each day provision of correspondent banking services

banking customers these payments in the reporting period

Calculate the percentage of their outgoing Monitor the throughput of a direct

• Excessively levered banks before the financial crisis

• Introduction of an additional ratio as a „backstop“ in addition to solvency ratios

• Easily computable, transparent gross measure

• Initial implementation under Pillar II

Arguments for a Leverage Ratio Goals for a well-calibrated Leverage Ratio

Leverage Ratio proposed by BIS

• Full international harmonization through • High quality capital measure (Tier 1)

Capital Baseline Proposal Additional Option

Capital measure Tier 1 or Core Tier 1 Total regulatory capital

Exposure Baseline Proposal

Deductions from capital Corresponding deduction from exposure

Highly-liquid assets Included

Securitisations Derecognized assets excluded

Off-balance sheet items* Included with CCF** of 100%

Derivatives Use fair value

Netting of derivatives and

Credit risk mitigation Not applicable

■ Funding Plan ■ Analysis of segments

Methodology Data Source

 Strong consolidation issue, both from a  No greater calculation technicality required

Bank role in securitization

Securitization related activities Issues and impacts

• Given the greater complexity of risk weight calculation,

EU legislative institutions have agreed on:

CURRENT FRAMEWORK (TB & BB) NEW REGULATORY FRAMEWORK

Banking Book & Trading Book Banking Book Trading Book

Standard Approach IRB Approach 1

STS SA - RW > 25%

NO-STS SA - RW > 25%

A 30% 50% 40% 65% 20% 25%

CCC 415% 460% 455% 505% 45% 50%

AA+ 15% 15% 55% 90% 0% 35% 80%

CCC 1250% 1250% 1250% 1250% 0% 0%