FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Bahrain

The supervisory and regulatory framework in Bahrain consists of one main body :

• Central Bank of Bahrain (CBB)

FRSGlobal in Bahrain

Bahrain’s economy has only been slightly affected, by the global ‘credit crunch’. This economic stability can be partly accredited to the country’s position as a hub for Islamic finance, where Sharia rule prohibits speculative activities and requires all financial transactions to be backed by real assets.

Where the country has felt the impact of the financial crisis is with regards to the global withdrawal of liquidity, which in turn led the Central Bank of Bahrain (CBB) to take prompt and effective action. In July 2009, the CBB released a consultation paper on liquidity risk in for conventional banks.

Bahrain’s biggest challenge is the increased amount of risk management that is required by the regulator, as evidenced by the liquidity regime. The CBB also made strong suggestions to banks to implement an integrated approach to liquidity risk as apposed to the silo‘d approach, incorporating market risk, credit risk, operational risk and interest rate risk for example.

One thing we know for sure is that regulation is not going to go away and if anything there will be more stringent changes ahead.

Regulatory Environment — Bahrain

Statutory

Financial reporting
Financial reporting in Bahrain is based on the International Financial Reporting Standards (IFRS) and the International Accounting Standards Board (IASB) framework. These financial audited statements are required to be submitted by both local incorporated banks and foreign banks (additional to supplementary reports such as provision for bad debts and non performing assets) on an annual basis. Retail branches of foreign banks are required to submit their profit and loss and balance sheets statements on a semi-annual basis as set out by the Central Bank of Bahrain.

Prudential

Prudential Information Reporting (PIR)
These reports contain information on bank’s assets and liabilities, capital, reserves, loans and advances and income statements. They are required to be submitted by local incorporated, overseas branches and branches of foreign banks (PIRB) on a quarterly basis.

• Capital adequacy reporting Capital adequacy reporting in Bahrain is based on the Basel II framework. It generally includes information on calculation of capital requirements considering credit risk, market risk and operational risk. These reports are required to be submitted by local incorporated banks and branches of foreign banks. The Foundation Internal Ratings Based Approach is used to calculate credit risk, market risk is based on the Standardised Approach and operational risk calculation is based on the Basic Indicator Approach.
• Large exposures reporting These reports form a part of the PIR reports required to be submitted by all local incorporated banks on a quarterly basis. It includes information on the exposures faced due to offsets in balance sheets and exposures related to counter party obligations and are required to be submitted on a monthly basis.

Connected counterparty exposures
The reports are generally concerned with exposures that exist on the transactional level specifying information on the exposure limits and actual exposures faced with the counterparty. These reports are required to be submitted by all local incorporated banks on monthly basis.

Statistical

Statistics returns reporting
These reports comprise data on quarterly statistical returns of balance sheet broken down by country, class of customer, currency and classification of loans and advances to the Financial Stability Directorate of the Central Bank. In addition it also includes statistical returns on balance sheet, assets and liabilities, loans, deposits etc. required to be submitted on monthly basis by all licensed banks.

Transactional

Suspicious Transaction Reporting (STR)
These reports are required to be submitted to the Compliance Directorate of the Central Bank of Bahrain (CBB) on an ad hoc basis in case of any suspicious transactions seen that might involve money laundering or terrorist financing.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel III

Employ dynamic ALM for better balance sheet management

To strengthen the global banking system, the Basel Committee on Banking and Supervision (BCBS) issued various papers concerning phased implementation of the new capital adequacy, liquidity and disclosure framework ‘Basel III’.

Basel III is one of the key constituents in strengthening the global financial system after the financial crisis of 2007. The CBB is committed to implementing this internationally agreed best practice standard for the financial sector.

The key elements proposed in Basel III are:

• Raise Quality of Capital Base (2013)
• Enhance capital charges for securitisation and off-balance sheet exposures (December 2011)
• New 3% Leverage Ratio (2015)
• New Liquidity Standards (LCR – 2015 and NSFR– 2018)
• New Capital Buffers

With a view to migrate from Basel II to Basel III, the Central Bank of Bahrain (CBB) published the consultation paper on proposed changes and its implementation timeline. This consultation paper discusses the key elements that is, the capital and liquidity requirements of Basel III and seeks response from the banks towards its implementation in Kingdom of Bahrain.

The consultation opens till 31 August 2011 suggested changes to be implemented in Bahrain from 31 December 2011.

Managing and Monitoring Liquidity

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management.

Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the Basel Committee on Banking Supervision issued its paper on ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets.

By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

Thus as means for effective liquidity risk management, the CBB proposed changes in their liquidity risk management module. These changes highlight the submission of prudential returns on liquidity position and liquidity stress-testing scenarios to be submitted on frequent basis.

As the CBB is the promoter of harmonisation efforts and internationalisation of standards, it is expected that the CBB will adopt Basel III liquidity norms as foreseen in BCBS recommendations.

Banks will have to prepare to be compliant with the new liquidity standards as foreseen for LCR by 2015 and NSFR (2018).

With our solution and experts keeping eye on global regulatory change, banks need not worry about the changes in reporting requirements.