FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Taiwan

Financial institutions in Taiwan are required to report to the following organisations:

• Central Bank of China (CBC)
  Promoting financial stability, ensuring sound banking operations, maintaining the stable internal and external value of the currency.
• Financial Supervisory Commission (FSC)
  Supervision and examination of the banking, securities and futures, insurance, and the financial holding companies

FRSGlobal in Taiwan

Taiwan’s heavy dependence on exports made its economy vulnerable to downturns in world demand, as shown by the recent global financial crisis. Taiwan suffered from a 20% year-on-year decline in exports, and its GDP fell by 2.5% in 2009.

Taiwan is characterised by a tightly regulated banking system, with state-owned banks still controlling half of the market assets and although Taiwan is not a member of the Bank for International Settlements, all domestic banks (i.e. local banks) were required to implement Basel II from 2007.

In compliance with directives issued by the Financial Supervisory Commission (FSC), Taiwan’s banks commenced a phased implementation of Basel II in 2007.

• First Pillar (minimum capital requirements): Taiwan’s banks began to calculate their regulatory capital requirements in accordance with the Basel II rules from 2007 Q1
• Second Pillar (supervisory review): As of April 2008, Taiwan’s banks are required to file internal capital adequacy assessment results and risk indicators self-assessment reports with the FSC on an annual basis
• Third Pillar (market discipline): As of April 2008, banks are required to establish a special section on their websites to disclose information on capital adequacy and risk management

Taiwan has focused its economic recovery effort on improving cross-strait economic integration. The FSC signed financial Memoranda of Understanding (MOU’s on banking supervision, securities and futures supervision and insurIance supervision) with Chinese authorities (the CBRC, China Securities Regulation Commission) that took effect mid-January, 2010. The MOU will enable the FSC to perform effective supervision on the mainland branches of domestic financial institutions.

The three Cross-Strait financial MOUs are modelled on prevailing international practices, and provide guidance for such matters as sharing information, protection of information, on-site inspections, ongoing coordination, and crisis management.

As to when Taiwan’s financial industries will be allowed to set up commercial presence in mainland China, the FSC has stated that after the three Cross-Strait MOUs take effect, domestic financial industries will be allowed file their applications with the FSC. In the future, the FSC will be able to pursue effective supervision on the mainland branches of domestic financial institutions through the three MOUs.

The legal framework in Taiwan for banking supervision mainly comprises the Banking Act and the Financial Holding Company Act. The FSC, according to its recent Annual Report, was drafting a Financial Service Act and preparing draft amendments to the Banking Act and the Financial Holding Company Act. The Ministry of Finance and FSC have jointly prepared a Financial Market Package that will establish a diversified, internationalised, and stable financial system in Taiwan

The most significant changes in the regulatory reports have allowed for new accounting standard such as the TWGAAP 34 (Accounting for Financial Instruments), which is also in line with IAS39 and the listed bank Financial Statement Disclosure Guideline.

Regulatory Environment — Taiwan

Financial

Balance sheet reporting

Balance sheet reporting covers a summary of the financial balances or relevant financial information of a reporting institution, based on Taiwan’s accounting principle (TWGAAAP 34 – Accounting for Financial instruments) which is also in line with IAS39. These reports are required to be submitted to the following bodies: Central Bank of the Republic of China (Taiwan) or CBC (Taiwan) in short, Department of Financial Inspection, the Offshore Banking Unit, the Bureau of Monetary Affairs, Ministry of Finance (MoF), and the Department of Economic Research.

These reports generally include information on assets and liabilities, net worth or retained earnings, profit and loss over a period of time, average balance sheet positions and statement of cash flows broken down by maturities in TWD and non-TWD. Other major reports in this category include interest rate sensitivity analysis information reports, assets quality, and material financial business summary/profitability summary, etc.

Prudential

Capital adequacy reporting (CAR)

The Taiwan Financial Supervisory Commission implemented Basel II from 2007. Basel II requires capital reserves to be aligned against carefully measured levels of credit risk and operational risk. The Basel II Accord requires banks to keep capital for credit risk for banking book exposures and market risk for trading book exposures. As a result, banks may be forced to hold more capital than current rules demand to guard against losses on some kind of complex financial products.

Large exposures reporting

Large exposures reporting requirements are requested by different departments of the CBC (such as Bureau of Monetary Affairs, Department of Economic Research, etc). These reports collect information on large credit analysis (in TWD or Non-TWD), deposit account movement over 200 million every 10 days and monthly, loan account movement over 300 million, derivatives outstanding (by non-residents with threshold over TWD 300 million), foreign currency deposit balance (by individual customers above USD1 million equivalent), and reports on top five largest net foreign exchange position.

Liquidity reporting

All banks in Taiwan are required to submit liquidity reports to the CBC (Taiwan) and Department of Banking. It includes reports with detailed information on status of liquidity and deposit reserves. The CBC has set a minimum liquidity reserves ratio for financial institutions to ensure that sufficient liquid assets are maintained to meet their deposit liabilities. The Bank is also required to maintain the required deposit reserve amount in the deposit reserve account within the applicable maintenance period.

Locational Banking Statistics -LSB (BIS Paper 18)

The purpose of the LSB report is to gather information of a bank’s external claims and liabilities. It also provides a basis for the preparation of balance of payment and external debt reports. The CBC (Taiwan) consolidates information from the reporting institutions of Taiwan and then submits the relevant information to the BIS.

Transactional (Operational)

Foreign exchange reporting

This type of reporting mainly collects information on foreign currency positions (spot, forward) and derivates position on daily basis, monthly inward and outward remittances volume with PRC, foreign currency transaction daily, and adjustment reports on foreign exchange deposit reserve, etc.

Derivatives reporting

Derivatives reporting include volume reports on Foreign exchange (FX) deals and derivatives commodities transactions arising from the applicable reporting period (based on the contract date). These volume reports are required to be submitted to the relevant regulator or departments, such the Bureau of Foreign Exchange of the CBC (Taiwan), Offshore Banking Unit, and the Banking Bureau (FSC).

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 II

Embracing advanced Basel II approaches and capital management practices

The Financial Supervisory Commission (FSC) of Taiwan implemented Basel II in 2007 to strengthen risk management of domestic banks and harmonize banks capital adequacy with that of the international standards.

The average capital adequacy of banks in Taiwan was 11.97% at the end of 2010.

Banks need to submit business plans, internal capital adequacy assessments, and demonstrations of their risk assessments to FSC under Pillar 2 standards. Banks disclose their qualitative and quantitative risk information under Pillar 3 to enhance market discipline and to provide better oversight of corporate operations and governance as well as contribute to the soundness of the financial system.

Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for credit risk, market risk and operational risk. It can be used as an independent stand alone solution or in combination with our other reporting and risk management solutions assisting banks to meet regulatory requirements and improve their performance over risk.

IFRS

The Financial Supervisory Commission (FSC) of Taiwan established a task force on May 14 2009 for adoption of IFRS in Taiwan.

The adoption of IFRS in Taiwan is planned in 2 phases.

• All listed companies and financial institutions which are supervised by FSC are required to prepare the financial statements as per IFRS standards from January 1 2013. Early adoption of IFRS for listed organisations is permitted from January 1 2012.
• All unlisted public companies including credit co-operatives and credit companies are required to prepare financial statements as per IFRS standards from January 1 2015. Early adoption of IFRS is permitted from January 1 2013.

All public companies are required to pre-disclose information regarding IFRS adoption plans and the impacts on their financial reports prior to the adoption phase. Our IFRS solution enables classification of financial instruments and calculation of valuations using appropriate fair values or amortised costs. It also supports several methods for testing and estimating impairment as required by IAS 39.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final 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 sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.