Orbit36 presence at 24th Annual Bank Capital Management Conference

  • Posted on June 16, 2021 by Dr. Andreas Ita

We are grateful that Orbit36 was invited again this year to the Marcus Evans Annual Bank Capital Management Conference. This industry-leading event includes mainly speakers from banks, banking supervisors and central banks. Orbit36 led the Conference Workshop on Day 1 and moderated the panel discussion with representatives of Lloyds Bank and HSBC on Day 2.

In the Conference Workshop, Andreas Ita spoke on the stress test tolerance levels for capital at a time of uncertainty. He showed based on two use cases why stress tests can provide additional insights.

Use Case 1: Default of Archegos as idiosyncratic stress

While this incident reveals shortcomings in the Pillar 1 methodologies for the calculation of Risk-weighted Assets for Credit Counterparty Risk, well-designed stress tests would have allowed to identify the high loss potential of the Archegos exposures and make the risk visible for the Board of Directors and the Senior Management.

Results from a live poll in the audience showed that the majority of capital managers regards bank internal stress tests as useful or very useful to identify idiosyncratic vulnerabilities.

Use Case 2: Covid-19 as systematic stress

After the temporary release of the capital buffers granted by the ECB as a reaction to Covid-19, banks could no longer set their capital targets based on the regulatory capital requirements applicable in normal times. Instead, they used stress tests to inform their stress tolerance level for capital.

The capital managers confirmed in a second live poll that bank internal stress tests were useful to navigate through the COVID-19 crisis, often complementary to other measures or considerations

In addition, it was very insightful to learn that most banks had to adapt their scenarios because of COVID-19. A few banks said that their scenario development was not flexible enough and that they may want to invest more into their scenario development capabilities.

The panel discussion on Day 2 provided additional insights. Covid-19 showed a clear need for more flexible, scenario-based capital planning and stress testing. The majority of capital managers seems, however, to have reservations concerning the use of PPNR (Pre-Provision Net Revenue) for this purpose. They do not believe that PPNR-models can fully replace the current, more qualitative approach which also includes the judgement and experience from the business. The views of the capital managers surveyed in a live pool were fairly diverse with respect to the usefulness of the ECB reaction to the Covid-19 crisis. While some found the temporary capital relieves at least partly useful, the majority was neutral. Also the decision to prohibit dividend payments and share buybacks was seen mixed. While around half of the participants found this decision at least partly useful, one third found it not useful as it sent a mixed message to the market and confused investors.

We lock back to a great virtual conference and thank Markus Evans for the invitation and the excellent organization. We hope that the 25th edition of the conference will be as usual in London and we would be honoured to participate again.

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