Friday, January 25, 2013

The OECD Arrangement on officially supported Export Credits – Cause and Consequence of Export Growth


Since 1964, the size of world merchandise exports has been multiplied almost 114 times. Recently, exports have dropped, in 2009, by 23 %, due to the global financial crisis. However, this drop has been canceled immediately by significant export increases in the 20 % range in 2010 and 2011.




In this context, public export support schemes can be seen as both consequence and cause of global export growth.

In 1978, the OECD has adopted its first Arrangement on officially supported Export Credits. This gentlemen's agreement has been updated numerous times since then, most recently on January 11, 2013. The basic idea of the arrangement is to foster a level playing field for official export support and to ensure that exporters compete on quality and price rather than on the best financing scheme.


Scope of application

On the merits, the arrangement applies to export credit support and tied aid.

Export credit support can take the form of

  • a guarantee;
  • an insurance;
  • a direct financing;
  • a refinancing;
  • an interest rate support.

Tied aid touches upon government support to countries, sectors, or projects with little or no access to financial markets. However, it excludes non-governmental aid programs.

Export credit support and tied aid for military equipment and agricultural commodities are also out of the arrangement’s scope.

Currently, Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland, and the United States participate in the OECD arrangement.


Export credit support

The OECD export credit support framework comprises the following:

  • Down payment
    The purchaser is bound to pay 15 % of the contract value prior to the export credit support. However, the contract value does not necessarily include the premium paid for the export credit, which might be financed or insured at 100 %.

  • Export credit cap
    As a general rule, export credit support is only allowed up to 85 % of the contract value, thereby excluding the above described 15 % down payment. Exceptionally, credit insurance and guarantee schemes can cover such down payment, but only regarding pre-credit risks.

  • Local costs
    Official support for local costs can be granted, but only if it doesn’t outstrip 30 % of the export contract value.

  • Repayment Terms
    The arrangement sets a cap for the repayment terms: Depending on the importing country’s gross national income, the cap is either 8.5 years (for high income countries) or 10 years (for low income countries). In addition, repayment terms usually comprise equal installments at least every 6 months.

  • Commercial Interest Reference Rate (CIRR) / Minimum Premium Rate (MPR)
    Interest refers to annual or semi-annual bank charges paid throughout the repayment period. This does not include insurance / guarantee premiums, fees and commissions, and withholding tax imposed by the importing country.
    According to the OECD arrangement, interest must be charged at least at the sum of CIRR and MPR. CIRR compensates for market risk and MPR for credit risk.


Interest rate calculation

The interest rate calculation can be summarized as follows:




CIRR calculation





Depending on the maturity of the export credit support, the CIRR base rate is

  • either the 3 year government bond yield in case of maturities up to 5 years
  • or the 5 year government bond yield in case of maturities beyond 5 years.


MPR calculation

MPR calculation is a rather complex task. Its main parameters are country risk, time at risk, buyer risk, political risk, and commercial risk.

The above outlined calculation steps are summarized hereinafter:

  • The country risk is classified along a scale from 0 (lowest risk) to 7 (highest risk) and depends on the likelihood of the country to serve its external debt. The classification is based on a quantitative assessment (payment experience, financial and economic situation) as well as a qualitative assessment (political and other risk factors).

  • Depending on the country risk classification, Annex VI of the OECD arrangement sets country risk coefficient and country risk constant.

  • The same is true for the buyer risk coefficient, which, in addition, depends on the buyer risk classification.

  • The buyer risk classification is a function of the buyer's senior unsecured credit rating and varies from CC5 (worst) to SOV+ (best).

  • The horizon of risk depends on the disbursement and repayment period of the export credit. Its calculation depends on the repayment profile and is specified in Annex VI of the OECD Arrangement.

  • The local currency factor is between 0 and 0.2 and can be increased by using offshore escrow accounts or local currency financing.

  • The credit enhancement factor is between 0 and 0.35 and can be increased by assigning receivables, providing securities over assets, or using escrow accounts.

  • The product quality factor relates to the quality of the export credit, not the underlying good or service. The OECD Arrangement distinguishes below standard products (= The insurance does not cover interest for the period between the due date for the obligor’s payment and the due date for the insurer’s reimbursement or only covers this period in return for a premium surcharge.), standard products (= The insurance covers the above described period without premium surcharge.), and above standard products (= Export credit is granted in form of guarantees). The product quality factor then is as function of the country risk classification (see Annex VI of the OECD Arrangement).

  • The cover percentage factor depends on three variables, e.g. cover percentage of buyer risk, the cover percentage of country risk, and the country risk classification. Details are described in Annex VI of the OECD Arrangement.

  • If the buyer is classified SOV+, the better than sovereign factor is 0.9. Otherwise, this factor is 1.


Tied aid

Under the OECD arrangement, tied aid must respond to three imperatives – country eligibility, project eligibility, and minimum concessionality level.




Sector Understandings

Sector understandings govern 5 sectors:

  • Ships (Annex I)
  • Nuclear Power Plants (Annex II)
  • Civil Aircraft (Annex III)
  • Renewable Energies and Water Projects (Annex IV)
  • Project Finance (Annex X)

In their respective sector, they complement the OECD Arrangement and, thus, provide for details or amendments to the above described general regulations on export credits and tied aid.


Resource:

Monday, January 21, 2013

Commercial Bank of Qatar – Yachts and Cars for your Loyalty!


Expanding on my recent post on Doha Bank, I would like to compare this bank to Commercial Bank of Qatar.

The bank's financial performance is just as convincing as Doha Bank's figures:






Doha Bank's return on equity is higher, due to higher leverage.






Commercial Bank of Qatar is organized, by customer type and location, in five business units:


Corporate Banking

This business unit offers financial services (treasury, investment banking, corporate finance and advisory) to domestic and international companies who invest, trade, and execute projects in Qatar. In cooperation with Qatar Development Bank, it keeps a special focus on small and medium enterprises.(“Al Dhameen Loan Assurance Program”)

In addition, a partnership agreement with Korea's HANA Bank promotes the growing trade and investment flows between Qatar and Korea.

Apart from offering core banking products and services, Commercial Bank of Qatar partners with MEEZA, a Qatar Foundation joint venture, to provide IT services and solutions to business customers. For example, the services cover cloud technology as well as HR and payroll solutions. This is somewhat surprising, as the bank has itself outsourced its IT and back office activities to Tata Consultancy Services.


Retail Banking

Commercial Bank of Qatar's retail division controls 27 branches and 153 ATMs in Qatar and emphasizes the importance of its mobile and Internet banking offerings.

Wealthy people (“high net worth customers” in banking language) are well served at Commercial Bank of Qatar: The “Limited Edition Cards Rewards Program” offers “a range of prestigious and highly exclusive gifts from some of the world's most luxurious brands – from limited edition watches to the latest must-have bags, stunning jewelery and even yachts and cars”. Obviously, this program seems attractive, compared to client loyalty programs in France where you have to purchase for years to get rewarded by a coffee machine....

Through its insurance joint venture, Massoun Insurance Services, Commercial Bank of Qatar completes its retail offering.


Islamic Banking

Following Qatar's decision to separate Islamic banking and commercial banking, this business line has been discontinued in 2012.


Investment Banking

The business line Commercialbank Capital (ComCap) provides advisory services for corporate activities such as M&A, joint venture, restructuring, and public and private fund raising in Qatar.


Brokerage services

Brokerage services are provided by the subsidiary Commercialbank Investment Services (CBIS).


Resources:

  • Commercial Bank of Qatar – Annual Report 2011

Wednesday, January 16, 2013

FED Foreign Bank Regulation – Simple and straightforward writing?



The FED intends to change the rules for foreign banks operating in the US. A first draft has been communicated on December 12, 2012.







What is the purpose of the new regulation?

The purpose is twofold: The US operations of foreign banks shall become more resilient and the US financial system and US economy shall be held immune against a failure of a foreign bank.



When will the regulation apply?

For now, the FED has only published a proposal.

Thresholds shall apply, for the first time, on July 1, 2014. The respective regulation will then apply one year after exceeding the threshold. The details vary from stipulation to stipulation, but it is probably a good idea to keep in mind the date of July 1, 2014.



What are the areas of regulation?

  • US intermediate holding company
  • Risk-based capital
  • Leverage
  • Liquidity
  • Single-counterparty limits
  • Risk management
  • Stress tests
  • Early remediation



When do you need to set up a US intermediary holding company?

You ought to set up a US intermediary holding company if you are a foreign banking organization with total consolidated assets of at least 50 BUSD and, cumulatively, dispose of combined US assets of 10 BUSD or more.


Why is a US intermediary holding company required?

This makes it easier for the FED to regulate and control you.


What is the framework for setting up a US intermediary holding company?

The holding can be set up in any US state. It must not be wholly owned by you. In other words, you can engage minority investors. A scheme with multiple holding companies is possible under exceptional circumstances.

The FED will apply specific prudential standards to you; the standards of US bank holding companies will not apply.



When do risk-based capital requirements apply?

They apply if you are a foreign banking organization with total consolidated assets of at least 50 BUSD.


Which risk-based capital requirements exist?

You will be subject to the same capital adequacy standards as they apply to US bank holding companies. There are minimum risk-based capital, leverage, and capital adequacy requirements as well as the capital plan rule.

If you are a global systemically important banking organizations under the Basel III scheme, the FED may implement consolidated capital surcharges.


Why do risk-based capital requirements apply?

Basel III only addresses capital requirements at the consolidated level of internationally active banking organizations. However, it does not handle the capitalization in each country of operations. In addition, the information on the firm’s consolidated capital position may not be available in time.

The foreign banking organization might not be able or willing to support its US operations during a crisis.

Finally, the bank’s home jurisdiction could restrict cross-border intra-group capital flows to the US when the foreign bank faces financial difficulties.



When do leverage limits apply?

You must meet leverage limits if you dispose of consolidated assets of 50 BUSD or more.


Which leverage limits apply?

At US intermediary holding company level and at the level of any US subsidiary not organized under your intermediate holding company, you have to meet a debt-to-equity ratio of no more than 15:1.

In addition, your US branch and agency network must maintain assets at 108 % of third party liabilities.



When do liquidity constraints apply?

Liquidity constraints apply if you hold combined US assets of at least 50 BUSD.

If you hold less, you will only have to report, on an annual basis, the results of an internal liquidity stress test on your combined US operations to the FED.


Which liquidity constraints are put in practice?

  • You must conduct monthly liquidity stress tests, based on a series of time intervals out to one year.
  • Holding a buffer of local liquidity will be obligatory. Your buffer must be of high quality and not carry any pledges. In addition, it should be sufficient to cover the first 30 days of cash flow needs under stressed conditions.
  • You shall establish a contingency funding plan for your combined US operations to counter a liquidity crisis. You have to update the plan at least annually.
  • Internally, you must set up an independent review function to evaluate the liquidity risk management of your combined US operations.
  • On- and off-balance sheet cash flows shall be projected; collateral positions of your US operations be monitored.
  • You need to establish and maintain limits on potential sources of liquidity risk such as concentrations of funding by instrument type, single counter-party limits, and secured vs. unsecured funding.

Liquidity requirements and buffers apply separately to your US branch and agency network on the one hand and your intermediate holding company on the other hand.


Why has the FED put up liquidity constraints?

The intention is not to increase liquidity requirements but to make sure that you hold liquidity locally in the US.



When do single-counterparty limits apply?

They apply when you show consolidated assets of at least 50 BUSD on your balance sheet.


Which single-counterparty limits apply?

Your exposure to a single counterparty, including affiliates, cannot exceed 25 % of your total regulatory capital. This threshold applies separately to both your intermediate holding company and your combined US operations. Moreover, the limit reduces to 10 % if you hold total consolidated assets of minimum 500 BUSD.


Which deductions are made when calculating your exposure?

You deduct the following items:

  • Adjusted market value of eligible collateral
  • Unused credit lines
  • Eligible guarantees
  • Eligible credit or equity derivatives and hedges that limit your exposure
  • Bilateral netting agreements
  • Face amount of a short sale of your counterparty's debt or equity
  • Repurchase transactions with your counterparty


Why are single-counterparty limits put in place?

Single-counterparty limits are meant to track the interconnectedness among large US and foreign financial institutions in the US and globally.



When do risk management requirements apply?

Risk management requirements apply gradually, first, if your stock trades publicly and you hold consolidated assets of 10 BUSD or more and, second, if you hold consolidated assets of at least 50 BUSD, regardless of whether your stock trades publicly or not.


Which risk management requirements exist?

In either case, you need to institute a risk committee to oversee your US operations. The committee must comprise one member independent from your bank.

In addition, meeting the 50 BUSD asset threshold will oblige you to appoint a U.S. chief risk officer.


What are the tasks of your risk committee?

Your risk committee is bound to review and approve the risk management practices of your combined US operations and to oversee your risk management framework.



When are stress tests brought into play?

Stress tests are necessary in three scenarios:

  • 1st scenario: Your US intermediate holding company carries assets between 10 and 50 BUSD.
  • 2nd scenario: Your US intermediate holding company carries assets of more than 50 BUSD.
  • 3rd scenario: You hold combined US assets of at least 50 BUSD.


How are stress tests put in practice?

  • In the first scenario, you must conduct annual company-run stress tests.
  • In the second scenario, you will need to conduct semi-annual company-run stress tests and annual supervisory stress tests.
  • In the third scenario, you must put in place annual capital stress tests on a consolidated level. These tests can be carried out by yourself, if they are reviewed by your home country supervisor. Naturally, a stress test accomplished by your home country supervisor directly would also suffice.


What happens if you fail to meet the stress testing conditions?

Your US branch and agency network will have to maintain eligible assets at a minimum of 108 % of third party liabilities. In addition, the FED can impose intra-group funding restrictions and increased liquidity requirements on you.



When do early remediation standards apply?

Remediation standards apply automatically if you hold combined US assets of 50 BUSD or more. They shall apply on a case by case basis if your combined US assets are less than 50 BUSD.


What triggers early remediation?

The FED proposes four triggers:

  • Level 1 refers to a qualitative analysis of
    Capital: Evidenced signs of deterioration / Capital position not commensurate with the level and nature of the risks you run in the US
    Stress test: Your US intermediate holding company fails to comply with stress testing rules.
    Risk management: Your US operations manifest signs of weakness in meeting risk management requirements.
    Liquidity risk management: Any part of your combined US operations manifests signs of weakness in meeting liquidity risk management standards.
    Market indicators: Expected default frequency / Marginal expected shortfall / Market equity ratio / Option-implied volatility / CDS spread / Subordinated debt spread – Thresholds will be published on an annual basis.

  • Level 2 is a quantitative analysis of
    Capital: Your or your US intermediate holding company's risk-based capital ratio falls below [200-250] basis points above the minimum risk-based capital requirement threshold. / Your or your US intermediate holding company's leverage ratio falls below [75-125] basis points above the minimum leverage requirement.
    Stress test: Under a severely adverse scenario, the results of your US intermediate holding company's supervisory stress test reflect a tier 1 common risk-based capital ratio of less than 5 %.
    Risk management: Your US operations have manifested multiple deficiencies in meeting the risk management requirements.
    Liquidity risk management: Any part of your combined US operations has demonstrated multiple deficiencies in meeting the liquidity risk management standards.

  • Level 3 is a quantitative analysis of
    Capital: For two consecutive quarters, your or your US intermediate holding company's risk-based capital ratio falls below [200-250] basis points above the minimum risk-based capital requirement threshold. / For two consecutive quarters, your or your US intermediate holding company's leverage ratio falls below [75-125] basis points above the minimum leverage requirement.
    Stress tests: Under a severely adverse scenario, the results of your US intermediate holding company's supervisory stress test reflect a tier 1 common risk-based capital ratio of less than 3 %.
    Risk management: Your US operations are in substantial noncompliance with the risk management requirements.
    Liquidity risk management: Any part of your combined US operations is in substantial noncompliance with the liquidity risk management standards.

  • Level 4 is a quantitative analysis of
    Capital: Your or your US intermediate holding company's risk-based capital ratio falls below [100-200] basis points above the minimum applicable risk-based capital requirement threshold. / your or your US intermediate holding company's leverage ratio falls below [50-150] basis points above the minimum leverage requirement.
    Stress tests: None
    Risk management: None
    Liquidity risk management: None


Which early remediation actions exist?

  • Level 1
    Your US operations will be subject to heightened supervisory review.

  • Level 2
    Capital distributions are limited to 50 % of the average net income over the two preceding calendar quarters.
    Your US branch and agency network must remain in a net due position towards your group.
    Your US branch and agency network must maintain a liquid asset buffer in the US sufficient to cover 30 days of stressed cash outflows.
    Average daily total assets and average daily risk-weighted assets of your US operations cannot exceed average daily total assets or average daily risk-weighted assets during the preceding calendar quarter by more than 5 %.

  • Level 3
    You need to put in place a capital restoration plan and, in absence of restoration, effectuate forced asset divestment.
    You cannot grow in the US: Your average daily total assets cannot grow from one calendar year to the next; your average daily risk-weighted assets cannot grow from one quarter to the next. In addition, you are prohibited to open any new branches, agencies, representative offices, or places of business in the US. Finally, you cannot acquire a controlling interest in a new company.
    Your US branch and agency network must remain in a net due position towards your group
    You must maintain eligible assets at least at 108 % of your US branch and agency network's third-party liabilities.
    Additional measures include capital raising requirements, limits on transactions with affiliates, obligatory management changes, prohibition of capital distributions and increased bonus and other compensation.

  • Level 4
    The FED considers to terminate or resolve your combined US operations.



How are assets calculated?

When you calculate the above described thresholds, you take into account the most recent four quarter average.



What else?

“The Board has sought to present the proposed rule in a simple and straightforward manner, and invites comment on the use of plain language.”, writes the FED on page 175 of its proposal. I have two comments:

  • Don't write 300 pages if you want to keep it simple.
  • Why do you repeat yourself several times when presenting the regulatory proposals?

Sunday, January 6, 2013

Doha Bank – A One Stop Financial Service Provider?



Incorporated in 1978, Doha Bank is today the largest private commercial bank in the State of Qatar. It is listed on the Qatar stock exchange.

Doha Bank has branches in Dubai, Kuwait, and Abu Dhabi and representatives offices in Frankfurt am Main, London, Istanbul, Seoul, Shanghai, Sidney, Singapore, and Tokyo.


Financial Performance

In times where most banks suffer, Doha Bank has experienced a good financial performance.









Return on equity is constantly above 15 %
















Doha Bank's return on assets is over 2 %.
















A net profit margin around 50 % and a leverage ratio of currently 7.4 complete the 
financial picture of the bank.




























Likewise, the recent business performance of Doha Bank is remarkable: In 2011, net banking income and net income have grown by 11 and 18 % respectively.







Business Lines

Doha Bank operates in 6 business lines:

Retail Banking Group (RBG)

The retail banking group is meant to “provide the right products to the right customers at the right point of their financial life cycle”.

It focuses on

  • mobile banking and cooperation with mobile phone companies (mobile phone recharge vouchers, bill payment services, etc.),
  • on-line trading marketplaces such as Doha Sooq,
  • co-branded shopping credit cards, and
  • personal loans (cars, education, etc.).

Wholesale Banking Group (WBG)

The wholesale banking group comprises seven primary divisions:

  • Public sector finance
  • Corporate and commercial banking (the “growth engine of the bank”)
  • Small & medium enterprises (working capital finance, corporate term loans, cash management services, and trade financing)
  • Project finance
  • Mortgage finance & real estate services
  • Overseas operations
  • Private banking

Treasury and Investment Group (T&I)

This business line is responsible for selling foreign exchange treasury products and managing the bank's proprietary trading book and asset / liability gaps.

International Banking Group (IBG)

The international banking group

  • facilitates cross-border trade,
  • manages the bank's relationships with (currently 350) financial institutions globally, and
  • arranges loans and participates in syndicated loan facilities.

Islamic Banking

The Islamic banking segment has been discontinued since the end of 2011, following Qatar Central Bank's decision to separate Islamic banking and conventional banking.

Doha Bank Assurance

Established as a 100 % subsidiary, this business line completes the “one stop financial service provider” approach of Doha Bank.



Resources:

  • Doha Bank Annual Report 2011
  • www.dohabank.com.qa