Increase risk sensitivity by basing risk weights on risk drivers instead of external ratings
Maintain simplicity of implementation and avoid reliance on internal modelling know-how
Reduce national discretions to increase comparability of capital requirements
Strengthen the link between standardised and internal model based approaches to allow for meaningful (and mandatory) capital floors
Reintroduction of the use of external ratings, in a non-mechanistic manner, for exposures to banks, corporates and Specialised Lending.
Modification of the proposed risk weighting of real estate loans, with the loan-to-value ratio as the main risk driver.
Proposals for exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items.
Credit risk– constraints on use of internal model approaches (BCBS 362 & 424)
Model parameters can be estimated sufficiently reliably for regulatory capital purposes:
Adoption of exposure-level, model-parameter floors to ensure a minimum level of conservatism.
Provision of a greater specification of parameter estimation practices to reduce variability in RWA.
Model parameters can not be estimated sufficiently reliably for regulatory capital purposes:
Remove the IRB approach for the following portfolios: Banks and other financial institutions, Large corporates and Equities.
Elimination of the internal models approach for CVA (IMA-CVA)
Revisions to the securitisation framework (BCBS 374 & 424)
A revised hierarchy of three approaches to reduce reliance on external ratings (SEC-IRBA, SEC-ERBA, SEC-SA).
Reduced complexity. The revised hierarchy relies on the information that is available to the bank and on the type of analysis that it can perform on a specific transaction
Reduction of mechanistic reliance on external ratings
Strengthening of risk sensitivity. The capital requirements have been significantly increased, commensurate with the risk of securitisation exposures.
Introduction of minimum risk weight of 15% for securitisations
Introduction of minimum risk weight of 100% for resecuritisations
Introduction of caps to risk weights of senior tranches and originators
Counterparty credit risk
SA counterparty credit risk (BCBS 279 & 424)
A revised approach which captures the exposure at default of the counterparty with three factors: Alpha, replacement cost, potential future exposure.
Replacement for existing current exposure approaches (mark-to-market method, standardised method)
EAD is to be calculated separately for each netting set.
EAD of a margined netting set cannot be higher than the netting set‘s EAD without taking into account the margin agreements.
Fundamental review of the trading book (BCBS 457)
A revised boundary between the trading book and banking book.
A revised risk measurement approach and calibration.
The incorporation of the risk of market illiquidity.
A revised standardised approach that is sufficiently risk-sensitive to act as a credible fallback to internal models, and is still appropriate for banks that do not require sophisticated measurement of market risk.
A revised internal models-based approach, encompassing a more rigorous model approval process, and more consistent identification and capitalisation of material risk factors.
A strengthened relationship between the standardised and the models-based approaches. A closer alignment between the trading book and the banking book in the regulatory treatment of credit risk.
Revisions to operational risk (BCBS 355 & 424)
Application of Advanced Measurement Approach (AMA) will be abandoned
Introduction of Standardized Measurement Approach (SMA) as the only approach for operational risk
The SMA combines the Business Indicator (BI), a simple financial statement proxy of operational risk exposure, with bank-specific operational loss data.
Business volume is only one factor that influences exposure to operational risk.
Historical loss experience will be regarded as a relevant risk indicator of future operational risk loss exposure
Introduction of a loss component
Review of the CVA risk framework (BCBS 325 & 424)
Adaption of market risk framework specified in FRTB (also two approaches)
Named as such to reflect cAvailable to banks that satisfy several fundamental conditions related to calculation and risk management of CVA.
Consistency with proposals under market risk framework (FRTB)
Designed for banks being capable to calculate CVA sensitivities to large set of risk factors.
BA-CVA consists of single Basic CVA approach (formula-based) and is an improved version of current standardised CVA method.
Step-in risk (BCBS 398)
New concept where step-in risk is the risk that a bank may provide financial support to an entity beyond or in the absence of any contractual obligations, should the entity experience financial stress.
Focus is on identification of unconsolidated entities (which are out of the regulatory scope of consolidation), to which a bank may nevertheless provide financial support, in order to protect itself from any adverse reputational risk stemming from its connection to the entities.
Banks to prepare descriptions of the relationships and of the indicators that characterise such relationships between banks and shadow banking entities. Significant step-in risk exists when one of the step-in indicators, which range from capital ties, sponsorship, provision of financial facilities, decision making and operational ties, exists.
The step-in risk assessment could eventually lead to the regulatory consolidation of the entity identified.
Capital floors (BCBS 306 & 424)
Capital floors are mainly supposed to reduce model risk, increase comparability of RWA, and limit the scope of action.
The revised capital floors will be based on the revised standardised approaches for credit, market and operational risk which are currently discussed by BCBS. This means a challenge to simultaneously implement standardised approaches and internal models
Exact configuration of capital floors yet to be determined:
Alternative 1: introduce a risk-category based floor for each major risk category (a separate floor for each major risk category, such as credit risk, market risk and operational risk)
Alternative 2: introduce an aggregate RWA-based floor (a floor based on the sum of the RWAs of all risk categories).
Interest rate risk in the banking book
Interest rate risk in the banking book (BCBS 319 & 368)
Introduction of a uniform approach for measuring the extent IRRBB could provide better comparability (Standardised Pillar I approach).
As a complement to the Pillar I approach, the bank’s internal measurement method for determining the interest rate risk is allowed after approval of the supervisor.