Basel III Reform Updates Webinar - Deloitte
Transcript of Basel III Reform Updates Webinar - Deloitte
Basel III Reform Updates Webinar
26th May 2020
Deloitte Advisory (Hong Kong) Limited
Information Classification: Confidential
For Reference Only
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Our Speakers
Tony WoodAP RA FSI LeaderHong Kong
Tony Wood is the Deloitte Asia Pacific and China Firm Leader for Risk Advisory in Financial Services. He has over 20 years' experience in banking, financial services and consulting. Prior to joining Deloitte, he worked with PricewaterhouseCoopers Regulatory Advisory Services based in Hong Kong and was previously Regional CRO with RBS Group covering 12 countries in Asia Pacific and the Middle East. He has worked on numerous Basel II, II.5 and III implementations, stress-testing exercises, framework development and a broad range of regulatory topics since 2004.
Xiaojing YuRisk Advisory PartnerHong Kong
Xiaojing Yu is a Partner in Risk Advisory at Deloitte China, based in Hong Kong. She has 15 years’ experience in financial services and risk management focusing on strategy, enterprise wide risk management, Basel II and Basel III, regulatory compliance, risk modelling and reporting. With solid advisory experience and banking industry background, Xiaojing has built strong connection with leading financial risk practitioners in Mainland China and Hong Kong.
Nai Seng WongExecutive DirectorSEA Regulatory Strategy Leader Singapore
Nai Seng is a Partner in Risk Advisory / Business Advisory at Deloitte SEA, based in Singapore. He has more than 20 years' experience in regulatory policy, financial stability surveillance, and supervision, covering banks, capital markets, payment systems and technology risk, from the Monetary Authority of Singapore. He led key policy reviews and reform implementation at MAS (Basel II and Basel III, OTC derivatives reforms, resolution policy, securities offering regulations, Take-over Code). He has also led and participated in various international and regional regulatory groupings (eg. FSB, BCBS, EMEAP, SEACEN).
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Our Speakers
Thomas SpellmanRisk Advisory PartnerUnited Kingdom
Tom is a Partner in Risk Advisory and leads the Deloitte Risk and Capital Management team in London. Tom has over 19 years experience working and leading major risk and finance transformation programs at Tier 1 UK and global financial institutions. Tom has significant experience in the design and implementation of IRB programmes. He has also supported major institutions to define and implement supporting systems for risk and finance reporting.
Sinead RothwellRisk Advisory DirectorUnited Kingdom
Sinead is a Director in Deloitte’s Risk and Capital Management team in London. She has extensive experience in delivering major and complex regulatory change projects at a range of financial institutions, from UK challenger banks to G-SIFIs. She specialises in Basel, in particular Credit Risk, and has significant experience in the design and implementation of IRB programmes. Furthermore, Sinead is responsible for coordinating the Global Basel proposition across Deloitte.
Denise LongRisk Advisory DirectorHong Kong
Denise is a Director within the Risk Advisory team and has extensive working experience in risk management and financial advisory. She specializes in risk management, strategy development, process change and product and marketing intelligence. She currently leads the Financial Risk Management area including credit risk, market risk, and liquidity risk management, model risk and data governance. Prior to Deloitte, she worked for Global Systemically Important Banks in Asia and Canada. She has also worked on regulatory affairs regarding capital monitoring and planning.
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Agenda
3:00 PM Introduction
3:10 PM Background of Basel
3:30 PM Global Regulatory Landscape and Market Landscape
3:45 PM Case Studies Sharing
• Case 1: Credit Risk Revision
• Case 2: Output Floor
4:20 PM Q&A
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
© 2020. For information, contact Deloitte China. 5Presentation title
Background of Basel
Basel III Reform Updates Webinar© 2020. For information, contact Deloitte China. 6
The Basel framework has developed over multiple decades, increasing in scope and sophisticationOverview of Basel III Reform Framework
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
• Eligible capital
• Minimum capital requirement
• Counterparty credit risk
• Securitisation
• Credit risk
• Very simple in application
• Easy to achieve significant capital
reduction with little or no risk
transfer
• Much more complex and risk
sensitive
• Three pillars approach
• Differentiates between both
exposures and banks
• Further market risk requirements
• New securitisation framework
• Increased regulatory capital for all
banks
• Enhanced quality of capital
• Additional capital buffers
• Leverage ratio
• Liquidity framework
• Reduced use of internal modelling for
RWA calculations
• More sophisticated standardised
approach for RWA calculations
• Capital floors
• Eligible capital • Eligible capital • Eligible capital • Eligible capital
• Minimum capital requirement • Minimum capital requirement • Minimum capital requirement • Minimum capital requirement
• Credit risk; standardised risk
weightings
• Credit risk
• Counterparty credit risk
• Securitisation
• Market risk
• Operational risk
• Pillar 2: regulatory review
• Pillar 3: market disclosure
• Market risk
• Operational risk
• Pillar 2: regulatory review
• Pillar 3: market disclosure
• Counterparty credit risk
• Securitisation
• Market risk
• Operational risk
• Pillar 2: regulatory review
• Pillar 3: market disclosure
• Counterparty credit risk
• Securitisation
• Market risk
• Operational risk
• Pillar 2: regulatory review
• Pillar 3: market disclosure
• Leverage ratio
• Liquidity framework
• Leverage ratio
• Liquidity framework
• Capital floors
Changing requirement
with increasing capital requirements
Changing requirement
with decreasing capital requirements
No change/
minimal impact
New
requirement
1988 / 1996 Jun 2004
Basel IIIBasel I Basel II
Nov 2009 Dec 2010 Jan 2019
• Credit risk• Credit risk
• Large exposures framework • Large exposures framework
• Market risk
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Basel III Reform was finalised in 2019 to address weaknesses that were revealed by the 2007/08 global financial crisis
Key Features of Basel III Reform
Constrain the use of internally-modelled approaches
Place limits on certain inputs used to calculate capital requirements under the internal ratings-based (IRB) approach for credit risk and remove the use of the internal model approaches for CVA risk and operational risk
Constrain excessive leverage
Introduce leverage ratio to constrain excessive leverage in banking system
Strengthen liquidity level
Introduce LCR and NSFR to strengthen liquidity and funding profiles of banks
Enhance capital buffer
Increase the quantity and quality of capital and introduce macro-prudential buffers
Enhance the robustness and risk sensitivity of Standardised Approach
Streamline the Standardised Approach to improve the comparability of banks’ capital ratios
Reduce excessive RWA variabilityImprove risk capture and risk sensitivity of Standardised Approach while reducing excessive RWA variation across banks by constrained use of internal models
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Basel III Reform Updates Webinar© 2020. For information, contact Deloitte China. 8
The following highlights the most notable Basel III Reform updates on capital calculation such as credit risk approach, Fundamental Review of Trading Book (FRTB), etc.
Highlights of Basel III Reform Updates on Capital Calculation
Revision to credit risk Standardised Approach• Recalibration of risk-weights for exposure to risk classes for jurisdictions in which ratings approach is not
permitted and for any unrated exposures;• Introduced a loan-to-value component, real estate asset class and customer type (i.e. transactor and revolver)
to calculate capital charges for real estate exposures;• Banks are required to conduct sufficient due diligence on an annual basis to avoid reliance on external
ratings.
Constraints on the use of IRB approach for credit risk• Eliminated the use of the A-IRB approach for calculation of exposure to large and mid-size corporates, banks
and other financial institutions;• Increased the use of F-IRB, which the bank should use more supervisory-estimated values, such as LGD, EAD, and
maturity
Revised market risk framework• Stricter guidelines for initial- / re-allocation of instruments between trading and banking books;• Trading desks with supervisory approval to use Internal Models Approach (IMA) must perform P&L attribution
tests on a quarterly basis;• Additionally,banks using IMA are requiredto calculate capitalcharge for risk factors which cannot be modelled
Revised operational risk Standardised Approach• Introduced business indicator component (BIC) which depends on a financial-statement-based proxy for
operational risk and a set of regulatory determined marginal coefficients;• Considered Internal Loss Multiplier (ILM), which is a scaling factor that is based on a bank’s average historical
losses and the BIC
New output floor requirements• Banks using internal models will need to calculate a separate capital charge using the Standardised Approach,
multiplied by 50% in 2023, from which the percentage will be incrementally increased each year, to 72.5% in2028. The higher of the two amounts will be taken as the capital charge
Basel III Reform
Constraints on the use of IRB approach for credit risk
Revised market risk framework
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
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From your understanding, which of the following may have the most significant impact on your institution?
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Poll 1
Revision to credit risk StandardisedApproachA
Constraints on the use of IRB approach for credit risk B Revised market risk frameworkC
Revised operational risk Standardised Approach D New output floor requirementsE
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The Basel III Reform is likely to bridge the gap in RWA densities between sophisticated banks using internal models and simpler banks using the Standardised Approach. A sophisticated bank (such as one that uses internal models extensively) is more likely to find the loss of modelling choices and parameter floors having a more material impact as compared to the new output floor
Capital Impact
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Increasing RWA impact
FXRisk weight multiplier to certain exposures with currency mismatch
STD FLOOR72.5% Output floor (amplified by changes to Standardised Market Risk and SA-CCR)
CREDIT10% CCF on unconditionally cancellable commitmentsCREDIT
Changes in SpecialisedLending IRB Risk Weight calculations (particularly HVCRE)
LEVERAGEChanges to leverage exposure calculations
CREDITLoss of A-IRB on Corporate & Financial Institution asset classes
OPERATIONALRevised SMA approach for Operational Risk
LEVERAGELeverage ratio buffer for G-SIBs
STD CREDITChanges in StandardisedRisk Weights for Sovereigns, Banks & Large Corporates
CREDITChanges in IRB Parameter (PD, LGD) floors
CREDITLoss of Advanced CVA (amplified by transition to SA-CCR)
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• Potential major changes to capital consumption for some businesses and products. Existing capital allocation will need to be revisited
• Banks will need to optimise based on an integrated view of their key performance objectives
Capital impacts
• Capital forecasting and management, stress testing and ICAAP approaches and processes will have to be adapted to the new rules
• Any performance measurement and management metrics that consume RWAs will also need to be amended
• Pricing strategies will need to be considered and amended to take into account the new rules
Capital forecasting and management
• Capital floors will apply at different levels of consolidation
• When combined with entity changes due to IHC and/or ring-fencing requirements, this increases the risk of trapped capital
• As a result, booking models may need to change
Structural and business impacts
• Changes require new data inputs, and subsequently changes data structures significantly
• Two sets of RWA numbers (Advanced and Standardised) to be calculated, reconciled and reviewed for each trade/exposure, where typically only one is calculated now. This could necessitate significant changes to the calculation architecture and monthly reporting processes
• Enhanced external reporting and market disclosures (e.g. Pillar 3)
Data, systems and reporting
Op
era
tio
nal
Stra
tegi
c
The Basel III Reform can significantly change capital consumption, and will result in banks having to operate two sets of calculations and downstream controls and processes in parallel, where they currently only operate one
Strategic & Operational Impacts
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
© 2020. For information, contact Deloitte China. 12Presentation title
Global regulatory landscape
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While global regulators gradually embrace the Basel III Reform, the customization of the Basel III Reform regulations for their local adoption are still in progress
Overview of Global Regulatory Landscape
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
• US Regulators primarily focused on CCAR/DFAST
• Mixed record on adopting Basel III measures
• Aligned with Basel timeline• Focused on regulatory reviews
of outputs and operating models, which is likely to continue with high levels of scrutiny
• Urging banks to conduct assessment and readiness for Basel III
• European Central Bank assessed
Internal Models via TRIM
• However, risk-based capital
framework remains non-
compliant
• Implemented most of the Basel
measures to date and aligned with
Basel timeline for finalised
standards
• Relaxed NSFR for short term loans
of less than 6 months due to COVID
• Kicked off Basel II implementation
in 2007
• CBIRC has consulted a wide variety
of banks and is currently drafting
the Chinese version of Basel III
• Committed to implement
finalisation of Basel III Reform in
line with the timelines proposed
by the Basel Committee
• JFSA has implemented most of the Basel measures to date and is working towards adopting the finalised Basel III standards
• Delayed implementation of NSFR due to COVID
• The Central Bank of Russia is
finalising the draft of Basel III
regulations
• Basel III regulations expected to
be in force in the second half of
2020
• APRA has released
consultations on the Basel III
standards and is expecting it
to be finalised over the next
12 months
EuropeUK
USA
South Africa
Russia
Japan
China
Hong Kong
Australia
Singapore
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The Basel Committee on Banking Supervision (BCBS) announced that it will defer implementation of the revised Basel III standards by one year, to 1 January 2023. While the BCBS delay will come as welcome respite for the banking sector, we do not see this announcement as grounds for a significant deceleration in preparations for Basel III implementation
Implication on Deferral of Basel III Reform Implementation
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Banks Implementation Activity
• Banks that stop now risk losing momentum
• Banks should use the additional year to address pressing strategic and operational challenges:
o Managing cross country differences
o Managing the interplay between models and standardised floors
• Decisions will also need to take account of how the business and risk environments are evolving in reaction to COVID-19 and be robust in the face of implementation demands – in terms of people, models, capital and costs
• Regulators will expect banks to make the most of the extra time, e.g. improving regulatory reporting – where increased transparency, timeliness and accuracy will be vital for the regulatory response to the COVID-19 disruption
• Banks that maintain momentum in their regulatory change programmes will be best placed to benefit most from the extra year
Key Takeaways
• The BCBS extension does not necessarily mean that national and jurisdictional authorities will delay their existing implementation work and consultations on transposing Basel III into their applicable legal frameworks
• Banks should be prepared to see policy proposals on Basel III implementation coming from key public authorities in the near term and ensure that they have sufficient resources available to review the content of the proposals and respond
• These proposals may diverge from the standards set by the BCBS, and not always consistent between jurisdictions
• Banks need to use this extra time to conduct granular impact assessment to gain an early understanding of how the different national variations of Basel III are likely to affect business models across their geographical footprint and help shape the final rules
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Outcome What might actually happen? Regulatory response
Financial resilience is materially impaired
• The key consideration is how far financial resources are depleted
• Capital or liquidity buffers are drawn down significantly, close to Pillar I requirements and/or below Pillar I requirements under stress tests. The depletion in capital may be large enough to cause some small or medium-sized banks to fail
• Under a more severe scenario, capital or liquidity are depleted so badly that it demonstrates that the post-crisis re-regulation did not go far enough
• Under the first outcome, Basel III could see further delay
• Under the second outcome it is clear that policymakers will want to re-regulate but weakened economies may not be able to support higher capital requirements in the short-term. We could see a very fragmented response as opposed to the globally coordinated response after the GFC
• Governments may extend support programmes for banks to continue lending to the economy (e.g. covering losses from payment holidays)
Operational resilience is materially impaired
• So far the system has held up well operationally, but problems could still occur, for example if staff absences continue/increase. Regulators will focus on the root cause
• A potential issue could be firms’ contingency plans for activities that have been outsourced
• Requirements may become more onerous and less flexible, and place greater emphasis on assurance work. We will probably see a delay to the finalisation or implementation of national/regional OpRes frameworks to make sure that they incorporate the lessons learned from this crisis
• Regulators could require banks to simplify complex supply chains and onshore rather than offshore. A prohibition against any outsourcing seems unlikely though
• Contingency planning requirements are likely to be reviewed
Resolution tools do not work
• Components of the resolution toolkit could be found to have shortcomings
• The modified insolvency procedure for banks could be found to be ineffective
• The mechanics of bail-in may not work (for example, if AT1s1 do not trigger, or are not triggered because of a contagion risk)
• In a situation of extreme stress, bail-in of a G-SIB may be found to be unworkable
• For modified insolvency procedure banks, decision that bail-in best way forward
• If bail-in does not work as expected, banks might find themselves required to hold even higher levels of CET1. Beyond this, there may be renewed efforts to simplify and reduce size of activities of G-SIBs (less acceptance of steps towards resolvability can mitigate the risks of size and complexity). “Breaking up the banks” back on the political agenda
Customers suffer material detriment
• Customers could be assessed to have been disadvantaged by action taken during the crisis e.g. on loan moratoria
• Banks could exploit the current circumstances to their financial benefit and to the detriment of customers, especially vulnerable ones
• Banks could take a narrow, “legalistic” view of documentation (e.g. insurance policy exclusions, reliance of risk disclaimers in advice offered), raising questions about their culture and undermining confidence in statements about their social purpose
• Higher fines, much higher redress/compensation pay-outs/greater focus on firms’ culture/more draconian conduct regulation/possible “duty of care” in respect of retail investors in countries where this does not already exist
We have considered various possible outcomes of the COVID-19 pandemic and how they will affect regulatory responses
Potential Scenarios and Regulatory Responses
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
1 Additional Tier 1 capital
© 2020. For information, contact Deloitte China. 16Presentation title
Market landscape
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China
The Basel III Reform leads to a shift in market demand globally. We have summarised industry perspectives across several regions as below
Summary of Basel Regional Views (1/3)
• Wide variety of clients with differing degree of maturity with regard to Basel topics – some are fully compliant as an F-IRB bank, some are establishing working groups to manage new Basel requirements (both at Group and country levels)
• Some struggles on which approach is optimal for certain portfolios
• Challenges with resources given a number of regulatory / compliance requirements are having similar implementation timeline
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Hong Kong
• Wide variety of clients, including nationwide, city commercial and major rural commercial banks, have completed Basel II Pillar I. Many of them also completed Pillar II and Pillar III
• Six big banks already received conditional approval for Basel II Pillar I compliance from regulator in 2014
• In terms of system vendors, some banks are revising their IT systems to calculate the regulatory capital and RWA
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The Basel III Reform leads to a shift in market demand globally. We have summarised industry perspectives across several regions as below
Summary of Basel Regional Views (2/3)
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Japan
• Wide variety of clients with differing degree of maturity with regard to Basel topics. There are 3 tiers of maturity within SEA
• 1st tier is Singapore with sizeable local banks and large global bank branches. Many of these would be following Basel requirements as per Group level
• 2nd tier includes Indonesia, Malaysia and Thailand with large regional banks as well as local banks. Most (especially smaller banks) are reporting with Standardised Approach
• 3rd tier includes CLMV countries where banks are implementing Basel II; or regulators are in the process of adopting or planning to adopt Basel III
SEA
• Wide variety of clients (leading global financial institutions, local banks and public sector financial institutions) with differing degrees related to Basel topics especially for the Basel III regulatory reform
• Challenges on quantification of risk components’ estimates under Basel F-IRB and A-IRB
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Central Europe
The Basel III Reform leads to a shift in market demand globally. We have summarised industry perspectives across several regions as below
Summary of Basel Regional Views (3/3)
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
• Seven G-SIBs (UK, CH, Netherlands) applying modelled approaches subject to SA output floor
• In addition, sophisticated foreign banks, tier 2 regional banks applying modelled and Standardised Approach
• Majority of banks subject to EU regulatory framework; CH regulatory framework aims at Basel pure implementation; development of UK framework yet unclear
North and South Europe
• Wide variety of clients with differing degree of maturity with regard to Basel topics
• Smaller less sophisticated institutions focusing on rules interpretation and compliance for CRR II only (esp. SA-CCR)
• More sophisticated institutions starting to think about capital optimisation, and IT and operational efficiency
© 2020. For information, contact Deloitte China. 20Presentation title
Case 1: Credit Risk Revisions
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Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Poll 2
Which of the following would your institution adopt for the calculation of credit risk capital charge?
Standardised Approach A
Internal Ratings-based Approach B Mix of Standardised Approach and Internal Ratings-based ApproachC
Simplified Approach D
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The BCBS’s objectives in the revision Content of the final standards agreed
The revised Standardised approach will deliver more risk sensitivity overall and lower capital requirements in some areas
Credit Risk – Standardised Approach
• A more risk-sensitive Standardised Approach
• Reduced reliance on external ratings
• NO CHANGE to Sovereign asset class
• MORE RISK SENSITIVE approaches to most asset classes:
– MORE GRANULAR risk weight tables for some asset classes (e.g. 6 risk weight categories for residential mortgage loans vs. 1 at present)
– LOWER risk weights for low-risk exposures for many asset classes (e.g. lowest risk weight for residential mortgages 20% vs. 35% at present)
– HIGHER risk weights for higher-risk exposures for many asset classes (e.g. highest risk weight for residential mortgages 70% (for LTV 100% or higher) vs. 43% at present)
• REAL ESTATE asset class created. Assets to be classified as Residential or Commercial, and within each sub-set, assets to be further split by whether the loan repayments are dependent on income generated by the underlying property or not. Dependent property loans attract higher risk weights
• TWO OPTIONS for risk weighting Residential Mortgages – whole loan and split loan – at regulatory discretion
• REDUCED reliance on external ratings: non-ratings-based options for banks and corporates
• NEW RISK WEIGHT for SME exposures – 85%
• NEW CATEGORY of Transactor for QRRE attracts risk weight of 45%; must have repaid borrowings in full for 12 consecutive months. All other QRRE borrowers are Revolvers, risk weight of 75%
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Basel III Reform Updates Webinar© 2020. For information, contact Deloitte China. 23
The revisions to IRB will deliver a more constrained modelled approachCredit Risk – IRB Approach
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
The BCBS’s objectives in the revision Content of the final standards agreed
• A more constrained internal ratings based regime
• Less scope for differences in risk weights unless these reflect differences in risk taken by banks
• NO CHANGE to Sovereign asset class
• REMOVAL of the 1.06 multiplier in the RWA equation
• WITHDRAWAL of IRB approaches for Equity asset class
• RESTRICTION of IRB approach to Foundation IRB for Bank and Large Corporate asset classes
• INCREASE in PD floor from 0.03% to 0.05% for all portfolios
• CHANGES to LGD values for Foundation IRB
– REDUCTION in unsecured LGD for non-bank exposures to 40%
– REQUIREMENT to haircut all non-financial collateral by 40%
– LOWER LGD values achievable: 0% for Financial collateral; 20% for receivables and all real estate; 25% for other physical collateral
– REMOVAL of the minimum collateral cover requirement
• CHANGES to LGD values for Advanced IRB
– EXPOSURE-LEVEL MINIMUM LGDs: 0% for Financial collateral; 10% for receivables and all real estate; 15% for other physical collateral; 25% for unsecured
• CHANGES to EAD values for IRB approaches
– MINIMUM conversion factor of 10% for unconditionally cancellable facilities
– MINIMUM EAD for Advanced IRB: drawn amount plus 50% of the Standardised CCF for the facility type
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New rules bring F-IRB and A-IRB closer together for well-collateralised loans, raising a question about whether achieving A-IRB approval is worth the additional cost
Wholesale Example: Changes to F-IRB LGDs (1/2)
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170
Collateral Cover (%)
F-IRB LGD current F-IRB LGD New A-IRB Floor (new)
LGD
Ach
ieva
ble
LGD for Other Physical Collateral
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Reduction in the unsecured LGD to 40% from 45% for non-bank exposures, combined with the elimination of the 1.06 multiplier, lead to lower risk weights
Wholesale Example: Changes to F-IRB LGDs (2/2)
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Non-bank Unsecured Risk Weights
25.0%
50.0%
75.0%
100.0%
125.0%
150.0%
175.0%
200.0%
225.0%
250.0%
275.0%
RWA current RWA new
0.0%
Basel III Reform Updates Webinar© 2020. For information, contact Deloitte China. 26
2.1% gross increase in risk weight; 16.5% proportional increaseEffect of 3-5bps PD Shift and F-IRB LGD Change
17.47%
0.87%
2.18%
15.31%
5.21%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Start remove 1.06 multiplier Base PD 0.03% to 0.05% Unsecured LGD 45% to 40% End
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Unsecured 3bps PD loan (F-IRB)
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15.8% gross decrease in risk weight; 16.1% proportional decreaseEffect of F-IRB LGD Change
82.06%
5.54%10.26%
97.86%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Start remove 1.06 multiplier Unsecured LGD 45% to 40% End
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Unsecured 1.0% PD loan (F-IRB)
© 2020. For information, contact Deloitte China. 28Presentation title
Case 2: Output floor
Basel III Reform Updates Webinar© 2020. For information, contact Deloitte China. 29
• CALIBRATION at 72.5% of the output of Standardised Approach. Set between the 70% to 75% range discussed in the previous year of negotiations
• AGGREGATE level application meaning that the output floor will be set at 72.5% of the RWAs produced by Standardised Approach across the entire balance sheet (i.e. credit risk, market risk, CVA risk, operational risk together)
• APPLICATION from 1 January 2023
• PHASE-IN PERIOD of 5 years running to January 2028
The BCBS agreed the calibration and phase-in of output floors after more than a year of stalled negotiations. The output floor will be introduced in 2023 with annual incremental increases until 2028
Output Floors
Year Output floor
2023 50%
2024 55%
2025 60%
2026 65%
2027 70%
2028 72.5% (steady state calibration)
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
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The BCBS’s objectives in the revision Content of the final standards agreed
• To calibrate an output floor for RWAs based on Standardised Approach
• Meant to set a lower limit on differences in RWA between banks using modelled approaches and those using Standardised
• Replaces the Basel I floor, which many banks and jurisdictions no longer apply
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Floor operates at the aggregate level, across all risk typesOperation of the Output Floor
Source: Basel Committee on Banking Supervision: Finalising Basel III In brief
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
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The output floor at work
100
80
60
40
20
0
Example additional RWAs needed under output floor
72.5%
RWAs Output floor
With Standardised Approach
With internal models
• The revised output floor limits the amount of capital benefit a bank can obtain from its use of IRB approaches, relative to using the Standardised Approach
• Banks’ calculations of RWAs generated by internal models cannot, in aggregate, fall below 72.5% of the risk-weighted assets computed by the Standardised Approach. This limits the benefit a bank can gain from using internal models to 27.5%
• Standardised RWAs must be calculated for all portfolios
• Modelled approaches for credit risk, operational risk, and market risk are all affected by the reform
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Deloitte has done some analyses based on simulated Pillar III data to show implications of Basel III rules for banks with different business models
Case Study - Financial Impacts Vary Given the Business Mix and Current Approaches
1
Global IRB bank• Significant exposures across Corporate and Retail• Large Derivatives book• Operating across multiple geographies
2027(70% of STA)
Revised IRB / F-IRB rules shifts RWA closer to STA
~20% increase Shift to F-IRBfor large Corporates and
Banks (LGD increases)
2
Large National bank• Substantial proportion of exposure to Retail mortgages (IRB)• Limited revolving Retail portfolios (Standardised Approach - STA)• National exposures
2026(65% of STA)
- proportional exposure to mortgages
De minimisLimited impact of IRB on Retail
mortgages
Output floorBiting due to Standardised
Retail mortgages
3
Small Standardised bank• Retail oriented (substantial buy-to-let mortgages)• All exposures under the STA (no IRB)
n/aFully STA
n/a STA increasesin Retail mortgages
4
Standardised to IRB bank• Primarily Retail with some Corporate exposures• Currently on the STA with planned application for IRB Permission
2024(55% of STA)
High LTV exposures
n/aCurrently STA
Output floor(relative to new STA)
Bank business mix Output floor bites IRB increases Biggest RWA driver
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
© 2020. For information, contact Deloitte China. 32Presentation title
E-Learning Services
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Xiaojing YuRisk Advisory Partner
+852 2238 7338 [email protected]
Deloitte offers an e-learning training module, which covers various market topics such as FRTB, output floors, credit risk changes, SA-CCR and the leverage ratio. The training module provides more detailed information related to Basel III Reform. For more information, please contact us
E-Learning Services
Tony WoodRisk Advisory Partner
+852 2852 6602 [email protected]
AP RA FSI Leader
Basel Experts
Denise LongRisk Advisory Director
+852 2238 7050 [email protected]
Overview of Operation Risk
Regulatory Capital: Measurement Approaches
Regulatory Capital: A New Approach
Principles for the Sound Management of
Operational Risk
Approaches to Managing Operational Risk
Lessons Learned from Control Failures
Operational Risk
Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
Welcome to Basel III Reform Training – Operational Risk
In this module, you will learn about definition, operational risk categories, regulatory requirements….
Help Menu Glossary
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Questions?
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Backgroundof Basel
Global regulatory landscape
Market landscape
Case 1: Credit Risk Revisions
Case 2: Output floor
E-Learning Services
Q&A
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