- Standardised Approach to Credit Risk
- IRB (Internal Ratings Based Approach)
- FRTB (Fundamental Review of Trading Book)
- Capital Output Floor
- Operational Risk
- CVA (Credit Valuation Adjustment)
- Legislation Timelines
- What are the key changes to this legislation?
- What should financial institutions be doing at this stage?
- How can EY help
- Contact us
Standardised Approach to Credit Risk
- The revised Basel rules introduce a number of changes on determining how institutions will determine the exposure value of off-balance sheet items and commitment on these items
- Introduction of two new credit conversion factors (CCFs) of 40% and 10% respectively, thereby removing the 0% CCF and only allowing its application in certain exemptions
- Significant change to Real Estate exposures to increase the granularity with regard to inherent risk posed by different types of real estate based on (Acquisition, Development and Construction) ADC and non-ADC e.g.; introduction of new IPRE and non-IPRE classifications.
- Exposures to corporates now subject to more granular risk weightings based on external ratings
- Project finance, object finance and commodities finance exposure classes are introduced under specialised lending exposures, in line with the IRB approach
- Revised amendments to introduce a preferential risk-weight treatment of 45% for revolving retail exposures that meet a set of conditions of repayment
- New risk-weight multiplier requirements for unhedged retail and residential retail exposures to individuals where there is a currency mismatch between the currency of denomination of the loan and that of the obligor’s source of income
- Revised risk weights for Equity exposures; like less risky assigned with 250% and longer term and speculative investments with 400%
FRTB (Fundamental Review of Trading Book)
- Revised FRTB standards introduced and implementation of binding capital requirements under FRTB framework to replace current market risk framework
- Clarity provided on the definition of trading desk
- Revision of criteria used to assign positions to the trading book and non-trading book (banking book)
- Further specifications provided on conditions used for reclassifying an instrument between the two books
- Amendments to clarify the treatment of foreign exchange vega risk factors, and adjusted formula for vega risk sensitivities
- Modifications to introduce a lower risk weight for the commodity delta risk factor related to carbon trading emissions
- Replacement of current Internal Model Approach (IMA) by the Alternative Internal Model Approach (A-IMA)
- Further clarity provided on the conditions that institutions must comply with in order to be granted permission to use the A-IMA for the calculation of own funds requirements for market risk
- Amendment to clarify the value of correlation parameters
- Clarity provided on responsibilities of the risk control unit and the validation unit with respect to the risk management system
- Removal of the advanced measurement approach (AMA) and introducing a single non-model-based measurement approach (Standardised Measurement Approach, SMA)
- The new approach aims to tackle to weaknesses in previous approaches, while also improving the comparability of results across institutions
- The new approach is based on a Business Indicator Component (BIC) that the EC incorporates
- The calculation of the Business Indicator is based on an interest component, a financial component and a service component. A 3-year average is used for all components
- The EC approaches do not further consider historical operational losses. Hence, as a much anticipated development, the operational risk internal loss multiplier (ILM) element is effectively set at 1
- The Internal Loss Multiplier is based on historical loss data from the previous 10 years
- Capital requirements are calculated by multiplying the Business Indicator Component by the Internal Loss Multiplier
- Institutions will have to disclose historical loss data and maintain a loss data set
- Requirement to periodically review the quality of the loss data set
What should financial institutions be doing at this stage?
We have developed a three-phase framework for implementing the new CRDVI/CRRIII requirements which utilises our experience in regulatory change and considers the full institution wide impact of the new CRRIII & CRDVI requirements. Utilising this phased approach, and setting pre-defined outputs, will provide your organisation with a clear roadmap for successful regulatory implementation.
Ideally by now, banks should have completed the article interpretation and impact assessment highlighted.