Basel III reforms were published by the BCBS in December 2017 (Basel III: Finalising post-crisis reforms) with the aim of restoring credibility in the calculation of risk-weighted assets (RWAs). The updates address this in four main ways:
- Enhancing risk sensitivity of the Standardised approach
- A-IRB option removed for exposures to banks, or corporates with revenue > € 500m
- IRB aggregate output floor set at 72.5% of the updated Standardised calculation
- G-SIB leverage ratio buffer set at 50% of the risk-based capital buffer
Changes involve updates to the categorisation of exposures and IRB banks will also be required to disclose Standardised RWA alongside modelled IRB values. The bulk of the reforms become effective on 1st January 2022 with the IRB output floor phased in over 5 years, starting at 50% in January 2022 and reaching 72.5% at January 2027.
Timely implementation is key to understanding how reforms will impact capital and compliance costs of current and future business plans. 4most can advise and support tactical implementation of both Standardised & IRB changes ahead of strategic system updates to streamline implementation efforts.
4most have a wealth of experience in dealing with both Standardised & IRB approaches, as well as how the introduction of IFRS 9 ECL provisions impact regulatory capital, forecasting & stress testing approaches. Our expertise can assist in detailing the business and system changes required for compliance:
- Impacts on business plans: changes to both Standardised & IRB approaches mean that the evolution of exposures needs to be understood to form an ongoing view of RWA impacts
- Data requirements: exposure categorisation requires historical as well as current data, and due diligence and consistency of data is key to compliance
- Leveraging existing processes: regular affordability reviews are crucial to classification of mortgage assets under both the Standardised & IRB approaches
- EU prudential legislation: EBA guidance, CRR II & CRD IV updates need to be implemented ahead of Basel III reforms and 4most can advise on implementation with future requirements in mind
- Governance framework: embedding & evidencing use of regulatory capital outputs in business plans, forecasts and stress testing are key to Pillar 2 supervisory reviews.