The Basel III reforms were published by the BCBS in December 2017. Basel III: Finalising post-crisis reforms aims to refine the calculation of risk-weighted assets (RWAs) 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
In addition changes were made to the categorisation of exposures, and moving forward IRB banks will 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 five years, starting at 50% in January 2022 and reaching 72.5% by 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 and IRB changes ahead of strategic system updates to streamline implementation efforts.
4most have a wealth of experience in dealing with both standardised an IRB approaches, as well as how the introduction of IFRS 9 ECL provisions impact regulatory capital, forecasting and stress testing approaches. Our expertise can assist in detailing the business and system changes required for compliance, such as:
Impacts on business plans: changes to both standardised and IRB approaches means 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. 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 and 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 and evidencing use of regulatory capital outputs in business plans, forecasts and stress testing are key to pillar 2 supervisory reviews.