Basel 4: The way ahead

Basel 4: The way ahead

In December 2017, the Basel 4 standards were finalised.

Andrzej Gałkowski KPMG in Poland

Partner, Head of Banking

KPMG in Poland

Woman paddling a sea kayak

In December 2017, the Basel Committee on Banking Supervision (BCBS) finalised the Basel 4 standards, leading to intense debate about how these would affect risk weighted assets and the resulting amount of regulatory capital banks will be required to hold under the new rules. To assess the full impact of these final rules, we are leveraging the insights of our global network to publish a series of articles that focus on specific areas affected by the standards.

Operational Risk: The new Standardised Approach

With the final Basel 4 standards, the BCBS introduced a new single non-model based method for the calculation of operational risk (OpRisk) capital called the Standardised Approach (SA). This replaces three existing approaches under Pillar 1 and is due to apply from 1 January 2022. But does it also pose the risk of reducing incentives for robust risk management within the business due to the lack of risk sensitivity?

Market Risk: Is the output floor a game changer?

The new capital requirement standards issued by the Basel Committee have several implications for market risk when implemented on 1 January 2022. The confirmation of an output floor will potentially constrain the benefits from the use of internal models when determining a bank's risk weighted assets (RWAs). Leaving aside supervisory expectation and guidance on the use of Internal Model Approach (IMA) and the 'non-capital' benefit, is the output floor the final nail in the coffin for the IMA or are there still benefits for banks moving to an IMA for market risk?

CVA Risk: A model-based standard approach

The set of final standards agreed by the Basel Committee in December 2017 for credit risk, operational risk and the output floor also included revised minimum standards for the capital treatment of credit valuation adjustment (CVA) risk. In this article, we discuss the two new approaches replacing the current standard; the Basic Approach (BA-CVA) and the Standardised Approach (SA-CVA). What impact will these have on banks' capital, data and systems and how will they be implemented across the European Union?

Credit Risk - the Standardised Approach

As part of the final Basel 4 standards, the Basel Committee finalised its reforms for the Standardised Approach (CR-SA) and the Internal Ratings Based approach (CR-IRB) for the calculation of risk weighted assets for credit risk. The revised CR-SA largely follows the proposals set out in the BCBS's December 2015 consultation paper. However, under the revised CR-SA the recalibration of risk weights in most asset classes will have a direct impact on banks’ capital requirements.

Credit Risk - IRB approach

This companion paper to our earlier CR-SA article discusses the use of the Internal Ratings Based (IRB) approach for credit risk. The new rules regarding the use of the IRB approach for the calculation of risk weighted credit exposures represent a further erosion of the benefits of internal models. Basel 4 is expected to force banks to re-examine their portfolio management practices to reflect changes to their capital requirements. In particular banks using the IRB approach should consider the impact to their risk exposure calculations, processes, data and systems.

Basel 4: Piecing the jigsaw together

The final article in our series brings together the full analysis of the series; the new standardised and internal ratings based approaches to credit risk, the impact of the output floor on market risk, operational risk, and credit valuation adjustment risk. We discuss banks' strategic options to address Basel 4, which are likely to focus primarily on adjusting their product and client portfolios, and on achieving operational efficiencies.

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