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Credit and Capital: 2023 Regulatory Challenges

Insights on capital shifts, credit risk sizing and concentration, and effective compliance

Safety and soundness will continue to be paramount assessment, particularly amid changing economic environment—expect capital changes, a focus on credit risk and the need to demonstrate compliance with key effective dates.

Explore here insights on Credit and Capital from the KPMG report Ten key regulatory challenges of 2023.

Developments on the prudential front will quicken with the release of the final Basel III ‘endgame’ rule draft. Along with this, updates to the capital and leverage ratio regimes for large banks are also likely to be acted upon in 2023. Supervisory expectations on climate risk will continue to intensify related to data and risk management practices, while societal elements such as fairness and inclusion will gather pace, with modernization of the Community Reinvestment Act likely.

Christopher Wolfe

Managing Director, North American Banks, Fitch Ratings


Capital shifts

The federal banking agencies (FRB, OCC, and FDIC) have indicated they will examine capital tools and how those tools support the resilience of the financial system, both at individual financial institutions and in combination. The FRB has stated that when calibrating capital requirements, the agencies will work to “minimize unintended consequences, limit opportunities for gaming, and avoid excess compliance costs that do not result in risk reduction.”

Capital changes being considered for large banking organizations include:

  • Potential adjustments to the supplementary leverage ratio, countercyclical capital buffer, and stress testing as part of an “holistic review” of the capital framework to ensure that it “evolves with new and emerging risks and remains responsive to macroeconomic conditions, market structure, and financial activities.”
  • Increased demand for supplementary analysis and runs.
  • Enhanced regulatory capital requirements to align with the final set of Basel III standards, commonly referred to as “Basel IV,” issued by the Basel Committee in December 2017. A proposal is expected to be released early in 2023 with implementation of final rules anticipated for January 2025.

In addition, persistent inflation, recessionary trends, and changing interest rates could drive strategic capital shifts, pushing companies to consider:

  • Robust and dynamic rate analysis to changing rate environment and economic indicators.
  • The use of analytics to guide decisions while considering fairness and impacts (e.g., lending impacts of higher interest rate environments to vulnerable populations).


Credit risk sizing and concentration

Changing economic conditions and the ability of the financial service sector to quickly measure, assess and factor changes into business processes will be a continuing focus for the regulators relative to credit risk sizing and concentration risks.  Specific areas of focus will include:

  • Climate Risks: Increasingly robust quantification of financial and non-financial climate risks (consistent with stress testing and capital models/standards).
  • Concentration Risks: Portfolio concentrations deemed potentially “higher risk”, including CRE (notably office space, hotels, retail), leveraged lending, and digital asset holdings.
  • Off-balance Sheet Risks: Reassessment to areas such as unfunded loan commitments, lines of credit, credit derivatives, foreign exchange, and cash management services.
  • Subprime / Vulnerable Populations: Impacts of decisions around credit, servicing, and collections across consumer groups, inclusive of credit decisioning, pricing, servicing, collections, and exceptions management.


Effective compliance

Regulators will be looking for companies to demonstrate compliance on several examination priorities, including LIBOR conversion, resolvability, and liquidity.

  • LIBOR: Given upcoming LIBOR cessation dates, companies should anticipate an increase in examinations and enforcements.
  • Resolvability and resolution planning (or “living wills”), including:
    • New focus on resolvability of domestic systemically important financial institutions (DSIBs), including consideration of more stringent requirements.
    • Enhanced supervisory expectations (FRB and FDIC).
    • Increasing examination findings and enforcement.
  • Liquidity, including:
    • Adequacy of liquidity position, and the effectiveness of risk management and stress testing.
    • Reporting, stress testing, and early warning indicators.

Call to action: Credit and Capital

  1. Conduct analytics to assess exposure to rate index tied loans
  2.  Assess or reassess the validity of credit rating models and demonstrate/document adherence to risk rating policies.
  3.  Assess CRE office exposure to increasing vacancies and likely declining collateral values based on rising cap rates. 
  4.  Prepare and quantify new capital requirement impacts
  5.  Improve operational efficiencies (speed/cost) for stress test runs
  6.  Softly land into the next EPS requirements

Dive into our thinking :

Ten Key Regulatory Challenges of 2023

Read our report for client perspectives, regulatory recaps, and actionable steps to help mitigate risk.

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