DOCSLIB.ORG

Fundamental Review of the Trading Book (FRTB) | Accenture

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Fundamental Review of the Trading Book (FRTB) | Accenture FROM THEORY TO ACTION In January 2016, the Basel Committee on Banking Supervision (BCBS) published final rules for the market risk framework for capital requirements. The BCBS proposed the end of 2019 as a compliance deadline for banks with a significant presence in capital markets.1 The new rules – known as Fundamental FTRB encompasses a revised internal Review of the Trading Book or FRTB – are model approach characterized by a shift designed to address Basel 2.5 issues from Value-at-Risk (VAR) to the Expected such as the under-capitalization of the Shortfall (ES) measure of risk, for a better trading book, capital arbitrage between reflection of “tail risk” and capital adequacy banking and trading books, and internal during periods of significant financial risk transfers. Through the FRTB rules, market stress.3 BCBS is seeking, for example, to establish a more objective boundary between the trading book and the banking book, and to eliminate capital arbitrage between the regulatory banking and trading books.2 2 FUNDAMENTAL REVIEW OF THE TRADING BOOK (FRTB) CHALLENGES TO FRTB IMPLEMENTATION Accenture believes that adoption of the FRTB • Additional investment in technology rules presents banks with major challenges infrastructure for risk calculation. in areas related to business operations and infrastructure provisioning. According FRTB rules require banks to strengthen to our analysis and estimates we expect: their existing market risk infrastructure and overall technology capabilities, with • Significant increases (as much as additional computational capacity to 40 percent) in market risk capital support calculations as required under new requirements; capital requirements. Banks should also plan for additional complexity in operations and • Higher costs for rules implementation processes due to changed desk structures programs – ranging from $100 million and should undertake the standardization to $250 million for large banks; of data sources to support these changes. • Large increases in Business as Usual (BAU) costs due to desk level requirements; and Figure 1. Expected FRTB Timeline Q2Q3 2019 Supervisor approvals Q4 2017 Advanced implementation DEC 2019 of standardized approach Compliance and internal model deadline approach components to be completed Q4 2016 Q2Q3 2018 Project plan, gap analysis Production parallel and program funding run of FRTB to begin to be completed Q2 2017 Foundational components of strategic market risk infrastructure under implementation Note: Industry participants are in discussion with national supervisors and the BCBS around the compliance timeline for FRTB. This may lead to the compliance deadline moving beyond December 2019. Source: Minimum capital requirements for market risk, BCBS, January 2016 and Accenture estimates. 3 FUNDAMENTAL REVIEW OF THE TRADING BOOK (FRTB) The BCBS recommended deadline of Data requirements and risk December 31, 2019 may not seem imminent, measures at desk level but the journey to compliance is not easy. Banks should begin to address their FRTB FRTB rules are explicit in proposing implementation strategy immediately and the reporting structure of market risk plan for implementation issues going forward. to management and regulators would be checking this at the trading desk New rules affect these key areas: level.6 As we see it, banks would also need to obtain the data and run their P&L (profit and loss) attribution test risk calculations at a trading desk level and to adjust their data sourcing and P&L attribution test helps evaluate the calculation strategies accordingly. efficiency of the internal models and their ability to capture all the relevant For banks, major areas of focus include risks impacting the portfolio. This is strengthening existing market risk a new requirement and each trading infrastructure and technology capabilities; desk must independently pass this test. positioning additional computational If a desk experiences breaches four capacity to support FRTB calculations; or more times, then it will be put on and planning for additional complexity standardized approach methodology.4 in operations and processes due to changes in their desk structures (although Risk factor eligibility (modelable we believe that some banks may seek vs non-modelable) to incorporate this into ongoing Volcker Rule implementation activities) and Each of the risk factors which banks model the standardization of data sources. will need to undergo an eligibility check, meaning that the banks will need to obtain As shown in Figure 2, a majority of FRTB real prices for them.5 With this measure, rules have a direct or indirect impact we believe that BCBS aims to strengthen on banks’ data management strategies. the internal models to include only those Solving for data challenges would be risk factors which would have consistent a top priority as banks mobilize their interpretation by the banks. This will also resources in their efforts to comply. eliminate any ad-hoc risk factor inclusion to help reduce the capital impact. 4 FUNDAMENTAL REVIEW OF THE TRADING BOOK (FRTB) Figure 2. FRTB Impact Analysis Framework 1. TRADING BOOK BOUNDARY 2. STANDARDIZED APPROACH 3. INTERNAL MODEL AND RISK POLICY APPROACH 2.1 Sensitivity 2.4 Delta, Vega 3.4 Default 1.1 Trade and Bank 1.4 Covered 3.1 Risk Based Method and Curvature Risk Charge Book Boundaries Instruments Factor Analysis (SBM) Calculation (DRC) – IMA 3.2 Expected 3.5 Non-Modelable: 1.2 Trading 1.5 Risk 2.2 Establish 2.5 Default Risk Shortfall Capital Add-Ons Desk Identiication Management Risk Classes Charge (DRC) - SA Policies Calculation (SES) 1.3 Internal 1.6 Reporting 2.3 Securitization 2.6 Residual 3.3 Trading 3.6 Multi Liquidity Risk Transfers Requirements Risk Add-On Desk Eligibility Horizons 2.7 SA Capital 3.7 Calibration 3.8 IMA Capital Calculation to Stress Period Calculation Methodology Methodology 1, 2, 3. FUNCTIONAL FUNCTIONAL 3. 2, 1, REQUIREMENTS 4.1 Trading 4.3 Instrument 4.4 Residual Risk 4.6 SBM 4.8 IMA 4.10 P&L Book Boundary Redesignation Add-On Approval Calculator Risk Factors Attribution 4.2 Exception 4.5 Internal Risk 4.7 Model 4.9 Backtesting 4.11 Changes for Covered Transfers Controls Validation to IMA Model Instruments 4. SUPERVISORY SUPERVISORY 4. APPROVALS 5.1 Asset 5.3 Instrument 5.3 Risk 5.5 Capital 5.6 Risk Factor 5.8 Full Classiication Master Sensitivities Aggregation Pricing Data Revaluation Data Sourcing 5.2 Security 5.4 Data 5.7 Stress 5.9 P&L Attribution Reference Data Taxonomy Calculations and Backtesting 5. DATA & DATA 5. TECHNOLOGY High Impact Activities Source: Accenture Analysis 5 FUNDAMENTAL REVIEW OF THE TRADING BOOK (FRTB) DATA ISSUES FOR BANKS We see three data issues as fundamental to an effective implementation of the FRTB framework 6 FUNDAMENTAL REVIEW OF THE TRADING BOOK (FRTB) 1 RISK SENSITIVITIES Under the revised rules, a bank would SOURCING need to compute at least 79 different calculation inputs for each sensitivity The rules for standardized approach (SA) and class for risk computation under SA. The internal models approach (IMA) advocate new prescribed risk factors and liquidity both: the use of risk sensitivities and computation may lead to as many as consistency in their calculation which, for 12,000 calculations per trade, compared the first time, should be the same as those to the current 250 to 500 calculations per used for the pricing models or instrument trade under earlier Basel 2.5 regulations. prices in the P&L statement that management receives.7 Unlike previous standardized The SA has introduced the concept of models, the SA under FRTB rules makes use curvature risk to capture nonlinear risk of risk sensitivities to capture both linear which is not captured by the delta of the and nonlinear risk in the trading desk. instruments with optionality. Curvature risk is Banks are also required to calculate risk not a second order approximation, but rather charges using SA, identifying Delta, Vega and a full revaluation needed for every instrument Curvature sensitivities across all risk classes. affected. This means, we believe, that The rules specify the maturity buckets for banks would need to update infrastructure, each risk class and sensitivity combination to data availability, and IT capacity to run the arrive at a final sensitivity value per bucket, revaluation for all products with optionality. using netting rules. This should lead to a The new rules also specify that the comprehensive calculation of risk using SA, sensitivities should be calculated on the adding to the complexity of computation. prices of instruments or on pricing models Figure 3 below shows the number of buckets which are used for P&L reporting or market for each sensitivity and risk class combination risk management within the bank. This calls under a sensitivities-based method for SA. for consistency between the calculations used for computing sensitivities and the valuation models used by the front office for trading purposes. Figure 3. Number of Buckets for Sensitivities Calculation RISK CLASSES GIRR CSR – CSR – CSR – Equity Commodity FX Non-Securitization Securitization Securitization (CTP) (Non-CTP) Delta Individual 16 16 25 11 11 Individual currency currency Vega Individual 16 16 25 11 11 Individual currency currency SENSITIVITY Curvature Individual 16 16 25 11 11 Individual currency currency LEGEND: CSR: Credit Spread Risk CTP: Correlation Trading Portfolio GIRR: General Interest Rate Risk Source: Minimum capital requirements for market risk. Basel Committee on Banking Supervision,
Load more

Recommended publications
  • Back-Testing of Expected Shortfall: Main Challenges and Methodologies
    © CHAPPUIS HALDER & CO Back-testing of Expected Shortfall: Main challenges and methodologies By Leonard BRIE with Benoit GENEST and Matthieu ARSAC Global Research & Analytics 1 1 This work was supported by the Global Research & Analytics Dept. of Chappuis Halder & Co. Many collaborators from Chappuis Halder & Co. have been involved in the writing and the reflection around this paper; hence we would like to send out special thanks to Claire Poinsignon, Mahdi Kallel, Mikaël Benizri and Julien Desnoyers-Chehade © Global Research & Analytics Dept.| 2018 | All rights reserved Executive Summary In a context of an ever-changing regulatory environment over the last years, Banks have witnessed the draft and publication of several regulatory guidelines and requirements in order to frame and structure their internal Risk Management. Among these guidelines, one has been specifically designed for the risk measurement of market activities. In January 2016, the Basel Committee on Banking Supervision (BCBS) published the Fundamental Review of the Trading Book (FRTB). Amid the multiple evolutions discussed in this paper, the BCBS presents the technical context in which the potential loss estimation has changed from a Value-at-Risk (VaR) computation to an Expected Shortfall (ES) evaluation. The many advantages of an ES measure are not to be demonstrated, however this measure is also known for its major drawback: its difficulty to be back-tested. Therefore, after recalling the context around the VaR and ES models, this white paper will review ES back-testing findings and insights along many methodologies; these have either been drawn from the latest publications or have been developed by the Global Research & Analytics (GRA) team of Chappuis Halder & Co.
    [Show full text]
  • Fundamental Review of the Trading Book – Interim Impact Analysis
    Basel Committee on Banking Supervision Fundamental review of the trading book – interim impact analysis November 2015 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-293-7 (print) ISBN 978-92-9197-294-4 (online) Fundamental review of the trading book – interim impact analysis (November 2015) Contents 1. Background ....................................................................................................................................................................... 1 2. Key findings ....................................................................................................................................................................... 2 3. Sample of participating banks ................................................................................................................................... 5 4. Analysis of the proposed standardised and internally-modelled approaches ....................................... 7 5. Trading desk structure ................................................................................................................................................ 10 6. P&L attribution test ...................................................................................................................................................... 12 7. Non-modellable risk factors ....................................................................................................................................
    [Show full text]
  • FRTB Standardized Approach for Market Risk
    A Bloomberg Professional Services Offering Bloomberg Terminal FRTB Risk & Valuations Standardized Approach for market risk Contents 03 Bloomberg’s FRTB SA Solution 05 An open architecture 06 Why Bloomberg for FRTB 07 Learn more FRTB Standardized Approach for market risk The Fundamental Review of the Trading Book (FRTB) is the biggest global sell-side regulatory change that has taken place in more than two decades. It completely overhauls the framework for market risk as a result of the severe market stress in 2007-08. FRTB was created to ensure that regulatory market risk models deliver reliable capital outcomes and promote consistent implementation of the standards across jurisdictions. The Standardized Approach (SA) is required for all entities regulated under the Basel market risk regime, regardless of whether or not they also run the Internal Models Approach (IMA). The SA is a capital charge consisting of: • Sensitivities-based Method (SBM) — a parametric market risk calculation based on standardized risk factor sensitivities and volatilities and correlations specified by the Basel Committee. • Default Risk Charge (DRC) — a jump-to-default measure for individual issuers as well as securitizations based on standard netting rules to capture hedging effects. • Residual Risk Add-On (RRAO) — an additional charge for non-vanilla instruments whose risk is not captured by either of the two metrics above. FRTB standardized approach The Standardized Approach for Market Risk Sensitivities-based Method: Capital Default Risk Charge (DRC) Residual risk add-on (RRAO) charges for delta, vega and curvature for prescribed risk classes risk factor sensitivities within a Risk weights applied to notional amounts prescribed set of risk classes • Default risk: non-securitization.
    [Show full text]
  • In Defence of Var Risk Measurement and Backtesting in Times of Crisis 1 June, 2020
    In Defence of VaR Risk measurement and Backtesting in times of Crisis 1 June, 2020 In Defence of VaR Executive Summary Since the Financial Crisis, Value at Risk (VaR) has been on the receiving end of a lot of criticisms. It has been blamed for, amongst other things, not measuring risk accurately, allowing banks to get away with holding insufficient capital, creating over reliance on a single model, and creating pro-cyclical positive feedback in financial markets leading to ‘VaR shocks’. In this article we do not seek to defend VaR against all these claims. But we do seek to defend the idea of modelling risk, and of attempting to model risk accurately. We point out that no single model can meet mutually contradictory criteria, and we demonstrate that certain approaches to VaR modelling would at least provide accurate (as measured by Backtesting) near-term risk estimates. We note that new Market Risk regulation, the Fundamental Review of the Trading Book (FRTB) could provide an opportunity for banks and regulators to treat capital VaR and risk management VaR sufficiently differently as to end up with measures that work for both rather than for neither. Contents 1 Market Risk VaR and Regulatory Capital 3 2 Can VaR accurately measure risk? 5 3 Regulation and Risk Management 10 4 Conclusion 13 Contacts 14 In Defence of VaR 1 Market Risk VaR and Regulatory Capital Market Risk VaR was developed at JP Morgan in the wake of the 1987 crash, as a way to answer then chairman Dennis Weatherstone’s question “how much might we lose on our trading portfolio by tomorrow’s close?” VaR attempts to identify a quantile of loss for a given timeframe.
    [Show full text]
  • Impact Study on the Proposed Frameworks for Market Risk and CVA Risk
    Basel Committee on Banking Supervision Instructions: Impact study on the proposed frameworks for market risk and CVA risk July 2015 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-190-9 (print) ISBN 978-92-9197-191-6 (online) Contents 1. Introduction ...................................................................................................................................................................... 4 1.1 General ................................................................................................................................................................................ 4 1.2 Fundamental Review of the Trading Book (FRTB).............................................................................................. 5 1.3 Credit Valuation Adjustment (CVA) ......................................................................................................................... 7 2. General Info ....................................................................................................................................................................... 8 2.1 Panel A: General bank data ......................................................................................................................................... 9 2.2 Panel B: Breakdown of total accounting CVA and DVA .................................................................................
    [Show full text]
  • Bloomberg FRTB Solutions Overview FRTB
    A Bloomberg Professional Services Offering Services Professional Bloomberg Bloomberg FRTB solutions overview FRTB The Basel Committee on Banking Supervision (BCBS) has set new global standards for Minimum Capital Requirements for Market Risk. Banks must implement the final version of this rule, also known as the Fundamental Review of the Trading (FRTB), by January 1, 2022. Given the many infrastructure and workflow changes needed to implement FRTB, banks must move quickly in order to meet the new requirements in time. Bloomberg’s suite of solutions offer data and tools to help ease the burden of FRTB implementation and facilitate ongoing compliance. Regulatory data for FRTB Risk analytics for Standardized Approach FRTB introduces a number of challenges requiring regulation Comprehensive market risk workflow enabling banks specific data sets in addition to the reference and pricing data to calculate and report regulatory capital in accordance necessary to perform the calculations that FRTB requires. with the current BCBS market risk requirements. Bloomberg provides data sets to meet both the Standardized • Integrated position feeds from Bloomberg OMS and Internal Models Approaches. • Mapping to SA risk classes and risk factors • FRTB SA bucketing data • Delta, Vega, Curvature, Jump to Default • FRTB RFET transparency data • Risk bucket assignment and aggregation • Full capital with BCBS risk weights and correlations Reference, pricing and derivatives data FRTB requires banks to fundamentally change the way they Risk analytics for internal models approach look at data if they are to meet the challenges in obtaining Basel-compliant market risk models powered by consistency, alignment, and understanding of provenance. Bloomberg pricing and data to help clients pass the Bloomberg delivers data-sets for all asset classes including: Risk Factor Eligibility Test and P&L Attribution Tests and avoid capital surcharges.
    [Show full text]
  • Explanatory Note on the Minimum Capital Requirements for Market Risk
    Basel Committee on Banking Supervision Explanatory note on the minimum capital requirements for market risk January 2019 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2019. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-236-3 (online) Contents Explanatory note on the minimum capital requirements for market risk ................................................................... 1 1. Introduction ...................................................................................................................................................................... 1 2. Background and rationale for revising the market risk framework ............................................................ 2 2.1 Deficiencies identified in the pre-crisis framework ........................................................................................... 2 2.2 Basel 2.5 reforms ............................................................................................................................................................. 2 2.3 Remaining issues with the Basel 2.5 market risk framework ......................................................................... 3 3. Key elements of the revised market risk framework ......................................................................................... 4 3.1 Scope of application under the January 2016 market risk framework .....................................................
    [Show full text]
  • FRTB) an ICMA Briefing Note on Implementation Challenges for Secondary Bond Markets January 2018
    Fundamental Review of the Trading Book (FRTB) An ICMA briefing note on implementation challenges for secondary bond markets January 2018 What is FRTB? The Fundamental Review of the Trading Book (FRTB) is a comprehensive suite of capital rules developed by the Basel Committee on Banking Supervision (BCBS) as part of Basel III, intended to be applied to banks’ wholesale trading activities. Finalised in January 2016 as the Minimum Capital Requirements for Market Risk, it aims to address a number of identified shortcomings in the existing Basel II.5 framework, in particular: (i) an insufficient trading book/banking book boundary; (ii) the weakness of the Value at Risk (VaR) measures (which do not include “tail risks” of extreme losses); (iii) the need for more coherent and comprehensive risk capture (including market liquidity under stressed conditions); and (iv) the need for the standardised approach (SA) to serve as a credible fall-back for the internal models approach (IMA). The revised framework is scheduled to be implemented as final rules under domestic legislation on 1 January 2019, with regulatory reporting under the framework becoming a requirement from 31 December 2019. In the EU, this will be implemented as the Revised Capital Requirements Regulation (CRR II), published in November 2016. Why is FRTB important for fixed income market makers? FRTB was never intended to increase the overall capital requirements of banks, which was largely achieved in the Basel II.5 framework. However, the results of cumulative quantitative impact studies (QIS) in the latest BCBS Basel III Monitoring Report, published in December 2017, based on December 2015 data provided by 248 banks,1 suggest that the weighted average overall capital increase will be significant: 52.3% for Group 1 banks, 50.9% for global systemically important banks (GSIBs), and 52.2% for Group 2 banks.
    [Show full text]
  • FRTB: a Collection of Thought Leadership from Our Financial Risk Analytics Experts
    FRTB: A collection of thought leadership From our financial risk analytics experts Second edition The long-awaited final version of the FRTB Market Risk Framework was published by the BCBS in January 2019. Banks should now be preparing in earnest for the incoming regu- lation. In our conversations with market participants we see three themes emerging: • FRTB is acting as a catalyst for the restructuring of banks’ market risk architecture and a closer alignment with the front office • The decision of whether to go with the IMA or the SA has not always been obvious. The new guidance provides significant clarity and some relief with respect to the potential impact of NMRFs, allowing banks to finally lock down their FRTB programs • Data remains a key challenge. While the new guidance gives banks some leeway in passing eligibility tests, they will still need to maximize the availability of real price observations to manage the impact of NMRFs, either directly or via proxying. In this second edition of our FRTB thought leadership booklet, we analyze some of the lingering questions and offer insights into possible approaches for FRTB compli- ance. Dr. Andrew Aziz Managing director and global head of Financial Risk Analytics at IHS Markit To download the first edition of our FRTB thought leadership booklet, click here. TABLE OF CONTENTS à Five Key Takeaways from our London FRTB Summit 2 à FRTB: The case for dynamic capital assessments 4 à Final FRTB text: Is the light finally green for modellability? 8 à FRTB: The road to IMA 12 à FRTB: The capital impact of proxy choice 16 à Forgotten but not gone: NMRF proxies and the struggle for accurate QIS and capital efficiency under FRTB 18 à FRTB Decision Making – The Data Quality Paradigm 21 à FRTB: Sparking new approaches for big data analytics 24 Five Key Takeaways from our London FRTB Summit Following the publication of the final FRTB text by banks should not expect any additional changes.
    [Show full text]
  • Basel “IV”: What’S Next for Banks? Implications of Intermediate Results of New Regulatory Rules for European Banks
    Basel “IV”: What’s next for banks? Implications of intermediate results of new regulatory rules for European banks Global Risk Practice April 2017 Authored by: Sebastian Schneider Gerhard Schröck Stefan Koch Roland Schneider 2 Implications of intermediate results of new regulatory rules for European banks Contents Executive summary 5 1 Beyond Basel III 6 1.1 Regulatory changes ahead 6 1.2 Need for a comprehensive view of regulations’ coming impact 6 2 Expected capital impact for the European banking industry 9 2.1 Impact at sector level 9 2.2 Variations in capital impacts between geographies … 10 2.3 ... size of institution 12 2.4 ... and business model 12 2.5 Expected impact on ROE 13 3 Implications and reactions: How banks can react 15 3.1 Mitigating actions 15 3.2 “No-regret” actions until Basel IV rules are finalized 22 Appendix 24 Global rules analyzed 24 Further regulatory initiatives 24 Methodology 26 Implications of intermediate results of new regulatory rules for European banks 3 Executive summary Many European banks will face significant capital shortfalls under the so-called Basel “IV” reforms proposed by the Basel Committee on Banking Supervision (BCBS). The current state of the suggested changes (a mix of consultation papers and finalized standards) would rework the approach to risk-weighted assets (RWA) and possibly internal ratings, as well as set regulatory capital floors. According to our analysis, if banks do nothing to mitigate their impact, these rules will require about €120 billion in additional capital, while reducing the banking sector’s return on equity by 0.6 percentage points.
    [Show full text]
  • The Market Risk Framework in Brief
    Basel Committee BIS on Banking Supervision The market risk framework In brief January 2019 Revised market risk framework The failure to prudently What is market risk and why is its measurement being measure risks associated updated? with traded instruments caused major losses for Many banks have portfolios of traded instruments for some banks during the short-term profits. These portfolios – referred to as global financial crisis. trading books – are exposed to market risk, or the risk of The Basel Committee’s losses resulting from changes in the prices of instruments revised framework such as bonds, shares and currencies. Banks are required marks a significant to maintain a minimum amount of capital to account for improvement to the this risk. pre-crisis regulatory framework by addressing The significant trading book losses that banks incurred major fault lines. during the 2008 global financial crisis highlighted the need for the Basel Committee to improve the global market risk framework. As a stop-gap response, in July 2009 the Committee introduced the Basel 2.5 framework to help improve the framework’s risk coverage in certain areas and increase the overall level of capital requirements, with a particular focus on trading instruments exposed to credit risk (including securitisations). The main drivers of market risk nterest “Market rates risk: the risk uity redit of losses prices spreads arising from ommodity Foreign movements in prices echange market prices.” 1 2016 revised framework and review Following up on the What changes were proposed? Basel 2.5 framework, the Committee initiated From 2012, the Committee initiated a fundamental review of a fundamental review the trading book.
    [Show full text]
  • Basel Iii Reforms: Impact Study and Key Recommendations
    BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS MACROECONOMIC ASSESSMENT, CREDIT VALUATION ADJUSTMENT AND MARKET RISK 4 December 2019 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS MARKET AND CVA RISK Publication number | DATE BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS — MACROECONOMIC ASSESSMENT, CREDIT VALUATION ADJUSTMENT AND MARKET RISK Contents List of figures 4 List of tables 6 1. Executive summary 11 Overall impact 12 Impact by risk type 13 Macroeconomic impact assessment 14 Main policy recommendations 14 2. General remarks 16 Background and mandate 16 Data collection process governance 18 Sample 19 2.3.1 Classification criteria 19 2.3.2 Consolidation 20 2.3.3 Samples based on data quality 20 2.3.4 Cumulative sample: summary statistics 21 2.3.5 Qualitative questionnaires sample: summary statistics 21 Methodology 23 2.4.1 Aggregation 23 2.4.2 Impact assessment scenarios 23 2.4.3 Impact metrics 23 2.4.4 Main differences with respect to the EBA Basel III monitoring analysis 23 Data quality and interpretation of the results 25 Structure of the report 26 3. Main findings 27 Changes in minimum required capital (Tier 1) 27 Changes in risk-weighted assets 29 Impact on capital ratios and capital shortfalls 30 4. CVA risk 31 Impact of overall reform 32 Individual reforms and scenario analysis 34 4.2.1 EU CVA exemptions and fair-valued SFTs 34 4.2.2 Proportionality in the CVA framework 37 4.2.3 November 2019 BCBS consultative document on CVA risk framework 37 Implementation and policy recommendations 41 4.3.1 CVA framework 41 2 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS — MACROECONOMIC ASSESSMENT, CREDIT VALUATION ADJUSTMENT AND MARKET RISK 4.3.2 CVA exemptions 41 4.3.1 Proportionality treatment for CVA risk 42 5.
    [Show full text]