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Basel Iii Reforms: Impact Study and Key Recommendations

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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. Market risk 43 Impact of overall reform 43 Individual reforms and scenario analysis 45 5.2.1 Treatment of covered bonds 45 5.2.2 Simplified alternative to the standardised approach 46 Implementation and policy recommendations 47 5.3.1 Treatment of covered bonds 47 5.3.2 Simplified alternative to the standardised approach 47 6. Macroeconomic impact assessment 48 Summary of the results 48 Introduction 49 The economic costs of introducing the Basel III finalisation reforms 49 The economic benefits of introducing the Basel III finalisation 54 6.4.1 The growth-at-risk approach 54 6.4.2 The long-term economic impact approach 56 Comparison with other studies 60 Conclusions 61 Annex 1: Sample and methodology 62 Business models 62 Sample coverage 64 Annex 2: Additional results 65 Impact of the central reform scenario net of EU-specific CET1 buffers and Pillar 2 requirements 65 Impact of the alternative scenarios 66 November 2019 BCBS consultative document on CVA risk framework 67 Impact by country 68 The results should be interpreted with caution, taking into account data quality. 68 Overview of revised RWA 70 Revised RWA for CVA risk 71 Revised RWA for market risk 72 Annex 3: Overview of current capital requirements 76 CVA risk 76 Market risk 82 3 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS — MACROECONOMIC ASSESSMENT, CREDIT VALUATION ADJUSTMENT AND MARKET RISK List of figures Figure 1 Percentage change in T1 MRC (relative to current T1 MRC), by business model ................ 29 Figure 2 Percentage change in CVA RWA (relative to total current CVA RWA), by bank size ............ 32 Figure 3 Percentage change in CVA RWA (relative to total current CVA RWA), by business model .. 33 Figure 4 Percentage change in CVA RWA (relative to total current CVA RWA), by current approach ............................................................................................................................................................. 34 Figure 5 Percentage change in CVA RWA (relative to total current CVA RWA) due to changes in the scope of the CVA capital requirements, all banks ............................................................................... 36 Figure 6 Percentage change in CVA RWA (relative to total current CVA RWA) due to changes in the scope of the CVA capital requirements, by bank size ......................................................................... 36 Figure 7 Breakdown of revised CVA RWA for EU CVA exempted transactions by type of counterparty, by bank size ......................................................................................................................................... 37 Figure 8 Breakdown of revised CVA RWA for exempted transactions to non-financial corporates by geography, by bank size ...................................................................................................................... 37 Figure 9 Percentage change in CVA RWA (relative to total current CVA RWA) due to November 2019 BCBS revisions to CVA framework and calibration adjustment .......................................................... 40 Figure 10 Breakdown of SA-CVA RWA (Basel scope) by risk class, SA-CVA banks only ...................... 40 Figure 11 Percentage change in CVA RWA (relative to total current CVA RWA) due to 2019 November BCBS revisions to CVA framework and calibration adjustment, by bank size .................................... 40 Figure 12 Percentage change in total market risk RWA (relative to total current market RWA), by size and bank type ...................................................................................................................................... 44 Figure 13 Percentage change in total market risk RWA (relative to total current market RWA), by business model .................................................................................................................................... 45 Figure 14 Average effect of Basel III finalisation on GDP annual growth rate in the 24 EU Member States plus Norway) ............................................................................................................................ 52 Figure 15 Average annual increase in GDP growth in adverse circumstances in the 24 EU Member States plus Norway) ............................................................................................................................ 55 Figure 16 Summary of GaR-based cost-benefit assessment ............................................................... 55 Figure 17 Percentage change in T1 MRC (relative to current T1 MRC), by country ........................... 68 Figure 18 Percentage change in total market risk RWA (relative to total current market RWA), by country ................................................................................................................................................ 69 Figure 19 Percentage change in CVA RWA (relative to total current CVA RWA), by country ............ 69 Figure 20 Percentage change in CVA RWA (relative to total current CVA RWA) due to changes in the scope of the CVA capital requirements, by country ........................................................................... 70 4 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS — MACROECONOMIC ASSESSMENT, CREDIT VALUATION ADJUSTMENT AND MARKET RISK Figure 21 Breakdown of revised RWA by risk and bank size .............................................................. 70 Figure 22 Composition of revised CVA RWA, by bank size ................................................................. 71 Figure 23 Composition of revised CVA RWA, by current approach .................................................... 71 Figure 24 Composition of FRTB RWA, by bank size ............................................................................ 72 Figure 25 Composition of FRTB RWA, by bank type ........................................................................... 72 Figure 26 Composition of FRTB-SA RWA, by bank size ....................................................................... 73 Figure 27 Composition of FRTB-SA RWA, by bank type ...................................................................... 73 Figure 28 Composition of FRTB-SA SbM RWA, by bank size ............................................................... 74 Figure 29 Composition of FRTB-SA SbM RWA, by bank type .............................................................. 74 Figure 30 Composition of FRTB-IMA RWA, by bank size .................................................................... 75 Figure 31 Breakdown of current CVA RWA by current method, by bank size .................................... 76 Figure 32 Breakdown of current CVA RWA by current method, by country ...................................... 77 Figure 33 Breakdown of current CVA RWA by current method, by business model.......................... 77 Figure 34 Breakdown of current CVA RWA by instrument, by bank size ........................................... 78 Figure 35 Breakdown of current CVA RWA by instrument, by country .............................................. 78 Figure 36 Breakdown of current CVA RWA by instrument, by business model ................................. 79 Figure 37 Breakdown of current CVA RWA by CVA scope, by bank size ............................................ 79 Figure 38 Breakdown of CVA RWA by CVA scope, by country ............................................................ 80 Figure 39 Breakdown of current CVA RWA by CVA scope, by business model .................................. 80 Figure 40 Regulatory CVA (EUR bn) versus accounting CVA (EUR bn) ................................................ 81 Figure 41 Breakdown of current market RWA by current method, by bank size ..............................
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