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Basel III: Post-Crisis Reforms

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Basel III: Post-Crisis Reforms Basel III: Post-Crisis Reforms Implementation Timeline Focus: Capital Definitions, Capital Focus: Capital Requirements Buffers and Liquidity Requirements Basel lll 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1 January 2022 Full implementation of: 1. Revised standardised approach for credit risk; 2. Revised IRB framework; 1 January 3. Revised CVA framework; 1 January 1 January 1 January 1 January 1 January 2018 4. Revised operational risk framework; 2027 5. Revised market risk framework (Fundamental Review of 2023 2024 2025 2026 Full implementation of Leverage Trading Book); and Output 6. Leverage Ratio (revised exposure definition). Output Output Output Output Ratio (Existing exposure floor: Transitional implementation floor: 55% floor: 60% floor: 65% floor: 70% definition) Output floor: 50% 72.5% Capital Ratios 0% - 2.5% 0% - 2.5% Countercyclical 0% - 2.5% 2.5% Buffer 2.5% Conservation 2.5% Buffer 8% 6% Minimum Capital 4.5% Requirement Core Equity Tier 1 (CET 1) Tier 1 (T1) Total Capital (Tier 1 + Tier 2) Standardised Approach for Credit Risk New Categories of Revisions to the Existing Standardised Approach Exposures • Exposures to Banks • Exposure to Covered Bonds Bank exposures will be risk-weighted based on either the External Credit Risk Assessment Approach (ECRA) or Standardised Credit Risk Rated covered bonds will be risk Assessment Approach (SCRA). Banks are to apply ECRA where regulators do allow the use of external ratings for regulatory purposes and weighted based on issue SCRA for regulators that don’t. specific rating while risk weights for unrated covered bonds will • Exposures to Multilateral Development Banks (MDBs) be inferred from the issuer’s For exposures that do not fulfil the eligibility criteria, risk weights are to be determined by either SCRA or ECRA. ECRA or SCRA risk weights. • Exposures to Corporates • Exposure to Project Finance, A more granular look-up table as well as a specific risk weight for small and medium-sized enterprises (SMEs) have been developed. Object and Commodities Finance A new standalone treatment for • Retail Exposures (Excluding Real Estate) specialised lending, a Retail exposures are broken down into more granular types such as transactors and revolvers. A Qualifying Retail Revolving Exposure (QRRE) subcategory of the corporate transactor is the exposure to an obligor in relation to a revolving credit facility where the balance has been repaid in full at each scheduled exposure class. repayment date for the previous 12 months or there have been no drawdowns over the previous 12 months. All exposures that are not QRRE transactors are QRRE revolvers. • Land acquisition, development and Retail Exposures Regulatory Retail (Revolving) construction (ADC) exposures Regulatory Retail (Non-Revolving) Other Retail Excluding Real Estate Transactors Revolvers New treatment for ADC financing, a subcategory of the Risk Weight 75% 45% 75% 100% real estate exposure class. • Residential Real Estate (RRE) and Commercial Real Estate (CRE) Exposures ADC Exposures Risk Weight More risk-sensitive approaches have been developed. Variable risk weights, based on mortgages’ Loan-to-Value (LTV) ratios, will replace the Loan to Company 150% previous flat risk weights of 35% and 100% for RRE and CRE respectively. / SPV Residential ADC 100% • Exposures to Subordinated Debts and Equity Loan A more granular risk weight treatment applies relative to the current flat risk weight. Subordinated debt and capital other Equity exposures to certain legislated Speculative Unlisted Exposures All Other Equity Exposures than equities programmes Equity Risk Weight 150% 100% 400% 250% • Exposures to Off-Balance Sheet Items Credit Conversion Factors (CCFs) have been made more risk-sensitive such as introducing positive CCFs for Unconditionally Cancellable Commitments (UCCs). Note Issuance and Certain Short term self- Direct credit Commitments except Revolving transaction- Off Balance Sheet Exposures UCCs liquidating trade substitutes and UCCs Underwriting related letters of credit other exposures Facilities contingent items CCF 10% 40% 50% 50% 20% 100% ECRA SCRA Risk Weight AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight Grade A Grade B Grade C Exposures 40% to Banks Base 20% 30% 50% 100% Base * 30% if CET 1 ≥ 14% and T1 Leverage Ratio ≥ 75% 150% SCRA 5% 150% Short term exposures 20% 50% Short term exposures 20% 50% Eligible Criteria Met ECRA SCRA Exposures to MDBs Risk Weight Rated/ Unrated Risk Weight AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight Grade A Grade B Grade C Base 0% Base 20% 30% 50% 100% 150% 50% Base 50% ECRA SCRA External Rating of Exposures to AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Grades Investment Others Corporates Counterparty Non-SME Corporate 65% 100% Risk Weight 20% 50% 75% 100% 150% 100% or 85% if Corporate SME SME Corporate 85% General RRE Risk Weights LTV ≤ 50% 50% < LTV ≤ 55% 55% < LTV ≤ 60% 60% < LTV ≤ 80% 80% LTV ≤ 90% 90% < LTV ≤ 100% LTV > 100% Criteria not met Residential Real Whole Loan Approach 20% 25% 25% 30% 40% 50% 70% Risk weight of counterparty Estate (RRE) Loan-Splitting Approach 20% Risk weight (RW) of counterparty Exposures Income-Producing Residential Real Estate (IPRRE) Risk Weights LTV ≤ 50% 50% < LTV ≤ 60% 60% < LTV ≤ 80% 80% < LTV ≤ 90% 90% < LTV ≤ 100% LTV > 100% Criteria not met Whole Loan Approach 30% 35% 45% 60% 75% 105% 150% General CRE Income-Producing Commercial Real Estate (IPCRE) Commercial Real Estate (CRE) Risk Weight LTV ≤ 55% 55% < LTV ≤ 60% LTV > 60% Criteria not met Risk Weight LTV ≤ 60% 60% < LTV ≤ 80% LTV > 80% Criteria not met Exposures Whole Loan Approach Min (60%, RW of counterparty) RW of counterparty RW of counterparty Whole Loan Approach 70% 90% 110% 150% Loan-Splitting Approach Min (60%, RW of counterparty) RW of counterparty Rated Covered Bonds Unrated Covered Bonds Exposures Issue-Specific Rating AAA to AA - A + to BBB - BB + to B - Below B - Risk Weight of Issuing Bank 30% 40% 50% 75% 100% 150% to Covered Bonds Risk Weight 10% 20% 50% 100% Risk Weight 15% 20% 25% 35% 50% 100% ECRA SCRA Exposures to External Rating of Exposures (excluding real AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Project Finance Object and Commodity Finance Project, Object Counterparty estate) and Commodities 100% or 85% 130% pre-operational phase Finance Risk Weight 20% 50% 75% 100% 150% if Corporate Risk Weight 100% operational phase 100% SME 80% operational phase (high quality) Internal Rating-Based Approach for Credit Risk Revision in the Scope of Internal Ratings-Based (IRB) Approaches Specification of Input Floors Loss Given Default (LGD) Probability of Exposure Exposure at Default (EAD) Basel III: Post Default (PD) Exposure Basel II Unsecured Secured Crisis Reforms By collateral type: Sum of • 0% financial (i) on balance sheet exposures; and Corporate 5 bps 25% • 10% receivables (ii)50% of off balance sheet exposure Large and Mid-Sized Corporates ( • Advanced IRB (A-IRB), • F-IRB • 10% CRE/RRE using applicable CCFs in SA Consolidated revenues > €500 • Foundation IRB (F-IRB), • 15% other physical • SA Million ) • Standardised Approach (SA) Mortgages 5 bps N/A 5% QRRE 5 bps 50% N/A • A-IRB Transactors Banks and Other Financial • F-IRB • F-IRB QRRE Revolvers 10 bps 50% N/A Institutions • SA Retail • SA By collateral type: • 0% financial Other Retail 5 bps 30% • 10% receivables Equities • Various IRB Approaches • SA • 10% CRE/RRE • 15% other physical Supervisory Specified Parameters in the F-IRB Approach Additional Enhancement Secured Exposures Unsecured Exposures The 1.06 scaling factor, currently • Non-financial collateral: LGD reduced • Non-financial corporates: LGD reduced to 40% applied to risk-weighted assets and haircuts increased • Banks, Securities Firms and Other Financial (RWAs) determined by the IRB • Financial collateral: Haircuts revised to Institutions: LGD retained at 45% approach to credit risk, has been be more granular removed. Market Risk – Fundamental Review of Trading Book More Defined Regulatory Boundary Between Banking and Trading Book The revised boundary treatment retains the link between the regulatory trading book and the set of instruments that banks generally hold for trading purposes but at the same time addresses the weaknesses (i.e. arbitrage between the two sets of books) in the previous standard. Key revisions are: Additional guidance on the appropriate contents of Reducing the ability to arbitrage the Enhanced supervisory powers and Clearer treatment of internal risk transfers across the the trading book boundary reporting requirements. regulatory boundary Market Risk – The Standardised Approach (SA) Revised Standardised Approach Using elements from the former standardised measurement method, the Sensitivities based method builds on the elements and expand the use of delta, vega and curvature risk to factor sensitivities. The standardised approach capital charge is the sum of the sensitivities Based Method capital charge, default risk charge and residual add on. Sensitivities Based Method Delta Risk Vega Risk Curvature Risk Classification of A risk measure based on A risk measure (for instruments with optionality) A risk measure (for instruments with optionality) , capturing the incremental risk not instrument into risk sensitivities of a bank’s trading + based on sensitivities to vega risk factors to be used + captured by the delta risk of price changes in the value of an option, based on two class and risk factor book to regulatory delta risk as inputs to a similar aggregation formula as for stress scenarios per risk factor involving an upward and downward shock where the factors. Delta risk. worst loss is accounted in the capital charge. Calculate the curvature risk charge for curvature risk factor k. 푹푾(풄풖풓풗풂풕풖풓풆)+ (풄풖풓풗풂풕풖풓풆) ෍ 푽풊 풙풌 − 푽풊 풙풌 − 푹푾풌 ∙ 풔풊풌 풊 퐶푉푅푘 = 푹푾(풄풖풓풗풂풕풖풓풆)− (풄풖풓풗풂풕풖풓풆) ෍ 푽풊 풙풌 − 푽풊 풙풌 + 푹푾풌 ∙ 풔풊풌 풊 where: Calculate the weighted net sensitivity (WS ) across all instruments to their respective risk factor k.
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