BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS Contents List of figures 4 List of tables 10 1. Executive summary 19 1.1 Overall impact and key assumptions 20 1.2 Impact by bank size, business model and risk type 21 1.3 Impact under alternative scenarios 24 1.4 Main policy recommendations 25 2. General remarks 29 2.1 Background and mandate 29 2.2 Data collection process governance 30 2.3 Sample 31 2.3.1 Bank size classification criteria 31 2.3.2 Business model classification 32 2.3.3 Consolidation 33 2.3.4 Samples based on data quality 34 2.3.5 Cumulative sample: summary statistics 34 2.3.6 Qualitative questionnaire sample: summary statistics 36 2.4 Methodology 37 2.4.1 Aggregation 37 2.4.2 Impact assessment scenarios 38 2.4.3 Impact metrics 39 2.4.4 Main differences with respect to the EBA-Basel III monitoring analysis 40 2.5 Data quality and interpretation of the results 43 2.6 Structure of the report 44 3. Main findings 45 3.1 Changes in minimum required capital (tier 1 MRC) 45 3.2 Changes in risk-weighted assets 50 3.3 Impact on capital ratios and capital shortfalls 51 3.3.1 The role of retained profits during the transitional implementation phase 51 3.4 Alternative scenarios 53 3.5 Interaction between RWA, output floor and leverage-driven capital requirements (constraint analysis) 54 3.6 Operational and administrative costs 56 3.7 Macroeconomic impact 59 4. Credit risk 64 4.1 Revised standardised approach 64 1 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS 4.1.1 Impact of the overall reform 64 4.1.2 Individual reforms and scenario analysis 71 4.1.3 Implementation issues and recommendations 94 4.2 Revised internal ratings-based approach 103 4.2.1 Impact of the overall reform 104 4.2.2 Individual reforms and scenario analysis 110 4.2.3 Implementation and policy recommendations 127 5. Securities financing transactions (SFTs) 132 5.1 Overview of SFT market 132 5.2 Impact of the overall reform 139 5.3 Individual reforms and scenario analysis 142 5.3.1 Minimum haircut floor framework 142 5.4 Implementation and policy recommendations 145 5.4.1 Minimum haircut floor framework 145 6. Market risk (FRTB) 146 6.1 Impact of the overall reform 146 7. CVA 148 7.1 Impact of the overall reform 148 8. Operational Risk 151 8.1 Impact of the overall reform 151 8.2 Individual reforms and scenario analysis 156 8.2.1 Decomposing the impact of the BCBS SA reform 156 8.2.2 ILM discretion: ILM=1 for bucket 2 and 3 institutions 159 8.2.3 ILM discretion: allowing the use of the ILM to bucket 1 institutions 162 8.2.4 ILM discretion: the minimum loss threshold 165 8.3 Implementation and policy recommendations 167 8.3.1 ILM discretion: ILM=1 for bucket 2 and 3 institutions 167 8.3.2 ILM discretion: allowing the use of the ILM to bucket 1 institutions 168 8.3.3 ILM discretion: the minimum loss threshold 171 9. Output Floor 173 9.1 Impact of the aggregate output floor 173 9.1.1 Impact of the output floor during the transitional period 173 9.1.2 Sensitivity of the output floor with respect to each modelable risk category 175 9.1.3 Role of provisions in the calculation of the output floor 177 9.2 Alternative scenarios 179 9.3 Assessment of the output floor and leverage ratio as backstops against RWA variability 182 9.4 Implementation and policy issues 187 9.4.1 Type of output floor to be implemented 187 9.4.2 Interaction of the output floor with other prudential requirements 189 9.4.3 Other implementation issues related to the aggregate output floor 190 10. Analytical focus on subsidiaries 192 2 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS 10.1 Results of the qualitative questionnaire 192 10.2 Results of the QIS data collection for subsidiaries 194 Annex 1: Sample and methodology 196 Annex 2: Additional results 202 Annex 3: Overview of current capital requirements 218 3 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS List of figures Figure 1 Percentage change in T1 MRC (relative to current T1 MRC), bank-by-bank data ............. 47 Figure 2 Percentage change in T1 MRC (relative to current T1 MRC), by bank size ........................ 48 Figure 3 Percentage change in T1 MRC (relative to current T1 MRC), by business model ............. 49 Figure 4 Percentage change in T1 MRC (relative to current T1 MRC), by country .......................... 50 Figure 5 How challenging would the implementation of the final Basel III framework be (% of total responses) ........................................................................................................................................ 57 Figure 6 One-off and recurring costs of the final Basel III framework (% of total responses), by risk category ............................................................................................................................................ 57 Figure 7 One-off and recurring costs of the final Basel III framework (as % of total responses), by type of cost ....................................................................................................................................... 58 Figure 8 Expected negative impact of the final Basel III framework (% of total responses) ........... 58 Figure 9 Expected benefits of the final Basel III final framework (% of total responses) ................ 59 Figure 10 Stylised representation of GaR based cost-benefit assessment ...................................... 61 Figure 11 Percentage change in exposure class SA RWA (relative to current exposure class SA RWA) ................................................................................................................................................ 65 Figure 12 Percentage change in SA RWA (relative to total current SA RWA), by bank size and exposure class .................................................................................................................................. 69 Figure 13 Percentage change in SA RWA (relative to total current SA RWA), by business model and exposure class .................................................................................................................................. 70 Figure 14 Percentage change in SA RWA (relative to total current SA RWA), by country and exposure class .................................................................................................................................. 71 Figure 15 Breakdown of exposures to banks (excluding covered bonds) by rating status (% of exposures to banks excluding covered bonds) ................................................................................ 73 Figure 16 Percentage change in exposures to banks (excluding covered bonds) SA RWA (relative to current exposure class SA RWA), ECRA versus SCRA ....................................................................... 73 Figure 17 Percentage change in exposures to banks SA RWA (relative to total current SA RWA), ECRA versus SCRA............................................................................................................................. 73 Figure 18 Breakdown of exposures to covered bonds by rating status (% of exposures to covered bonds) ............................................................................................................................................... 74 Figure 19 Percentage change in exposures to covered bonds SA RWA (relative to current exposure class SA RWA), ECRA versus SCRA ................................................................................................... 74 Figure 20 Percentage change in exposures to covered bonds SA RWA (relative total current SA RWA), ECRA versus SCRA ................................................................................................................. 74 Figure 21 Breakdown of exposures to corporate SMEs by rating status (% of exposures to corporate SMEs ................................................................................................................................ 75 4 BASEL III REFORMS: IMPACT STUDY AND KEY RECOMMENDATIONS Figure 22 Percentage change in exposures to corporate SMEs SA RWA (relative to current exposure class SA RWA), ECRA versus SCRA .................................................................................... 75 Figure 23 Percentage change in exposures to corporate SMEs SA RWA (relative to total current SA RWA), ECRA versus SCRA ................................................................................................................. 75 Figure 24 Breakdown of exposures to corporates (excluding SMEs) by rating status (% of exposures to corporates excluding SMEs) ....................................................................................... 76 Figure 25 Breakdown of exposures to corporates (excluding SMEs) by grade (% of exposures to corporates excluding SMEs) ............................................................................................................. 76 Figure 26 Percentage change in exposures to corporate (excluding SMEs) SA RWA (relative to current exposure class SA RWA), ECRA versus SCRA ....................................................................... 76 Figure 27 Percentage change in exposures to corporate (excluding SMEs) SA RWA (relative to total current SA RWA), ECRA versus SCRA................................................................................................ 76 Figure 28 Breakdown of exposures to specialised lending by rating status (% of specialised lending exposure class) ................................................................................................................................