Basel IV Regulatory Environment

This session provides participants with a detailed tour and review of the Basel accords issued by the Bank for International Settlement (BIS) and the ever-evolving regulation stemming from Basel II to the latest developments in Basel III proposals (named "Basel IV").

Through a mix of lecture and case studies, the workshop will equip participants to achieve a detailed understanding of the latest Basel guidelines, specifically on the following technical topics:

• Latest changes to the Basel requirements, namely credit risk, market and operational risk RWAs;
• Components of Tier I and Tier II instruments;
• G-SIBs and the impact of TLAC
• European banks and MREL;
• Leverage, LCR and NSFR ratios.

• Basel III Latest Requirement (Basel IV) - Outline - download

Session 1

Introduction

• How much capital do banks need?
• Overview of the regulatory banking framework
• Global rules for local implementation
• From Basel I to Basel IV
• Capital requirements directive IV (CRD IV)
• Stress testing of European banks
• The 3 pillars approach
• Pillar 1 available capital
• Pillar 1 risk weighted assets: credit risk, counterparty risk, market risk and operations risk
• Pillar 2A ICAAP and risks not covered by Pillar 1 (strategic, reputational risks, etc.
  

Case study: Review the financial statements of Barclays

Session 2

Available Capital

Throughout this module, participants review the current regulatory requirements, in particular Tier I and Tier II capital ratios and understand the computations behind all regulatory ratios.

• Common Equity Tier I (CET 1), Tier I, Tier II and Total Capital
• From accounting equity to common equity Tier 1
• Overview of key accounting adjustments
  
  • Goodwill and intangibles
  • Non-controlling interests
  • Deferred taxes
• Additional Tier 1 (AT1)
  
  • Perpetual preference shares
• Non-cumulative dividend
• No step-ups
  
  • Subordinated debt, mandatory and contingent convertibles
• Tier 2
  
  • Subordinated debt
  • Over 5 years of maturity
  • No accelerated repayment

Case study: participants will reconcile an IFRS book equity of a European bank to compute Tier I and Tier II capital

Session 3

Capital Ratios

• Minimum capital ratios: Basel III phasing from 2013 to 2019
  
  • 5% CET 1 , 1.5% AT1 and 2.0% T2
• Capital conservation buffer (CCB): 2.5%
• Countercyclical buffer (CCB) up to 2.5%
  
  • Based on national supervisor discretion
• Capital surcharge for Global Systemically Important Banks (G-SIBs)
  
  • Based on BIS list update every November up to 3.5%
• Total Loss Absorbency Capital (TLAC)
  
  • Global standard applicable to G-SIB banks only
• Minimum Requirement for own funds and Eligible Liabilities (MREL)
  
  • Applicable to credit institutions & investment firms in the EU

Session 4

Basel IV Changes

• Analysis of banks’ impact
  
  • Aggregate increase of €1.0 to €2.5 trillion in additional RWAs expected
  • Sweden/Denmark/Netherland most affected by credit risk floor cap
  • France and United Kingdom impacted by change in operational risk
• Capital floors
  
  • RWAs floored by a percentage based on standardised approach
  • Phase-in from 50.0% in 2022 to 72.5% in 2027
• Revised credit risk from standardised approach
  
  • RWAs floored by a percentage based on standardised approach
  • Constraints on use of internal models
  • LGD floor to be applied
• Counterparty credit risk
  
  • Introduction of standardised approach for Credit Value Adjustment (CVA)
  • New standardised approach for calculating Exposure at Defaults (EAD) for derivatives exposures
• Market risk
  
  • Finalised in 2016
  • Revised boundary of trading book
  • Sensitivities based on new standardised approach
  • Internal models based on expected shortfalls
• Operational risk
  
  • New standardised approach to replace all prior methodologies
  • Based on size and historical operational loss data

Session 5

Basel IV Changes

• Highest impact on banks who relied on internal models for credit risk calculation (low Pd and LGD)
• Phase-in from 50.0% in 2022 to 72.5% in 2027
  
  • National regulator to cap incremental increase
  • Increase could be capped at 25% of RWAs before floor

Case Study: participants compute the impact of the output floors on RWAs

Session 6

Credit Risk – Standardised Approach

• RWA grid for sovereign and Public Sector Entities (PSEs)
• Discussion on multilateral development banks
• RWAs table for banks
  
  • Difference explained between external and standardised credit risk
  • Grade A to C for standardised assessment
• RWAs for general corporate exposures and specialised lending
• RWAs for residential real estate (cash-flow and non cash-flow based repayments)
• RWAs for off balance sheeet items and credit equivalent exposures
• RWAs for default exposures
• Credit risk mitigation (CRM) approaches

Case Study: participants compute the credit risk RWAs of a European bank based on a standardised approach

Session 7

Credit Risk – IRB Approach

• Standardised to foundation (F-IRB) and advanced approach (A-IRB)
• Understanding probability of default (Pd), loss given default (LGD) and exposure at default (EAD)
• Limitation on use of methods
  
  • Large corporates and banks A-IRB no longer premitted
  • Retail F-IRB and equity disallowed
• Parameter floors in A-IRB for LGD for corporates and retail exposures

Case Study: participants compute the EL of a European bank and then review the formula for calculating RWAs (based on asset class) from Pd, LGD and EAD

Session 8

Counterparty Credit Risk (CCR)

• Risk of counterparty defaulting prior to the final settlement of transaction
  
  • OTC derivatives
  • Financial assets designated at fair value
  • Reverse repurchase agreements and other secured lending
• Standardised approach for CCR (SA-CCR) measures EAD
  
  • Based on replacement cost and potential future exposure
• Risk of mark-to-market loss due to counterparty credit risk (CVA)
  
  • Basic and standardised approach
  • Standardise based on value at risk (VaR)

Session 9

Market Risk

• Risk of loss from movement in market prices
  
  • Interest rate, credit spread, equity, foreign exchange and commodities
• Revised standardised more complex approach
  
  • Sensitivities-based (delta, vega and curvature risks)
  • Default-risk charges and residual add-ons
• Internal models
  
  • Approval required from supervisory authority
  • Financial models based on global expected shortfalls, default risk charge and stressed capital add-on

Session 10

Operational Risk

• Risk of loss from inadequate or failed internal processes, people and systems or from external events
• Revised standardised approach
  
  • Based on Business Indicator (BI), marginal coefficient and scaling factor

Case Study: participants compute the operational RWAs of a European bank based on the last three years P&L

Session 11

Pillar 2 and 3

• Pillar 2: risks not covered by covered by Pillar 1 (credit concentration risk, stress testing, etc)
• Pillar 3 focuses on the disclosure requirements

Session 12

Leverage and Liquidity Ratios

• Back-stop leverage ratio based on non-risk weighted exposure
  
  • G-SIBs buffer
• Liquidity coverage ratio (LCR)
• Net stable funding ratio (NSFR)

Case Study: participants calculate the Capital Requirements Directive leverage ratio of a European bank

• Financial analysts in investment banks (FIG departments)
• Lateral hires in investment banks (FIG department)
• Risk managers in banks
• Junior equity research
• Junior investment managers
• Strategy and corporate development bank professionals
• All other interested Finance and professionals

Currently there are no Q&As for this course. Be the first to ask a question.

Certificate of completion

Digital certificate - Included