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Basel IV Regulatory Environment

A half-day webinar by experienced trainer


City Training UK

Summary

Price
£600 inc VAT
Or £50.00/mo. for 12 months...
Study method
Online with live classes
Duration
3 hours, Part-time
Qualification
No formal qualification
Additional info
  • Tutor is available to students
  • Certificate of completion available and is included in the price

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Overview

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.

Resources

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

Description

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

Who is this course for?

  • 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

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