In December 2017 the BCBS made their final decision on what they call the “Finalisation of Basel III” and what the industry has called “Basel IV”.
The reforms tighten the rules, aiming to reduce variation in RWAs across banks and are aimed to be in force from 2022, although they do require governments (EU, US etc.) to write them into their own laws, which may see further changes made.
The package of changes includes:
- More risk sensitive Standardised Approach for credit risk
- Restrict full internal modelling (AIRB) for some portfolios with very low default data
- AMA removed for Operational risk, leaving a single standardised approach
- 72.5% floor on internal model approaches vs standardised (note that this floor starts at 50% in 2022 and rises each year to 72.5% in 2027).
We summarise the effect on Bank loan portfolios as follows (for further details see BCBS summary):
|
Portfolio |
Basel III current to 2022 |
BCBS Consultation, March 2016 |
BCBS Finalised December 2017 (from 2022) |
|---|---|---|---|
|
Banks & Other Financials |
AIRB permitted | SA only permitted | FIRB, with 45% unsecured LGD 5bp PD floor |
| Largest Large Corporates (turnover >€500m) | AIRB permitted | SA only permitted | FIRB, with 40% unsecured LGD 5bp PD floor |
| Large Corporates turnover between €50m & €500m | AIRB permitted | FIRB for corporates with Revenue > €200m |
AIRB permitted |
| SME | AIRB permitted, without input floors |
5bp PD floor; |
AIRB permitted |
| Mortgages (retail) | AIRB permitted, without input floors |
5bp PD floor; |
AIRB permitted |
| Specialised Lending | AIRB permitted | 4 slots, min RWA 70% |
AIRB permitted (w. floor) |
| Sovereigns | AIRB permitted | SA only permitted |
AIRB permitted (w. floor) |
This outcome allows for continuation of Advanced IRB modelling on most loan portfolios and continues the potential incentive, although limiting this to 27.5%. The outcome is better than initial proposals, thanks in part to analytics on GCD data supplied to support analysis by industry associations, including IIF and AFME. The debate is not closed on either sovereigns or specialised lending, so it is likely that GCD will be asked for more analytics in this area.
Conclusion:
The continuation of the full AIRB modelling of PD, EAD and LGD for mid corps, SME and Specialized Lending plus the continuance of regulatory PD modelling for banks and even the largest corporates will see continued demand for high quality data from GCD both for modelling and for benchmarking purposes.
Regulators have made clear on many occasions in the recent past that benchmarking remains a key element of the validation process, even in portfolios where the LGD parameter is fixed. Harmonization of national regulations, e.g. by the EBA and the SSM, supports the future of data pooling. On top of that, the need for internal modelling for pricing and Economic Capital remains strong and even increased with Credit Loss Provisioning (IFRS9). GCD’s growth in terms of coverage and depth of data will continue and we will deliver new ways of sharing data, methods and analytics, by banks for banks.