BCBS Developments in Credit Risk Regulation Hanne Meihuizen Quantitative Risk Management Expert Supervision Policy Department De Nederlandsche Bank (DNB) June 2015
The views expressed in the following material are the author s and do not necessarily represent the views of the Global Association of Risk Professionals (GARP), its Membership or its Management. 2
Agenda Developments in Internal Ratings Based approach Developments in Standardised Approach for Credit Risk Developments in RWA floor 2
Developments in Internal Ratings Based approach
Basel II Accord Internal model approaches to calculate capital requirements were introduced with Basel II 2006 Objectives: Strengthen soundness and stability of international banking system Maintaining sufficient consistency avoid competitive inequality Promote stronger risk management practices Risk sensitive capital charges 4
Evaluation of Internal Ratings Based approach Strong aspects: Risk sensitivity (investment incentives) + enhancement of quantitative risk management Weaker aspects: Room for country and bank specific modelling practices + lack of transparency => lack of comparability, lack of confidence in the outcomes 5
RWA comparison Low Default Portfolios 2012-2013 Top-down analyses and Hypothetical Portfolio Exercises Legend: Europe North America Asia/Australia Change from 10% capital ratio if risk-weights from bottom-up benchmarking are adjusted to the median. Each bar represents one bank. The chart is based on the assumption that variations observed at each bank for the hypothetical portfolios are representative for the entire sovereign, bank, and corporate portfolios of the bank and are adjusted accordingly, but makes no other adjustment to RWA or capital. 6 Source: BCBS July 2013
Results LDP study 75% of RWA variation driven by underlying differences in risk composition of banks assets 25% driven by diversity in bank and supervisory practices, particularly on LGD and EAD estimation for sovereign and bank exposures through lack of data 7
Issues identified for enhanced harmonisation IRB Definition of Default Minimum historic data availability requirements + alternatives for non-modelable parameters PD estimation (Through-the-Cycle vs Point-in-Time) Downturn LGD estimation, incl potential floors Exemption from the one-year maturity floor Margins of conservatism Treatment of defaulted exposures Permanent partial use of Standardised Approach Disclosure Under construction, see BCBS Reducing excessive variability in banks regulatory capital ratios, report to the G20, November 2014 8
Developments in Standardised Approach for credit risk
Review SA for credit risk Objectives: More risk sensitive Avoid mechanical use of external ratings (US Dodd-Frank Act) Separately: Holisistic review of the treatment of Sovereign Exposures 10
Proposal SA credit risk: risk drivers Financial Institutions: Corporates: CET1-ratio and Non-Performing Assets ratio Revenues and Leverage ratio Residential Mortgages: LTV (=current loan extended over Value at origination) and Debt service to Income ratio Commercial Real Estate: Treated as unsecured; or LTV 11
Developments in RWA floor
RWA floor Replace Basel I as base for RWA-floor by Standardised Approaches Expand scope from credit and operational risk, to also include market and counterparty credit Not yet specified in consultation paper December 2014: Level Transition period Level of application (over all 4 risk types joinedly; separately per risk type; or per portfolio) BCBS vs EU implementation 13
Considerations
Considerations Trade-offs: Harmonisation vs bank-specificity Simplicity vs risk-sensitivity Comparability Equal risk weights, yet differences in risk weights are driven by differences in risks. Retain models where risks are soundly modelable; develop alternatives where such is not the case. Enhance comparability of outcomes where risks are modelable. Important to achieve capital charges in line with the levels of risk in the applicable portfolios, including the Dutch portfolios. Yet, also important to realise that no international standard could take into account all international differences affecting risks. 15
Disclaimer The information in this presentation reflects the author s personal opinion. This opinion does not necessarily coincide with the opinion and policy of DNB. Further, the information in these sheets may be subject to errors. DNB nor the author can accept any liability for loss or damage ensuing from using, relying on or acting on any information provided in these sheets.