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This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

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In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

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In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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Introduction to Basel IV

Introduction to Basel IV

Jonathan Ng

15 years: Banking regulation

On 7 December 2017, the Group of Governors and Heads of Supervision implemented revisions to the Basel III standard, commonly referred to as ‘Basel IV’. In this video, Jonathan provides an overview of these revisions and outlines what this means for the banking sector.

On 7 December 2017, the Group of Governors and Heads of Supervision implemented revisions to the Basel III standard, commonly referred to as ‘Basel IV’. In this video, Jonathan provides an overview of these revisions and outlines what this means for the banking sector.

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Introduction to Basel IV

19 mins 30 secs

Key learning objectives:

  • Understand how the standardisation of processes has impacted credit risk and operational risk

  • Learn about the revisions made

Overview:

Revisions to Basel III, which is now referred to as Basel IV changed the calculations and uses of risk weighted assets, internal models and several other factors that were meant to restore confidence in our calculations of capital ratios.

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Summary

What was the objective of Basel III revisions?

Revisions to the Basel III standard, which the market commonly refers to as ‘Basel IV’, were agreed upon in December 2017. The overall objective of the revisions to Basel III standards is to “restore credibility in the calculation of risk-weighted assets (or RWAs) and improve the comparability of banks’ capital ratios”.

In the final package, the BCBS made the following revisions:

  • Amendments to the applicable risk-weights under the Standardised Approach for credit risk, credit value adjustment (or CVA), and operational risk
  • A number of granular constraints on internal models, which includes the move of exposures to Banks and Large Corporates from Advanced Internal Ratings-Based Approach or AIRB, to Foundation Internal Ratings-Based Approach or FIRB, and a series of ‘input floors’ at Probability of Default and Loss-Given Default level
  • The removed use of the Advanced Measurement Approach (AMA) for operational risk and CVA risk
  • An output floor, which is calibrated at 72.5% of the Standardised approaches
  • Amendments to the Leverage Ratio calculation, with confirmation of the new surcharge for global systemically important banks (or GSIBs)

What changes were made to credit risk?

Changes to credit risk were made more standardised and impacted the following entities:

  • Banks and other financials
  • Large corporates
  • Middle market corporates
  • Small to medium sized businesses
  • Mortgages

Fundamental and standardised reviews of trading books were set in place to determine credit valuation and the adjustment of risk.

What changes were made to operational risk?

Operational risk capital will be calculated based on banks’ income (which represents the Business Indicator) and their historical operational losses (which represents the Loss Component). Within the Business Indicator component, the consultation document proposed 3 buckets.

What changes were made to the leverage ratio?

In relation to the Leverage Ratio, GSIBs will be subject to an additional Leverage Ratio buffer requirement. This buffer is to be met with Tier 1 Capital, and is set at 50% of a GSIB’s risk weighted higher-loss absorbency requirement – for example, for a Level 1 GSIB (subject to a 1.0% surcharge on their risk-weighted capital ratio), the Leverage Ratio surcharge will be an additional 0.5%, to make a total requirement of 3.5%. As with the capital risk-based framework, capital distribution constraints will apply for a GSIB if the leverage ratio buffer requirement is breached.

Where to next?

The individual new requirements are to be implemented by January 2022. To commensurate the standards, the BCBS also published analysis showing very moderate aggregate impacts globally, while confirming the very uneven nature of these impacts. Where some banks would appear to receive a benefit, those with adverse impacts vary from negligible to highly material, depending on each bank’s starting-point and portfolio mix.

While BCBS have said this is the finalisation of Basel III revisions, national supervisors are in a process of developing revised policies. National supervisors will be working on policy drafting and consultation and more granular assessment as to what the impacts, with the eventual implementation by 2022. Revisions to the RWA framework will be a key area of priority for supervisors, which will keep them and industry busy over the next 2 to 3 years.

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Jonathan Ng

Jonathan Ng

Jonathan started his career at Australian Prudential Regulation Authority, before moving to APRA, where he was responsible for frontline supervision and implementation of Basel III capital, liquidity and funding rules. Most recently, Jonathan spent 4 years with the Commonwealth Bank of Australia where he was responsible to execute equity and AT1 transactions.

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