CRR III The EU Implementation of Basel IV - the Next Generation of Risk Weighted Assets
, by Neisen, Martin; Roth, Stefan
- ISBN: 9783527511648 | 3527511644
- Cover: Hardcover
- Copyright: 7/31/2023
The revised banking package of CRD VI and CRR III contains a large number of new requirements, the implementation of which will pose major challenges for the banking industry. In addition to the adoption of the final Basel IV regulations, other topics such as crypto assets or the consideration of ESG in banking supervisory law will be addressed.
The current proposals of the EU Commission for the implementation of the Basel reform proposals are presented in the edited volume by Martin Neisen and Stefan Röth. The aim is to give the reader a comprehensive but easily understandable overview of the proposals and to work out implementation challenges in a practical way.
With the help of an international team of experts, the complexity of the topic is reduced and important assistance is offered.
Compared to the second edition of the Basel IV book, the topics already implemented in the EU as part of the CRR II have been removed and a comprehensive presentation of all content of CRD VI and CRR III has been added.
The current proposals of the EU Commission for the implementation of the Basel reform proposals are presented in the edited volume by Martin Neisen and Stefan Röth. The aim is to give the reader a comprehensive but easily understandable overview of the proposals and to work out implementation challenges in a practical way.
With the help of an international team of experts, the complexity of the topic is reduced and important assistance is offered.
Compared to the second edition of the Basel IV book, the topics already implemented in the EU as part of the CRR II have been removed and a comprehensive presentation of all content of CRD VI and CRR III has been added.
Martin Neisen is a Partner at PwC in Frankfurt and leads PwC's global Basel IV initiative. He is also responsible for the FS Risk & Regulation department at PwC Germany. He has extensive experience and technical expertise in the German and European banking industry. Mr. Neisen has 20 years of project and auditing experience at banks and financial service providers. This applies in particular to advising institutions on questions relating to the entire spectrum of banking supervisory law and risk management.
He is involved in PwC's international project teams and is regarded throughout Germany as the expert in the implementation of regulatory requirements and challenges that simultaneously affect supervisory law, risk management and accounting.
Stefan Röth has worked for PwC since 2008 and, as Director in the FS Risk & Regulation department, advises banks and financial service providers on all issues relating to banking supervisory law. Mr. Röth has managed numerous projects for the implementation of banking regulatory requirements, including the implementation of CRD IV/CRR, CRD V/CRR II and the corresponding COREP & FINREP reporting. In addition, Mr. Röth supported banks in preparing for Basel IV / CRR III, for example in the context of test calculations and impact analyses.
He is involved in PwC's international project teams and is regarded throughout Germany as the expert in the implementation of regulatory requirements and challenges that simultaneously affect supervisory law, risk management and accounting.
Stefan Röth has worked for PwC since 2008 and, as Director in the FS Risk & Regulation department, advises banks and financial service providers on all issues relating to banking supervisory law. Mr. Röth has managed numerous projects for the implementation of banking regulatory requirements, including the implementation of CRD IV/CRR, CRD V/CRR II and the corresponding COREP & FINREP reporting. In addition, Mr. Röth supported banks in preparing for Basel IV / CRR III, for example in the context of test calculations and impact analyses.
Foreword 11
Preface 13
1. Chapter: Introduction 15
Literature 17
2 Chapter: Revision of the Standardised Approach for Credit Risk (SA-CR) 19
2.1 Introduction 19
2.2 General aspects 23
2.3 Determination of the exposure value 25
2.4 Exposures to institutions 26
2.5 Exposures to corporates 29
2.6 Specialised lending exposures 30
2.7 Subordinated debt and equity exposures 32
2.8 Retail exposures 33
2.9 Exposures secured by mortgages on immovable property 34
2.9.1 General requirements 35
2.9.2 Calculation of the exposure-to-value (ETV) 36
2.9.3 Exposures secured by mortgages on residential immovable property 37
2.9.4 Risk positions secured by mortgages on commercial immovable property 40
2.9.5 Receivables related to land acquisition, development and construction (ADC) 41
2.9.6 Changes compared to the current CRR regulations 42
2.10 Defaulted receivables 43
2.11 Other assets 43
2.12 Additional risk weights for risk positions with currency mismatches 43
2.13 Use of external ratings 44
2.13.1 General aspects 44
2.14 Credit risk mitigation techniques 46
2.14.1 The financial collateral simple method 46
2.14.2 The financial collateral comprehensive method 47
2.14.3 Eligibility of repurchase agreements and similar transactions 48
2.14.4 Consideration of guarantees and credit derivatives 49
2.15 Summary 50
Literature 51
3 Chapter: The future of the IRB Approach 53
3.1 Introduction to the fundamentals of the IRB approach in accordance with CRR 53
3.1.1 Introduction to the IRB risk weight formula 54
3.1.2 The adoption of the IRB approach 60
3.1.3 Calculation of RWA and EL 60
3.1.4 Minimum requirements for the entry and ongoing use of the IRBA 66
3.1.5 Approval process: home/host coordination 73
3.1.6 Decision on the application 73
3.2 The implementation of the Basel Committee’s initiative to improve the IRB approach in the EU 74
3.2.1 Introduction 74
3.2.2 Scope of the internal models 76
3.2.3 Partial use of the IRB approach 80
3.2.4 Risk parameter floors as an instrument RWA variability reduction 82
3.2.5 Parameter estimation procedure 84
3.2.6 Credit risk mitigation 87
3.2.7 Changes in the modelling specifications 88
3.2.8 Expected impact on banks 90
3.2.9 Conclusions 93
Literature 94
4 Chapter: Supervisory treatment of market risks 95
4.1 Introduction 95
4.2 General and overarching adjustments 96
4.3 Revised trading book boundary 97
4.4 Adjustments to the requirements for reclassifications (Article 104a CRR 3) 99
4.5 Adjustments to the requirements for internal risk transfers (Article 106 CRR 3) 100
4.6 Revised treatment of investments in funds in the trading book 101
4.7 Adjustments to the Alternative Standardised Approach for market risk 103
4.7.1 Adaptation to the qualitative requirements of the A-SA 104
4.7.2 Technical adjustments to the Alternative Standardised Approach for market risk (A-SA) 104
4.8 Simplified standardized approach for market risk (S-SA) 107
4.9 Alternative Internal Model Approach for market risk (A-IMA) 107
4.9.1 Permission and own funds requirements 108
4.9.2 General requirements 108
4.9.3 Internal model for default risks 109
4.10 Conclusion 110
Literature 110
Contents 7
5 Chapter: The CVA risk capital charge framework 113
5.1 Introduction 113
5.2 Hierarchy of approaches 114
5.3 CVA exemptions and securities financing transactions 116
5.4 Standardised approach for CVA 117
5.4.1 Regulatory CVA model 117
5.4.2 Calculation of own funds requirements 118
5.5 Basic approach for CVA 122
5.5.1 Determination of the regulatory capital requirements on the basis of the basic CVA 122
5.5.2 Determination of the reduced version of the BA-CVA in detail 122
5.5.3 Determination of the full version of the BA-CVA in detail 124
5.6 Conclusion and expected impact 126
Literature 126
6 Chapter: Operational risks 129
6.1 Background 129
6.2 Methods for Determining OpRisk According to Basel II 130
6.2.1 Basic indicator approach and standardised approach 131
6.2.2 Advanced measurement approaches 132
6.2.3 Criticism of existing approaches 133
6.3 Overview: From Basel II to CRR 3 133
6.4 Standardised approach to operational risk (BCBS 424) 135
6.4.1 Functioning of the revised standardised approach 135
6.4.2 Calculation of annual OpRisk-related losses 140
6.4.3 Management of operational risks 142
6.4.4 Disclosure 143
6.5 Outlook 144
6.5.1 Capital requirements for OpRisk 144
6.5.2 Further consideration 144
6.6 Summary and conclusion 145
Literature 147
7 Chapter: The output floor 149
7.1 Introduction 149
7.2 Reasons for the introduction of the output floor 151
7.2.1 Outdated or no Basel I calculation systems 151
7.2.2 National deviations in the implementation of Basel I and the Basel I capital floor 152
7.2.3 The scope of application of the Basel I floor 152
7.2.4 Development of new standard approaches 152
7.3 The CRR 3 output floor 155
7.3.1 Scope of CRR 3 output floors 155
7.3.2 Calculation of the CRR 3 output floor 155
7.3.3 Transitional arrangements for the output floor pursuant to CRR 3 158
7.3.4 Selection of the right standardised approach 159
7.3.5 Deviations from Basel IV capital floor 159
7.4 Objectives and effects of the output floor 160
7.4.1 Impact of the output floor on standard approaches and their implementation 160
7.4.2 Optimization of the standardised approaches 161
7.4.3 Influence of the output floor on valuation models 164
7.4.4 Interaction between the floor and the scope of the IRB approach 167
7.5 Conclusion 168
Literature 169
8. Chapter: Disclosure 171
8.1 Introduction 171
8.2 Proportionality principle 172
8.3 Risk management objectives and policy 174
8.4 Scope of disclosure 174
8.5 Own funds 175
8.6 Capital requirements and risk-weighted exposure amounts 176
8.7 Counterparty credit risk 177
8.8 Countercyclical capital buffer 178
8.9 Indicators of global systemic importance 178
8.10 Credit risk 178
8.10.1 Credit risk mitigation 180
8.10.2 Credit risk in the standardised approach 180
8.11 Asset encumbrance 181
8.12 Market risk 181
8.13 CVA risk 181
8.14 Operational risk 182
8.15 Disclosure of key parameters (“key metrics”) 183
8.16 Interest rate risk of the banking book (IRRBB) 183
8.17 Securitisations 184
8.18 Environmental, social and governance risks – ESG risks 184
8.19 Remuneration policy 187
8.20 Leverage ratio 188
8.21 Liquidity ratios 188
8.22 Conclusion and expected impact 189
Literature 189
9. Chapter: MREL and TLAC as part of the resolution regime 191
9.1 Introduction 191
9.2 Key requirements for resolution capability 193
9.2.1 Minimum requirements of the EBA 193
9.2.2 Minimum requirements of the SRB 193
9.3 TLAC 197
9.3.1 TLAC implementation 197
9.3.2 TLAC calibration 198
9.3.3 TLAC-eligible liabilities 198
9.3.4 Resolution units and internal TLAC 198
9.3.5 TLAC holdings 202
9.3.6 TLAC reporting requirements 202
9.3.7 TLAC disclosure 203
9.4 MREL 203
9.4.1 MREL implementation 203
9.4.2 MREL calibration 204
9.4.3 MREL-eligible liabilities 205
9.4.4 Resolution units and internal MREL 208
9.4.5 MREL holdings 210
9.4.6 MREL reporting requirements 210
9.4.7 MREL disclosure 213
9.5 Outlook and conclusion 214
Literature 216
10 Chapter: ESG: Regulatory overview for dealing with sustainability risks 219
10.1 Sustainability risks in the financial sector 219
10.2 Consideration of sustainability aspects in SREP 219
10.2.1 Regulatory background 219
10.2.2 Overview of the expectations of European banking supervision 222
10.2.3 Consideration of ESG in the Supervisory Review and Evaluation Process (SREP) 225
10.3 ESG ratings – methodology and comparison 226
10.3.1 Introduction to the subject of ESG ratings 226
10.3.2 Overview of the ESG rating market 229
10.3.3 Methodological approaches and problems 232
10.4 Adjustment of capital requirements to cover sustainability risks 238
10.4.1 A possible adjustment of the minimum capital requirements on the basis of ESG ratings 238
10.4.2 Privileging of infrastructure projects under Pillar I 240
10.4.3 “Green Supporting Factor” and “Brown Penalty Factor” as adjustment factors 241
10.4.4 Sustainability Factor (SF) and Sustainability Weight (SW) as alternatives to the binary approach 243
10.4.5 Outlook 245
Literature 247
11. Chapter: Cryptoassets 249
11.1 Definition and types of cryptoassets 249
11.2 Development of a prudential framework 250
11.3 Classification procedure for cryptoassets 251
11.4 Regulatory requirements in relation to Group 1 cryptoassets 253
11.4.1 Credit risk 253
11.4.2 Market price risk 256
11.4.3 Add-on factor for infrastructure risk 257
11.4.4 Credit valuation adjustment (CVA) 257
11.4.5 Determination of counterparty default risk 258
11.5 Regulatory requirements in relation to Group 2a cryptoassets 258
11.5.1 Minimum capital requirements for credit and market risk 259
11.5.2 Credit valuation adjustment 260
11.5.3 Determination of counterparty default risk 260
11.6 Regulatory requirements in relation to Group 2b cryptoassets 261
11.6.1 Minimum capital requirements for credit and market risk 261
11.6.2 Credit valuation adjustment 261
11.6.3 Determination of counterparty default risk 261
11.7 Final BCBS standard 262
11.8 Conclusion 263
Literature 263
12. Chapter: Further requirements of CRD 6 265
12.1 Introduction 265
12.2 Supervisory powers 265
12.2.1 Requirements for the independence of competent authorities 265
12.2.2 Extension of supervisory powers in the case of acquisitions, disposals, mergers and divisions 266
12.2.3 Professional qualification and personal reliability (Fit & Proper) 267
12.3 Branches from third countries 269
12.3.1 Approval 270
12.3.2 Minimum regulatory requirements 270
12.3.3 Reporting requirements 272
12.3.4 Supervision 272
12.3.5 Conclusion 273
Literature 273
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