Abstract
The impact of the credit risk-related changes on the total RWA and capital requirements is important primarily due to the share of the current share of credit risk to the total RWA and capital requirements (almost two-thirds of the total minimum required regulatory capital of the major international banks [BCBS, Basel III: Finalising post-crisis reforms—Standards, 2017]).
The scope of this chapter is to provide the reader with the necessary background for the evaluation of the current and final Basel III. The comparison between the current and revised frameworks focuses on the assessment of the migration from the current to revised SA and from the current to the revised IRBA. Also, it aims at discussing the properties of such horizontal migration and introduces the reader to the properties of credit risk modelling.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
This term is adopted by the ECB’s European Credit Assessment Framework (ECB, 2015).
- 2.
RW in italics refer to the final Basel III.
- 3.
This RW corresponds to “option 2” of the two alternative sets of ratings available for banks under Basel II (BCBS, 2006a: para 63) and Basel III.
- 4.
BCBS, 2015: 31, para 36.
- 5.
SMEs treated as corporates.
- 6.
The one-to-one deduction from capital is generally deemed equivalent to an RW of 1250%, where the actual capital ratio of a bank is exactly at the minimum required total capital ratio (8%). However, for highly capitalised banks (well above 8%), the deduction from capital is more favourable than an RW of 1250% as it reduces the capital ratio less than the RW of 1250%.
- 7.
The values in parenthesis refer to national discretions that would result in a different RW.
- 8.
The content of this table refers exclusively to the final Basel III framework.
- 9.
According to the Basel framework, provisions are items additive to TC .
- 10.
According to the International Financial Accounting Standards (IFRS), it is prohibited to rely on past experience to form current provisions.
- 11.
Off-balance sheet (OffBS) items are assets which the bank is not the recognised as legal owner of, or liabilities which the bank does not have direct legal responsibility for. However, since there could be direct or indirect recourse to the bank, OffBS items bear a certain level of risk which should be translated to the equivalent risk of assets or liabilities of the balance sheet.
- 12.
The CCF of 20% applies to both issuing and confirming banks.
- 13.
The scaling factor is not explicitly included in the typology of formulae for the calculation of RW and RWA, but it is mentioned as an additional requirement of Basel II (BCBS, 2006: para 14).
- 14.
The book will not examine the formulation and impact of the EAD as it depends on the nature of banks’ portfolios.
- 15.
The illustrations and the examples presented in this book consider the LGD input as given.
- 16.
Instead of presenting it in the SA section.
- 17.
The impact assessment will test additional scenarios.
- 18.
Basel II framework (BCBS, 2006) sets out a lower floor of 100% for public and private equities with certain characteristics, that is, investment in public equities should be part of long-term customer lending or general banking relationship with the issuing corporate while the capital gains are expected in the long term; investments in private equity should be based on regular and periodic cash flows not derived from capital gains. This lower floor would result in the overestimation of the current RWA corresponding to equities and consequently to underestimation of the impact from the implementation of the final Basel III.
- 19.
It disregards asset classes where the floors remained the same.
- 20.
FTSE 100 Index (UKX) comprises the 100 most highly capitalised “blue-chip” companies listed on the London Stock Exchange. For more information see http://www.ftse.com/products/indices/uk
References
Bank for International Settlements (BIS). (2013). Central bank collateral frameworks and practices. Retrieved September 2017, from http://www.bis.org/publ/mktc06.pdf
Basel Committee on Banking Supervision (BCBS). (2006, June). Basel II: International convergence of capital measurement and capital standards: A revised framework – comprehensive version. Retrieved from http://www.bis.org/publ/bcbs128.pdf
Basel Committee on Banking Supervision (BCBS). (2011, June). Basel III: A global regulatory framework for more resilient banks and banking systems – revised version. Retrieved from http://www.bis.org/publ/bcbs189.pdf
Basel Committee on Banking Supervision (BCBS). (2014, December). Revisions to the Standardised Approach for credit risk – consultative document. Retrieved from http://www.bis.org/bcbs/publ/d307.pdf
Basel Committee on Banking Supervision (BCBS). (2015, December). Revisions to the Standardised Approach for credit risk – second consultative document. Retrieved from http://www.bis.org/bcbs/publ/d347.pdf
Basel Committee on Banking Supervision (BCBS). (2016a, March). Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches – consultative document. Retrieved from http://www.bis.org/bcbs/publ/d362.pdf
Basel Committee on Banking Supervision (BCBS). (2016b, October). Regulatory treatment of accounting provisions – interim approach and transitional arrangements – consultative document. Retrieved from http://www.bis.org/bcbs/publ/d386.pdf
Basel Committee on Banking Supervision (BCBS). (2017, December). Basel III: Finalising post-crisis reforms – Standards. Retrieved December 7, 2017, from https://www.bis.org/bcbs/publ/d424.pdf
Bindseil, U., Corsi, M., Sahel, B., & Visser, A. (2017). The Eurosystem collateral framework explained. Occasional Paper, No 189. Retrieved September 2017, from https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op189.en.pdf
European Central Bank (ECB). (2015). The financial risk management of the Eurosystem’s monetary policy operations. Retrieved September 2017, from https://www.ecb.europa.eu/pub/pdf/other/financial_risk_management_of_eurosystem_monetary_policy_operations_201507.en.pdf
Jacobson, T., Lindé, J., & Roszbach, K. (2004). Credit risk versus capital requirements under Basel II: Are SME loans and retail credit really different? Sveriges Riksbank. Working Papers Series No. 162. April. Retrieved March 2017, from http://www.riksbank.se/Upload/WorkingPapers/WP_162.pdf
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2018 The Author(s)
About this chapter
Cite this chapter
Akkizidis, I., Kalyvas, L. (2018). Credit Risk: Aspects of Implementation. In: Final Basel III Modelling. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-70425-8_4
Download citation
DOI: https://doi.org/10.1007/978-3-319-70425-8_4
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-70424-1
Online ISBN: 978-3-319-70425-8
eBook Packages: Economics and FinanceEconomics and Finance (R0)