Basel III: Finalising post-crisis reforms

In December 2010, the BCBS published the Basel III framework with the aim at addressing a number of shortcomings with the pre-crisis regulatory framework and providing a regulatory foundation for a resilient banking system that supports the real economy. Since then, the BCBS has published several consultation papers focused on strengthening the current regulatory framework (e.g. by increasing the level of capital requirements, enhancing risk capture by revising areas of the risk-weighted (RWs) capital framework for market risk, counterparty credit risk, etc.).

In this context, the BCBS has now published Basel III: finalising post-crisis reform which includes revisions to the current Basel III framework in order to reduce excessive variability of risk-weighted assets (RWAs). In particular, these revisions to the regulatory framework will help restore credibility in the calculation of RWA by: i) enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will facilitate the comparability of banks' capital ratios; ii) constraining the use of internally modelled approaches; and iii) complementing the risk-weighted capital ratio with a finalised leverage ratio and a revised and robust capital floor.

This Technical Note prepared by Management Solutions’ R&D department includes a summary of the reforms introduced by the BCBS on the Basel III regulatory framework.

Executive Summary

This reform package to the regulatory framework covers the following aspects: the standardised approach (SA) and the internal ratings-based (IRB) approaches for credit risk, the credit valuation adjustment (CVA) risk framework, the operational risk framework, the output floor, as well as the leverage ratio (LR) framework.

Area of application:

The amendments introduced by this reform into the Basel III framework are applicable to all internationally active banks.

Main content:

• SA for credit risk. The key amendments are related to the revisions to individual exposures (e.g. exposures to sovereigns, banks, corporate) and the recognition of external ratings by national supervisors, CRM techniques, etc.
• IRB approach for credit risk. The main amendments cover the mechanics of the IRB approach (including categorisation of exposures, among others), the rules for corporate and bank exposures, for retail exposures and for purchased receivables, as well as the minimum requirements for the IRB approach.
• CVA risk framework. The main amendments include general provisions (including SA-CVA and BA-CVA approaches, CVA hedges, etc.), BA-CVA approach (full and reduced version) and SA-CVA approach (eligible hedges, calculations, etc.).
• Operational risk framework. The reform focuses on the standardised approach which includes a business indicator component (BIC) and the internal loss multiplier (ILM); the application of this approach in a group; and other aspects (e.g. general/specific criteria on loss data identification).
• Output floor. This floor was revised considering the requirements for the output floor (CET1, Tier 1 and total capital), the calculation of the output floor, disclosure requirements, implementation dates and transitional measures.
• LR framework. The key revisions to this framework are related to the definitions and requirements, as well as, exposure measures regarding on-balance sheet exposures, derivative exposures, securities financing transactions exposures and off-balance sheet items.

Download the technical note by clicking here.