The Basel Committee on Banking Supervision (BCBS) has proposed several measures designed to: (i) reduce the complexity of the regulatory capital framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk. In releasing a consultation document that enumerates the proposals, BCBS cited past concerns regarding excessive variability in risk-weighted assets (RWAs) and said its proposals constitute a key element of the regulatory reform program that it committed to finalizing by the end of 2016.

The BCBS document contains several complementary measures. The BCBS proposes to:

  • remove the option to use the internal ratings-based (IRB) approaches for certain exposures, where it is judged that the model parameters cannot be estimated sufficiently reliably for regulatory capital purposes;
  • adopt exposure-level, model-parameter floors to ensure a minimum level of conservatism for portfolios where the IRB approaches remain available; and
  • provide greater specification of parameter estimation practices to reduce variability in risk-weighted assets for portfolios where the IRB approaches remain available.

The document also proposes to:

  • remove the Advanced-IRB (A-IRB) and Foundation IRB approaches for the following portfolios, which as a result will be subject to the standardized approach to credit risk:
    • banks and other financial institutions;
    • large corporates (defined as corporates belonging to consolidated groups with total assets exceeding €50 billion); and
    • equities.
  • remove the option to use the A-IRB approach for exposures to corporates that are part of consolidated groups that have annual revenues greater than €200 million.
  • remove the IRB approaches for specialized lending that use banks’ estimates of model parameters, leaving only the standardized approach and the IRB supervisory slotting approach.
  • introduce a floor to the internal model method for counterparty credit risk (IMM-CCR) based on a percentage of the applicable standardized approach.

Specialized lending includes project finance, object/asset finance, commodities finance, income-producing real estate and high-volatility commercial real estate.

Banks with sufficient history and related data for these specified portfolios and exposures to support an IRB approach may seek to challenge the assumption that their data is not sufficiently reliable to provide appropriate model inputs.

The BCBS has previously consulted on the design of aggregate capital floors based on standardized approaches and is still considering this design and calibration, which would complement the proposed constraints discussed in the consultation document.

The BCBS states that the final design and calibration of the proposals will be informed by a comprehensive quantitative impact study and that the BCBS' aim is not to significantly increase overall capital requirements.

Comments on the consultation document are due by June 24, 2016, and can be submitted via the BCBS portal.

For more information about this topic, please contact J. Paul Forrester or your regular Mayer Brown lawyer or other contact.