2022-08-25-KPMG_Global-A_comparison_of_the_Basel_Committee_and_European_Commission_requirements_10页_1mb

Summary of Basel4 Publications and EU Regulatory Requirements

Core Content Overview

The document outlines the key regulatory changes introduced by the European Commission through the CRR3 legislative proposal and its amendment in May 2022, as well as the EBA's draft technical standards (RTS) for the Fundamental Review of the Trading Book (FRTB) Standardised Approach (SA). These changes aim to align EU regulations with Basel 4 requirements, which include more risk-sensitive capital frameworks and stricter definitions for the trading and banking books. The implementation timelines and capital impacts are also detailed, with many provisions set to take effect from 1 January 2023 onwards.

Key Regulatory Changes

Market Risk

• Stricter boundary between trading and banking books: Enhances risk sensitivity and introduces more detailed definitions.
• Revised Internal Model Approach (IMA): Aligns with Basel standards.
• Implementation Date: 1 January 2025.
• Capital Impact: Higher capital requirements.

Credit Risk

• More granular and risk-sensitive SA: Removes the option to use the advanced IRB approach for certain entities.
• Implementation Date: 1 January 2023.
• Capital Impact: Higher capital requirements.

Operational Risk

• Withdrawal of IMA process: Standardised measurement approach is now mandatory.
• Implementation Date: 1 January 2023.
• Capital Impact: Higher capital requirements, especially for banks with significant historical losses and transitioning from AMA.

CVA (Credit Valuation Adjustment)

• New basic approach and SA risk framework: Enhances risk sensitivities and consistency with market risk standards.
• Implementation Date: 1 January 2023.
• Capital Impact: Higher capital requirements.

Leverage Ratio

• Revised exposure definition: Introduces a G-SIB leverage ratio buffer.
• Implementation Date: 1 January 2023.
• Capital Impact: Lower capital requirements.

Output Floor

• Limits the use of IMA: Reduces capital requirements for market and credit risk.
• Calibrated to 72.5% of RWA under SA: This percentage is applied to the total risk-weighted assets.
• Implementation Date: Phased in between 1 January 2023 and 1 January 2028.
• Capital Impact: Higher capital requirements, with a significant impact from 2025 onwards.

RTS on Gross – Jump-To-Default (JTD)

• Reformulated components: P&L long, P&L short, Adjustment long, and Adjustment short are redefined.
• Gross JTD amount: Defined as the bond-equivalent market value minus the defaulted value.
• Excluded instruments: Indices are not treated as a single instrument under DRC requirements.

RTS on Residual – Risk Add-On (RRAO)

• Exotic risks considered: Longevity risk, weather, natural disasters, and future volatility.
• Residual risk scope: Applies to digital, Asian, Bermudan, and CMS spread options.
• Conditions for RRAO: Only applies if the option is with a retail client and has prepayment risk in the trading book.
• No clarity on netting: Uncertainty remains on whether long and short positions with the same underlying can be netted.

Timeline and Implementation

• Binding capital requirements: Effective from 1 January 2025.
• IMA reporting: Uncertainty remains on the exact reporting date, which could be in 2024, one year prior to binding requirements.
• Overlapping RTS and CRR3: May cause challenges in IMA applications.

Delegated Acts

• Empowerment of the European Commission: To amend market risk requirements and align them with international standards.
• Multiplier option: Allows for a multiplier between 0 and 1 to align with other jurisdictions.

Trading Book and Banking Book Boundary

• Product-specific lists: Defined for both trading and banking books.
• Reclassification possibility: Instruments in the trading book can be reclassified to the banking book if approved.
• Dedicated trading desks: Permitted for non-trading book positions subject to FX and commodity risk.
• Exclusion of FX risk: Allowed when hedging FX risks.
• EBA RTS on net short positions: To be published within 24 months of CRR3 entry into force.

CRR2 & CRR3 Rule Change Analysis

• KPMG analysis: Provides a detailed comparison of FRTB IMA and SA regulations.
• Material change categorisation: Flags changes as "Y" (material) or "N" (no change), with "Not assessed" for rules dependent on future RTS.
• Impact assessment: Evaluates changes across functions and operating models, with a focus on materiality.

Key Requirement Differences (CRR2 vs. CRR3)

• Standardised Approach (SA):

  • Article 106: Clarifies internal risk transfers.
  • Article 325j: Introduces look-through approach and allows third-party data.
  • Article 325q: Clarifies FX Vega treatment.
  • Article 325s: Improved vega sensitivity definition.
  • Article 325t: Aligns sensitivities with risk management models.
  • Article 325ea: Standard scaling factor for GIRR.
  • Article 325ai: Intra-bucket correlation parameter adjusted.
  • Article 325ah: Unrated covered bonds bucket assignment clarified.
  • Article 325as: Lower risk weight for carbon trading.

• Internal Models Approach (IMA):

  • Data inputs: EBA to specify criteria.
  • Modellability & Backtesting: New powers for regulators, flexibility for NMRFs, and EBA RTS for backtesting exceptions.
  • P&L Attribution Test (PLAT): Incorporates capital surcharge as a binding requirement.
  • CIU validation: Requires look-through on a weekly basis and separate validation units.

EU Parliament Proposed Changes (June 2022)

• Trading book definition: CIUs with trading intent and banking book instruments are allocated to the banking book.
• Frequency of review (SA): Standardised approach reviews now occur every two years, with the possibility of annual reviews.
• Curvature risk (SA): Curvature risk weights are based on the highest delta risk weight of the bucket.
• CIU look-through: Weekly look-through required, with additional monitoring for less frequent reviews.
• Commodity risk: Extended maturity ladder approach allowed without IMA, subject to notification.

Conclusion

The Basel4 publications and related EU regulatory changes significantly affect the capital requirements and risk management practices of financial institutions. The implementation of these changes, particularly from 2023 onwards, introduces more stringent and risk-sensitive frameworks, with a focus on aligning EU regulations with international standards. The timeline and phased implementation provide a transition period for firms to adapt, while the introduction of new technical standards and the redefinition of key risk concepts necessitate thorough internal review and model adjustments.