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Data Pooling needs after Basel III Finalisation

by | Feb 6, 2018 | Uncategorized

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In December 2017 the BCBS made their final decision on what they call the “Finalisation of Basel III” and what the industry has called “Basel IV”. 

The reforms tighten the rules, aiming to reduce variation in RWAs across banks and are aimed to be in force from 2022, although they do require governments (EU, US etc.) to write them into their own laws, which may see further changes made.

 

 

The package of changes includes:

  • More risk sensitive Standardised Approach for credit risk
  • Restrict full internal modelling (AIRB) for some portfolios with very low default data
  • AMA removed for Operational risk, leaving a single standardised approach
  • 72.5% floor on internal model approaches vs standardised (note that this floor starts at 50% in 2022 and rises each year to 72.5% in 2027).

We summarise the effect on Bank loan portfolios as follows (for further details see BCBS summary):

Portfolio

Basel III current to 2022

BCBS Consultation, March 2016

BCBS Finalised December 2017 (from 2022)

Banks & Other Financials

AIRB permitted SA only permitted FIRB, with 45% unsecured LGD
5bp PD floor
Largest Large Corporates (turnover >€500m) AIRB permitted SA only permitted FIRB, with 40% unsecured LGD
5bp PD floor
Large Corporates turnover between €50m & €500m AIRB permitted FIRB for corporates with Revenue > €200m

AIRB permitted
5bp PD floor;
25% LGD floor for unsecured
0-15% LGD floor for secured
50% EAD floor (CCF3 method) 

SME AIRB permitted, without input floors

5bp PD floor;
25% LGD floor for unsecured 0-20% LGD floor for secured

AIRB permitted
5bp PD floor;
25% LGD floor for unsecured
0-15% LGD floor for secured
50% EAD floor (CCF3 method) 

Mortgages (retail) AIRB permitted, without input floors

5bp PD floor;
10% LGD floor

AIRB permitted
5bp PD floor;
5% LGD floor

Specialised Lending AIRB permitted 4 slots, min RWA 70%

AIRB permitted (w. floor)
No change yet, under review.

Sovereigns AIRB permitted SA only permitted

AIRB permitted (w. floor)
No change yet, under review.

This outcome allows for continuation of Advanced IRB modelling on most loan portfolios and continues the potential incentive, although limiting this to 27.5%.  The outcome is better than initial proposals, thanks in part to analytics on GCD data supplied to support analysis by industry associations, including IIF and AFME. The debate is not closed on either sovereigns or specialised lending, so it is likely that GCD will be asked for more analytics in this area.

Conclusion:

The continuation of the full AIRB modelling of PD, EAD and LGD for mid corps, SME and Specialized Lending plus the continuance of regulatory PD modelling for banks and even the largest corporates will see continued demand for high quality data from GCD both for modelling and for benchmarking purposes.

Regulators have made clear on many occasions in the recent past that benchmarking remains a key element of the validation process, even in portfolios where the LGD parameter is fixed. Harmonization of national regulations, e.g. by the EBA and the SSM, supports the future of data pooling. On top of that, the need for internal modelling for pricing and Economic Capital remains strong and even increased with Credit Loss Provisioning (IFRS9).  GCD’s growth in terms of coverage and depth of data will continue and we will deliver new ways of sharing data, methods and analytics, by banks for banks.

 

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