The Basel Committee on Banking Supervision today released a consultative document entitled Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches.
The consultative document sets out a proposed set of changes to the Basel framework’s advanced internal ratings-based approach and the foundation internal ratings-based approach. The IRB approaches permit banks to use internal models as inputs for determining their regulatory capital requirements for credit risk, subject to certain constraints. The proposed changes to the IRB approaches are a key element of the regulatory reform programme that the Basel Committee has committed to finalise by end-2016.
The proposed changes to the IRB approaches set out in this consultative document include a number of complementary measures that aim to: (i) reduce the complexity of the regulatory framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk. Specifically, the Basel Committee proposes to:
- remove the option to use the IRB approaches for certain exposure categories, such as loans to financial institutions, since – in the Committee’s view – the model inputs required to calculate regulatory capital for such exposures cannot be estimated with sufficient reliability;
- 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 Committee has previously consulted on the design of capital floors based on standardised approaches and is still considering the design and calibration. This would complement the proposed constraints discussed in this consultation paper. The final design and calibration of the proposals will be informed by a comprehensive quantitative impact study and by the Committee’s aim to not significantly increase overall capital requirements.
As set out in its work programme and in its reports to G20 leaders, the Committee is today releasing proposed measures to reduce excessive variability in credit risk-weighted assets. With the release of these proposals, the Committee has now consulted on all key elements of its post-crisis regulatory reform programme. Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank said “Addressing the issue of excessive variability in risk-weighted assets is fundamental to restoring market confidence in risk-based capital ratios”. He added that “the measures announced today largely retain the use of internal models for the determination of credit risk weighted assets, but with important safeguards that will promote sound levels of capital and comparability across banks”.
The Committee welcomes comments from the public on all aspects of the proposals described in this document by Friday 24 June 2016. All comments will be published on the Bank for International Settlements website unless a respondent specifically requests confidential treatment.
