Basel: the next generation

What is the future for internal regulatory capital models?

While the dust is still settling from the sweeping reforms of Basel III, the Basel Committee on Banking Supervision has not been idle. A series of consultations and proposals launched throughout 2014, with more to come this year, suggest another fundamental overhaul of banking capital requirements is on the horizon.

In recent months, the Basel Committee on Banking Supervision (BCBS) launched a series of standards and consultation papers on various areas of the regulatory framework. Many of the proposals have a target implementation date of 2017 – 2018, setting the scene for a consolidated package of legislation to overhaul regulatory standards once again. The breadth and scale of the changes should not be underestimated. In fact, some have questioned whether this heralds the beginning of the end for the use of internal models in regulatory capital.

The core theme underpinning the new BCBS proposals, as reported to the G20 in November 2014, is a desire to reduce the variability in capital ratios arising from modelling differences between banks. This intention, which has not been met with universal approval, appears to have stemmed from the results of the BCBS hypothetical portfolio exercise at the end of 2013, which illustrated a material variation in risk-weighted assets (RWA) calculated on the same portfolio by different banks.

In this paper, we summarise the key changes, their consequent impact and the resultant potential challenges for banks.

What is the future for internal regulatory capital models?
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