Basel IV: the effect on Dutch banks
And how to act adequately
Impact studies on the Basel III post-crisis reforms of December 2017 show a significant increase in overall required capital of Dutch banks. Due to the complexity of the new requirements, a deeper understanding is needed on how this overall increase affects the various components of a bank. Our Basel IV report analysis the reforms, the impact and how to act adequately.
Understanding the impact of Basel IV
Without a great understanding of the Basel IV reforms, inappropriate allocation of capital requirements will occur. Inappropriate allocation will subsequently result in obscuring bad lending, lower availability of growth in low loss portfolios, mispricing of products and, therefore, increased cost to customers.
This report therefore analyses the impact of the post-crisis reforms on the various portfolios of a typical Dutch bank, using changes in credit risk requirements from both a Standardised and (Advanced) Internal Ratings Based (A-IRB) perspective as a focus. It aids in understanding the drivers of the overall increase in required capital and sheds light on which components of the bank will be affected most. This paper further gives guidance on first steps to take to start understanding the impact of the reforms on required data, changes in processes, changes in modelling and the required governance, and how Dutch banks could commence implementation of these reforms.
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New standardised approach for residential mortgage exposures
The analysis shows that overall impact of the reforms is particularly driven by the new standardised approach for residential mortgage exposures, combined with the introduction of a capital floor for risk weighted assets (RWA) at (A)-IRB banks.
In-depth analysis of the composition of the residential mortgage portfolio and its responsiveness to the regulatory Loan-to-Value (LTV) metric is needed for both standardized and (A)-IRB banks. Furthermore, proper documentation on this portfolio is necessary for appropriate allocation of capital.
Other portfolios that require further attention are: exposures to corporates (especially SME), project financing (as part of specialised lending) and retail exposures to SME. For some of these portfolios, the risk weights used in the standardised approach depend on external rates, which require a due diligence process from the bank.
Analysing the Basel IV reforms
Analysing and understanding how the Basel IV reforms will affect the various portfolios of the bank – and how these drive the significant increase in required capital – is of paramount importance for Dutch banks to ensure required capital is allocated appropriately to the various components of the bank. Banks are therefore challenged to start collecting new data as described in the requirements of the reforms.
Would you like to know more about the impact of Basel IV on your organisation? Please contact Noortje Corbey through the contact details below.