Global Risk Management Survey - Banking Spotlight | Deloitte

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Global Risk Management Survey 10th Edition - Banking Spotlight

Heightened uncertainty signals new challenges ahead

The 10th edition of the Global Risk Management Survey is the latest installment in Deloitte's assessment of the state of risk management in the global financial services industry. In this article we take a closer look at the Banking sector.

'There will be quite a hit from a capital perspective from the Basel Committee proposals but it will impact everyone, so it should level the playing field.' - Chief Risk Officer, large diversified financial services company

Revised capital rules

The Basel Committee is in the process of proposing revisions to its capital rules for market, credit, and operational risk, with a general goal of providing an enhanced set of standardized approaches to lessen the reliance on internal models in the advanced approaches. Collectively, this group of revised risk-weighted asset (RWA) capital rules has been called Basel IV. These efforts are at varying stages of progress, with the market risk rules now finalized.

Global Risk Management Survey 10th Edition

Credit and operational risk

For credit risk, revisions to the standardized approach have been proposed, along with constraints on the use of internal models. The Basel Committee has proposed removing the option to use internal-ratings-based approaches for certain exposures where it has concluded that the model parameters cannot be estimated sufficiently reliably. For portfolios where internal-ratings-based approaches remain available, it has proposed adopting exposure-level, model-parameter floors to ensure a minimum level of conservatism and providing greater specification of parameter estimation practices to reduce variability in risk-weighted assets. These potential regulatory changes could spur some institutions to undertake a substantial revision of their methods and systems.

For operational risk, a new Standardised Measurement Approach (SMA) has been proposed, which would replace the current existing approaches. The SMA would provide a single non-model-based method for estimating operational risk capital that incorporates in a standardized fashion a bank’s financial statement information and internal loss experience.

Fundamental Review of the Trading Book (FRTB)

The new Basel Committee market risk rules (resulting from the Fundamental Review of the Trading Book (FRTB) including the new standardized approach for counterparty credit risk and securitization) sets out how banks will have to assess their capital requirements for their trading portfolios. The initiative is intended to ensure that capital requirement approaches are better aligned with the trading book’s underlying risks and to reduce the variability in modeling outcomes from firm to firm.

Implementation of FRTB

Europe is furthest ahead in implementing the FRTB, with many institutions having already begun imple-mentation, even though legislation to implement the FRTB has only recently been proposed. The United States has not yet proposed a corresponding rule and implementation at US banks is still in the early stages. It is currently expected that the FRTB effective date will be in 2019, which means that institutions should begin to implement the required procedures in 2017 and conduct a parallel run in 2018. Implementing the new FRTB rules will require institutions to make progress in developing data, analytics, and processes in a number of different areas and these present significant challenges.

Challenges ahead

The issues most often considered by respondents to be extremely or very challenging in implementing FRTB were technology/infrastructure (56 percent), clarity/expectations of regulatory requirements (54 percent), and data management (50 percent). See figure below. With the United States/Canada not as far along as in Europe, US/Canadian institutions are much more likely to rate many issues as extremely or very challenging, including technology/infrastructure (100 percent in the United States/Canada compared to 55 percent in Europe), data management (75 percent in the United States/Canada compared to 45 percent in Europe), and internal resources, capabilities, and budget (100 percent in the United States/Canada compared to 36 percent in Europe).

Implementation of the new Basel Committee market risk rules

Implementation of Total Loss Absorbing Capacity

The Basel Committee’s new Total Loss Absorbing Capacity (TLAC) requirements for global systemically important banks (G-SIBs) are designed to increase the capital and leverage ratios of these banks so they are better able to withstand adverse financial conditions. TLAC is scheduled to take effect in 2019. As a result, the implications are still being understood. Issues often cited by respondents as extremely or very challenging in complying with TLAC include clarity/expectations of regulatory requirements (42 percent), data management (41 percent), and strict deadlines (38 percent).

Questions?

For more information, please contact Emeric van Waes via evanwaes@deloitte.nl / +31882884619 or Eelco Schnezler via eschnezler@deloitte.nl / +31882885220

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