In January 2016, it was agreed that the BCBS would complete its work to address the problem of excessive variability in risk-weighted assets (RWAs) by the end of 2016.
In this regard, and aiming at reducing the complexity of the regulatory framework and improving comparability and addressing excessive variability in the capital requirements for credit risk, the BCBS issued a consultation document in March 2016 including constraints to the use of internal models for credit risk, open for consultation until 24 June 2016. Specifically, the BCBS proposes to:
- Remove the option to use the IRB approaches for certain portfolios: banks and other financial institutions; large corporates (i.e. corporates belonging to consolidated groups with total assets exceeding 50 bn€); and equities, where it is judged that the model parameters cannot be estimated sufficiently reliably for regulatory capital purposes.
- Adopt exposure-level, model-parameter floors to ensure a minimum level of conservation for portfolios where the IRB approaches remain available.
- Replace the current capital floor.
- Provide greater specification of parameter estimation practices to reduce variability in RWAs for portfolios where the IRB approaches remain available.
This document prepared by Management Solutions R&D department analyses the proposed changes to the advanced internal ratings based approach (A-IRB) and the foundation internal ratings based approach (F-IRB).
This consultation document sets requirements regarding the use of internal models, parameter floors, output floors and parameter estimation. The final calibration of the proposals will be informed by a QIS.
Scope of application:
Banks that use internal models as inputs for determining their regulatory capital requirements for credit risk.
- Scope of the proposals: the proposals introduce changes to the F-IRB and the A-IRB.
- Use of internal models: removal of IRB approaches for exposures to banks and other financial institutions, large corporates, equities, specialized lending.
- Parameter floors: application of floors to the following parameters: PD, LGD and CCF used to determine EAD for off-balance sheet items; the applicable floors will depend on the type of exposure: corporate or retail.
- Parameter estimation: PD: requirements related to rating systems, data, granularity, etc. LGD: supervisory-specified LGDs and floors to bank´s own estimations. EAD/CCFs: supervisory-specified CCFs and other constraints to models.
- Output floors: replacement of the current capital floor by one of the following options (decision after the QIS): an aggregate output floor in the range of 60% - 90% or output floors at a more granular level, where appropriate.
Download the technical note by clicking here