Ever since the Great Recession, regulators have been looking for a new form of financial system surveillance.

The reforms of Basel II gave institutions the opportunity to introduce internal models in various areas of risk, which could then be used in both internal and regulatory risk measurement. Equipped with these instruments, banks were able to provide a high level of risk sensitivity. Banks that wanted to limit the costs of implementing new regulations had standard approaches that were less risk-sensitive, but easy to implement. For smaller institutions, these standard approaches were generally better suited.

The financial crisis showed regulators that not all risks could be correctly assessed with the existing methods and models, which ultimately led to the introduction of Basel III. Some changes concerned the already known methods for measuring credit, counterparty and operational risks.

2013 and 2014 saw the first drafts of new regulations, such as the FRTB framework and a consultation paper on the new counterparty risk method (SA-CCR). In both cases, new standard approaches were presented.

Subsequent publications by the Basel Committee and a draft of the new Capital Adequacy Directive and Regulation (CRD V / CRR II) confirm a new trend towards standard approaches. On the one hand, the internal model for operational risks is abolished (AMA)[SS1] , on the opposite existing standard approaches are revised (SA-CR) and an introduction of a general output floor is announced. This floor will limit the impact of risk measurement based on internal models in order to increase the results of these models to at least 75% of the corresponding standard approaches. A more risk-sensitive internal model is deliberately limited by the supervisory authority, meaning each bank will have to introduce the new standard approaches even if it already uses existing internal models, which is contrary to the possible advantages for the calculation of the regulatory capital will be limited by the floor.

Many elements of the new regulations are contradictory in spirit and impact, yet they need to be evaluated individually to assess the impacts and take appropriate action. Undoubtedly, banks will face the challenge of how and with whom they tackle the topic of Basel IV.

BearingPoint has already supported several banks in an impact analysis of Basel IV. We offer flexible calculation cores to calculate the new standard approach to credit risk (SA-CR) and the new standard approach to counterparty risk (SA-CCR). Questions regarding steering the bank and positioning its reporting unit for the future are addressed by our innovative Regulatory KPI steering tool.

The Regulatory KPI steering tool is based on a comprehensive key measures model, which combines the regulatory and economic KPIs based on their drivers. This provides a bank the opportunity to carry out simulations and analyzes of business policy decisions and to examine their influence on all key figures.

BearingPoint's Risk & Regulatory Reporting Team builds on its many years of expertise. Our experts have advised about 200 banks on various regulatory issues over the last 20 years. Together with our clients, we have successfully implemented new regulations and made the banks fit for the future. Basel IV raises new questions and causes new challenges for the banks. Let us discuss the appropriate answer for your institute.

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If you want to get more information about this subject please get in touch with our experts who would be pleased to hear from you.

  • Thomas Steiner
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  • Tony Farnfield
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