EC publishes Basel III reform consultation
19 March 2019 Luxembourg
Image: Shutterstock
The European Commission (EC) has published a consultation on the finalisation of Basel III reforms explaining that responses to the paper will provide important guidance to the commission when preparing if considered appropriate, a formal commission proposal.
The consultation follows the endorsement in December by the group of governors and heads of supervision of a package of amendments to the internationally agreed prudential standards for banks developed by the Basel Committee on Banking Supervision (BCBS), with the intention of finalising the reform to the Basel framework.
The EC described this agreement as the result of a strategic review of those international reforms. It suggested that the review was conducted by the BCBS with a view to improving the balance between simplicity, comparability and risk-sensitivity.
There are several key areas covered by the consultation paper, including a standardised approach for credit risk is intended to increase risk sensitivity and granularity and reduce a mechanistic reliance on external credit ratings. It also proposed internal ratings-based approaches for credit risk that aim to increase robustness in modelling certain asset classes while reducing excessive complexity and unwarranted variability of risk-weighted assets.
It also covered the credit valuation adjustment risk framework, which is being revised to boost its risk sensitivity, strengthen its robustness and improve its consistency, as well as fundamental revisions to the operational risk framework, which intend to replace banks’ internal models with a single risk-sensitive standardised approach to be used by all banks.
Lastly, the revised output floor, which is intended to provide a risk-based backstop that limits the extent to which banks can lower their capital requirements relative to the standardised approaches. The EC said this is meant to help maintain a level playing field between banks using internal models and those on the standardised approaches.
Market participants are being asked for their views on the proposed revisions and how they will impact upon their business.
Replies must be submitted to the online questionnaire by 12 April 2018 at: https://ec.europa.eu/info/consultations/finance-2018-basel-3-finalisation_en.
The consultation follows the endorsement in December by the group of governors and heads of supervision of a package of amendments to the internationally agreed prudential standards for banks developed by the Basel Committee on Banking Supervision (BCBS), with the intention of finalising the reform to the Basel framework.
The EC described this agreement as the result of a strategic review of those international reforms. It suggested that the review was conducted by the BCBS with a view to improving the balance between simplicity, comparability and risk-sensitivity.
There are several key areas covered by the consultation paper, including a standardised approach for credit risk is intended to increase risk sensitivity and granularity and reduce a mechanistic reliance on external credit ratings. It also proposed internal ratings-based approaches for credit risk that aim to increase robustness in modelling certain asset classes while reducing excessive complexity and unwarranted variability of risk-weighted assets.
It also covered the credit valuation adjustment risk framework, which is being revised to boost its risk sensitivity, strengthen its robustness and improve its consistency, as well as fundamental revisions to the operational risk framework, which intend to replace banks’ internal models with a single risk-sensitive standardised approach to be used by all banks.
Lastly, the revised output floor, which is intended to provide a risk-based backstop that limits the extent to which banks can lower their capital requirements relative to the standardised approaches. The EC said this is meant to help maintain a level playing field between banks using internal models and those on the standardised approaches.
Market participants are being asked for their views on the proposed revisions and how they will impact upon their business.
Replies must be submitted to the online questionnaire by 12 April 2018 at: https://ec.europa.eu/info/consultations/finance-2018-basel-3-finalisation_en.
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