Panellists encourage market collaboration to tackle RWA pressures
22 June 2023 Lisbon
Image: SFT
Market participants need to partner to find solutions to mitigate risk-weighted asset (RWA) pressures across the industry that are derived from Basel IV regulation, according to The Trading Renaissance panel at the ISLA 30 Conference in Lisbon.
The anticipated Basel IV rules have become a much debated topic that panellists expect will have a large impact on market participants in Europe.
The Basel Committee on Banking Supervision (BCBS) redrafted the entirety of the risk-weighted assets (RWA) framework for Basel IV. The regulation presents an increased focus on the standardisation of risk weights and moves away from the European Central Bank (ECB) and Bank of England (BoE) internal model, explained one panellist.
Basel III/ IV regulation is a set of international standards developed by the BCBS, which produced a framework of measures to strengthen the supervision and risk management of banks.
Reviewing Europe and the UK specifically, one panellist indicated that there should be no minimum haircuts for securities financing transactions (SFTs).
This point was also raised within the recently published Prudential Banking Rules: Explanatory Note, which was created by the International Securities Lending Association (ISLA). The paper indicated that minimum haircuts for SFTs under the Basel III reforms could prove challenging for the industry.
The panellist also highlighted that an Output Floor requirement under the UK and Europe regime means that banks will have to recalculate their exposure using the standardised approach, which will have an impact on the market.
For banks under the UK regulation, the RWA for unrated corporates and unrated sovereign and central banks will become “extremely punitive”, conference attendees heard, as these entities could be rated with 100 per cent risk weight.
The Basel IV regulation will be implemented through a phased implementation that began on 1 January 2023 and will take five years to come fully into force. It will undoubtedly create further discussions for the industry as market participants work to adopt the redrafted framework.
The anticipated Basel IV rules have become a much debated topic that panellists expect will have a large impact on market participants in Europe.
The Basel Committee on Banking Supervision (BCBS) redrafted the entirety of the risk-weighted assets (RWA) framework for Basel IV. The regulation presents an increased focus on the standardisation of risk weights and moves away from the European Central Bank (ECB) and Bank of England (BoE) internal model, explained one panellist.
Basel III/ IV regulation is a set of international standards developed by the BCBS, which produced a framework of measures to strengthen the supervision and risk management of banks.
Reviewing Europe and the UK specifically, one panellist indicated that there should be no minimum haircuts for securities financing transactions (SFTs).
This point was also raised within the recently published Prudential Banking Rules: Explanatory Note, which was created by the International Securities Lending Association (ISLA). The paper indicated that minimum haircuts for SFTs under the Basel III reforms could prove challenging for the industry.
The panellist also highlighted that an Output Floor requirement under the UK and Europe regime means that banks will have to recalculate their exposure using the standardised approach, which will have an impact on the market.
For banks under the UK regulation, the RWA for unrated corporates and unrated sovereign and central banks will become “extremely punitive”, conference attendees heard, as these entities could be rated with 100 per cent risk weight.
The Basel IV regulation will be implemented through a phased implementation that began on 1 January 2023 and will take five years to come fully into force. It will undoubtedly create further discussions for the industry as market participants work to adopt the redrafted framework.
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