The European Banking Authority (EBA) has published a speech given by its chairperson, Andrea Enria. The speech is entitled Basel III ‘Are we done now?’

Key points in his speech include:

  • the package of reforms that the Basel Committee on Banking Supervision agreed on in December 2017 was a major achievement. Among other things it was essential to remove regulatory uncertainty and bring the reform process to a close. Also, the credibility of international standards had to be restored, addressing the issue of excessive variability of risk weighted assets (RWA) calculated via internal models. The standards agreed by the Basel Committee now provide a good yardstick for long-term capital planning for international banks;
  • in the area of credit risk, the agreed restrictions on the scope of loss-given default (LGD) estimation for low-default portfolios reflect evidence that LGD estimation and wholesale portfolios are the most important targets when it comes to RWA variability within credit risk. The introduction of ‘moderately’ calibrated input floors should further help keep model risk and arbitrage practices at bay;
  • operational risk was an area where a regime shift was most warranted, triggering a capital requirement increase, where needed. The Advanced Measurement Approach lent itself to far too opaque modelling choices and too heterogeneous model outcomes. Replacing all existing models with the newly developed one should substantially simplify the framework. However, the proposed new model should be carefully tested to understand the implications of the discretion that the Basel Committee introduces in relation to the historical loss component of the requirement – a choice that has to be made at the EU level;
  • the decision to ban modelling for credit value adjustment risk is less straightforward, as it decreases risk sensitivity of capital requirements in this area;
  • the final calibration of the output floor strikes a good balance;
  • the reform of the standardised approach for credit risk introduces enhanced risk differentiation and granularity in areas such as exposures secured by real estate, specialised lending exposures, exposures to small and medium sized enterprises, unrated exposures to corporates and institutions, retail exposures, covered bond exposures, as well as for equity exposures;
  • the EU will ensure that the transposition of the international standards are transposed in accordance with the principle of proportionality, taking into account the compliance burden for smaller and less sophisticated local banks and considering the appropriateness of the impact on specialised business models;
  • the new Basel reform package includes transitional provisions and national discretions on several fronts. Mr Enria believes that irrespective of the transitional path and national choices on the optional components, disclosure should cover the fully-fledged Basel framework; and
  • the EBA stands ready to assist and conduct preparatory technical work as soon as possible, with a view to ensuring a timely application of the new international standards in 2022.

View Basel III ‘Are we done now?’, 29 January 2018