The Bank for International Settlements has published a speech by William Coen, Secretary General of the Basel Committee on Banking Supervision (BCBS), that sets out the progress of the BCBS’s work to finalise revisions to the Basel III framework. In his speech, Mr Coen states that BCBS intends to finalise a package of reforms by the end of 2016, consisting of work on the:

  • standardised approach for credit risk: in previous consultative documents the BCBS noted that its intention was to improve the standard’s risk sensitivity, and not to increase the overall regulatory capital requirements. The BCBS intends to adhere to this objective as capital requirements on riskier exposures should increase while decreasing for lower risk exposures;
  • internal ratings-based approaches (IRB): in a previous consultative document, Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches, the BCBS expressed concern about banks’ modelling practices and the degrees of freedom in estimating risk components such a probability of default, loss-given–default and exposure at default. The BCBS proposed to remove the option to use the IRB approaches for certain exposures, where it is judged that the model parameters cannot be estimated sufficiently reliably for regulatory capital purposes. This objective can be achieved through various combinations of approaches, which the BCBS is still assessing;
  • operational risk: the BCBS is considering adjustments to its March consultative document Standardised Measurement Approach for operational risk. Mr Coen expects that the fundamental elements of the revised operational risk framework will be maintained (e.g. combining a simple accounting proxy of operational risk with a bank’s internal loss data). Nevertheless, the BCBS is considering refinements to the methodology that go in the direction of simplifying the framework and enhancing its robustness; and
  • output floor: discussions are still under way to replace the existing transitional capital floor based on the Basel I framework that the BCBS, in 2009, agreed to keep in place. The floor is meant to mitigate model risk and measurement error stemming from internally modelled approaches and would place a limit on the benefit a bank derives from using its internal models for estimating regulatory capital.

There are several other elements of the Basel III package that the BCBS will finalise by the end of the year, including the leverage ratio exposure measure and a surcharge for global systemically important banks. The BCBS is also finalising the treatment of credit valuation adjustment risk.

View BCBS speech on progress on revisions to Basel framework, 7 October 2016