2018/2019 Edition of the Global Regulatory Update

Global Regulatory Update  | Corporates Edition 9 Initiation Service Provider (PISP) on the UK Open Banking Directory, becoming the first corporate bank to do so. Inclusion in the directory will allow Citi to begin piloting new payment and collection services for clients. 2) Capital and liquidity a) The Basel framework: next steps towards Basel IV A summary of the issues and current status The Basel Committee on Banking Supervision (BCBS) continues its journey towards Basel IV and 2017 ended with a key development: In December 2017 the BCBS published the much awaited reform package on the Basel rules- colloquially referred to as Basel IV. The full reform package can be found here: https://www.bis.org/bcbs/ publ/d424.pdf Over the next few paragraphs we highlight the key reforms, impacts and issues to consider. Key reforms: 1. Revisions to the standardised approach for credit risk For exposures to banks, some of the risk weights for rated exposures have been recalibrated. In addition, the risk-weighted treatment for unrated exposures is more granular than the existing flat risk weight. A standalone treatment for covered bonds has also been introduced. For exposures to corporates, a more granular look-up table has been developed. A specific risk weight applies to exposures to small and medium-sized enterprises (SMEs). In addition, the revised standardised approach includes a standalone treatment for exposures to project finance, object finance and commodities finance. 2. Internal ratings-based (IRB) approaches for credit risk The changes to the IRB approaches for credit risk intends to address some of their shortcomings as highlighted by the financial crisis in particular their excessive complexity, the lack of comparability in banks’ internally modelled IRB capital requirements and the lack of robustness in modelling certain asset classes. The BCBS has therefore made the following changes: Removing the use of the Advanced Internal Ratings Based Approach for certain asset classes, adopting ‘input’ floors (for metrics such as probabilities of default (PD) and loss-given-default (LGD)) to ensure a minimum level of conservativism in model parameters for asset classes where the IRB approaches remain available; and providing greater specification of parameter estimation practices to reduce risk-weighted assets (RWA) variability.