2018/2019 Edition of the Global Regulatory Update

Treasury and Trade Solutions 10 3. Operational Risk The BCBS has streamlined the operational risk framework. The advanced measurement approaches (AMA) for calculating operational risk capital requirements (which are based on banks’ internal models) and the existing three standardised approaches are replaced with a single risk-sensitive standardised approach to be used by all banks. 4. Leverage ratio The BCBS has introduced a leverage ratio buffer for global systemically important banks (G- SIBs). The leverage ratio G-SIB buffer must be met with Tier 1 capital and is set at 50% of a G-SIB’s risk weighted higher-loss absorbency requirements. The leverage ratio buffer takes the form of a capital buffer akin to the capital buffers in the risk weighted framework. As such, the leverage ratio buffer will be divided into five ranges. As is the case with the risk- weighted framework, capital distribution constraints will be imposed on a G-SIB that does not meet its leverage ratio buffer requirement. 5. Output floors The Basel III reforms replace the existing Basel II floor with a floor based on the revised Basel III standardised approaches. Consistent with the original floor, the revised floor places a limit on the regulatory capital benefits that a bank using internal models can derive relative to the standardised approaches. In effect, the output floor provides a risk-based backstop that limits the extent to which banks can lower their capital requirements relative to the standardised approaches. Under the revised output floor, banks’ risk-weighted assets must be calculated as the higher of: (i) total risk-weighted assets calculated using the approaches that the bank has supervisory approval to use in accordance with the Basel capital framework (including both standardised and internal model-based approaches); and (ii) 72.5% of the total risk- weighted assets calculated using only the standardised approaches. The standardised approaches to be used when calculating the output floor are set out per risk type. Impacts and issues to consider The impact of these reforms on the industry will remain unclear as they still need to be implemented by the various BCBS member jurisdictions and we await details as to what degree they will stay close to or diverge from what has been proposed at BCBS level. The E.U. for example, will not propose implementing legislation until 2019 at the earliest given their current focus on the risk reduction package (covered below) which has been prioritised. It is likely that legislatures across both sides of the Atlantic will adjust the agreement reached in Basel to suit local priorities.