The Basel III measures taken in response to the 2008 crisis have been serving the financial world well. The legislation has effectively ensured that people and businesses have had the capital to keep the economy strong, with increased liquidity and capital levels being even sufficient during the covid-19 crisis. The finalisation of Basel III will be effective from June 28th onwards, reforming Basel and posing a challenge for financial institutions to meet – but society will continue to benefit from these reforms.
But is it still relevant for banks to maintain IRB models when the output floor is going to rise in the next coming years?
The Complications
There are two developments having a major impact on the model and capital landscapes for Dutch banks that financial institutes need to consider while deciding which approach will work the most in their favour.
The first complication is the revised scope of the IRB approaches. The top three portfolios move from A-IRB to F-IRB, though the A-IRB approach is usually more favorable for banks. There is also an impact on collateral as portfolios shift, with different eligibility requirements for collateral under the SA/F-IRB than for the A-IRB.
The second complication is regarding the introduction of the output floor, which is starting at 50% this year and building all the way to 72.5% in the upcoming five years, which of course has an impact on capital requirements, needing to take higher percentages in the SA/IRB approach.
It’s important to remember while navigating that while these changes are daunting, they are beneficial for the industry’s overall health and help to build a sound and responsible financial landscape.
Deciding which route to take is going to be a different process for each financial institution. Finding the route that takes the least amount of time and money takes a thorough analysis of your unique DNA with a significant amount of orchestration and attention to all facets and disciplines within your company.
At ACE, we can help you find the correct route for you that considers all aspects and co-dependencies you might have. We can help you ensure you’re using the most beneficial models for your business while assessing the impact sustainably so that you will be ready for future legislation.
If you have any questions about the finalisation of Basel III or anything else, get in touch.
As always, thanks for reading,
TEAM ACE