Cyber, Risk & Regulatory PwC US EUR 52.2 bn. XQ# "iwM uf|^"|s5"PV;8ltBp|c -!p-Q!q{VR-x4xqGKNqe QM[V'HU! <>/Font<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 595.32 841.92] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> More granular requirements for counterparties to be eligible for favorable risk weightings, requiring incremental analysis and data (e.g., Transactors vs. revolving for credit credit cards, LTV for CRE, CET1 ratio for banks). <> Credit limit increases and customer spend behavior (e.g., transactor vs revolving) will directly impact capital requirements. High-quality operational loss data must extend back ten years. Increasing numbers of financial policymakers, regulators and supervisors acknowledge that the financial system, including banking, requires significant changes to adapt to, let alone facilitate the necessary transition to a net zero environment. SA-CCRs EAD calculation is based on over 100 data elements that include trade, collateral, hedging set and counterparty information. endstream endobj startxref Basel III Endgamenarrows the applicability of theAdvanced IRB approach for equities, largecorporates and banks. <> Cyber, Risk & Regulatory M6S3)UHC"Mv-w\ZN8ukbv cGeb3$UK&'PULz YHNg!8k~~qCkS * sf0I6jm&PZ U1?c^B Q/jdV=1Au(Se|W' U'L Principal, Risk & Regulatory - Financial Services Ineffective document governance leads to increased time in locating correct version of data transformation documentation. Based on our profound expertise in financial regulation, we aim to equip you with actionable insights on trending regulatory and technology topics. endobj Implementation of the known and stable elements of the proposed rules offers earlier insight into your capabilities and accelerates identification of where your system and data infrastructure may be lacking and start building flexible capabilities which allow for implementation of different outcomes. For IMA, increased operational complexity with multiple data sources e.g. The Basel Committee for Banking Supervision (BCBS) proposed finalization of Basel III encompasses so many changes that the industry started referring to it as Basel III Endgame. Operational risk RWA under the SA may be greater than the current AMA due to Internal Loss multiplier; The impact of operational risklosses on capital may be amplified due to capitalrequirements driven by the SCB through CCARoperational risk losses. 98q98EnDgOCvBp$p%L!w 4UTv+> In its pilot exercise on quantifying climate risk exposures in May 2021[20], the EBA identified significant data gaps and divergences in the approaches used by banks to calculate exposures, which suggests that meaningful and reliable climate stress tests could still be a long time off. Determining the full impact to your business model requires more certainty from regulators. Introduces due diligence requirements for certain types of counterparties, Adds more granular counterparty types (e.g. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Finance Watch does not agree with the Commissions general assessment that the overall level of capital in the EU banking sector is now considered satisfactory. Replaces the Current Exposure Method (CEM), Introduces hedging sets for specific asset classes, Provides better recognition of secured and cleared trades, Introduces increased risk sensitivity by addressing over-collateralisation and negative market values, Increased data granularity results in more precise calculations, Optimization focuses on net exposure rather than gross notional reduction, Allocation of netting set level Exposure At Default (EAD) to trades and what-if analysis can improve capital management. Reassess depth and timeliness of business processes and governance. Allocation of capital may become a mix of the SA, F-IRB, A-IRB, CCAR and economic capital models. This article sums up Finance Watchs detailed analysis of the package, The global regulatory framework agreed by the Basel Committee on Banking Supervision in December 2017 (Basel III), was created to address the insufficient capitalisation and inadequate risk controls of the banking sector that led to the financial crisis of 2008/09.

This circle does not square. Introduces risk sensitivity-based Standardized Approach (SA) calculations for market risk capital floor, Internal Model Approach (IMA) requires enhanced considerations, CVA Internal Model Method (IMM) will not be allowed, Introduces product-based banking boundary versus trading book, Infrastructure and growth plans dictate IMA versus SA election, Systems/operational overhaul may be more optimal, IMA risk factor governance is a significant hurdle, CVA-SA suited for sophisticated CVA models and hedging, Reoptimization of banking vs trading designation. The QIS is based on end-2015 data provided by 248 banks that participated in the exercise. Email | LinkedIn, Dietmar Serbee r!1,/A4ldCFZ;D.eB endobj 32, [14] European Banking Authority (EBA), Basel III Reforms: Updated Impact Study, EBA/Rep/2020/34, 15 December 2020, pg.42, [15] Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27 June 2013, pgs. 1; (, [8] The implementation of Basel III in the EU began with the adoption of the legislative package comprising Regulation (EU) 575/2013 (CRR) and Directive 2013/36/EU (CRD IV) in June 2013, which came into force on 01 January 2014, [9] Global Systemically Important Institutions (G-SIIs) and Other Systemically Important Institutions (O-SIIs), [10] Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No. endobj >; Us zn'BuhS}aJ_#1mbbbbbbboF 0iku-}d,#5Fvc@w26W5A1;)xj<=QMUmr'cx(4QYWuG1Az,XR&;`,z:QOdf]5 endobj This change may require reoptimizationof strategy andhedges, as needed. PwC US Additional data requirements on collateral type for calibration of LGD for secured corporate and retail exposures. European G-/O-SIIs, traditionally among the most avid users of internal modelling, have long been beneficiaries of the variability in RWAs facilitated by flaws in the original design of the risk-sensitive internal ratings-based (IRB) approach to determining capital requirements. 3, [12] Basel Committee on Banking Supervision, Basel III Monitoring Report, September 2021, pgs. Email | LinkedIn, Justin Keane 0 L8:igE9#w'~~l3A$rn#3Z<5wz-Ju[%|nS,vE:zmN5z^wDKN(:'6ekm m\_ .H"_|2f",5l#c& l.>DVvT:h&_w^Qx =1zLi`S'D)Um*,5 Bb :\4*W s{%. A large number of smaller and mid-sized EU banks would remain either largely unaffected or even benefit from the combined effect of (i) the modifications of the standardised approach (SA) introduced by Basel III, and (ii) the output floor, which caps the cost of capital advantage of banks using the internal-ratings based approach (IRB). Depending on current stateand scope of infrastructure,it may be more optimal tooverhaul operating model ofcurrent risk/modeling/PnLinfrastructure and processfor long term sustainability. FRTB requiresreclassification of bankingand trading book based onhighly prescriptive product based designations, whichcan lead to significant addedgovernance. hbbd```b``UA$""H`RLHnldg@d; bdYb+Llv10Rg J Meaningful insights require more granular impact analysis to identify business impacts, refine capabilities, and identify opportunities and challenges. PLA full revaluation enhancements. Due to the greater specification in the rules about how to determine model parameters, reassessment and recalibration of PD, LGD and EAD may be needed. Many banks have developed homegrown systems for capturing operational loss data. [12] In other words, the capital ratios of major EU banks were between 27% and 33% lower than their global peers. Normalize database layers to enable cloud computing and add elasticity. Even then, EU-specific adjustments that compensate for one-half to two-thirds of the capital impact of the Basel III package could remain in place, in particular if the proposed legislative review results in perpetuating the disapplication of certain Basel III standards. Develop data governance model for operational loss data. Customers representing 7,000 firms worldwide, among them large international banks, a major part of the largest European banks, leading insurance companies as well as supervisory authorities and central banks, trust our products and services. 4-17, [11] European Commission (Fn 3 above), pg. FRTB implementation will compete for same resources at same time as LIBOR transition, creating significant overload and delivery risks during 2021-23.

introduce a leverage ratio buffer to further limit the leverage of global systemically important institutions (GSIIs). [11] Various studies by EU and international bodies demonstrate that the level of capitalisation of major EU banks continues to lag behind their global peers. <> For larger/growing flowbusinesses with liquidunderlying products,investing in infrastructureto get IMA approval isrecommended. These EU-specific adjustments are designed, according to the Commission, to balance a number of political objectives: Finance Watch welcomes the initiative of the EU co-legislators to proceed with the implementation of the final instalment of the Basel III standards. <> ^*[Dal!V 87M| ,$sw]pz%0%*IyB-s{{ Mu~D" sLg)Q9/tMrB 8 0 obj Principal, Risk & Regulatory - Financial Services Lack of standard nomenclature of derivative and long dated settlement product types to map to SA-CCR requirements. .,@`D+tfELj_( 5E$#1zjk@svv_)g?M3C2vi@v$/f\N`R_c Changes have to be assessed comprehensively. ECB economists seem to agree that the current framework for capital does not adequately provide for climate risk. 1650 0 obj <>stream [18] Finance Watch has argued for a long time that a diverse and well-integrated banking sector, comprising banks of different sizes and business models, is demonstrably beneficial, both for financial stability (at the macro-level) and for corporate and retail customers (at the micro-level). 2022 Regnology Group GmbH All Rights Reserved, BCBS DP Review of the regulatory treatment of sovereign exposures_d425. Banks need to continue to have independent assurance that operational loss tracking systems, processes and controls provide for high-quality data. Required capital underBasel III Endgame may increase due to potential amplification of operational losses betweenBasel III Endgame and CCAR/DFAST. 648/2012, OJ L 314, 05 December 2019, pgs. Anticipate overload and delivery risks and dedicate resources to simultaneously implement FRTB and LIBOR transition. endobj Get our monthly newsletter with the most important news delivered to your email inbox - and occasional one-off emails with new cartoons, events and other materials about our work. strengthen the risk-based capital framework, without significant increases in capital requirements overall; enhance the focus on environmental, social and governance (ESG) risks in the prudential framework; further harmonise supervisory powers and tools; and.

Email | LinkedIn, Financial Services Sector Leader, Cyber, Risk & Regulatory, PwC US. They include, in particular, (i) the postponement, by two years, of the requirement for EU banks to adjust their capital requirements for loan loss provisions in line with the adoption of the IFRS9 standard for classifying non-performing exposures (NPEs); (ii) the postponement, by one year, of the introduction of the leverage ratio buffer; (iii) the accelerated introduction of a higher SME supporting factor and an infrastructure supporting factor on certain loan exposures; and (iv) bringing forward the decision to no longer require banks to deduct internally developed software from regulatory (CET 1) capital. The Commissions legislative proposal, also known as the Banking Package 2021, aims to complete the post-crisis reforms and to faithfully implement the outstanding elements of the Basel III reform in the EU, while taking into account EU specificities and avoiding significant increases in capital requirements.[1]. Clearly articulate operational risk RWA calculation methodologies and assumptions forBasel III Endgame and CCAR/DFAST in Basel Pillar III disclosures, 10-Qs, 10-Ks and CCAR/DFAST annual stress tests. Global banks will have to deal with local regulators implementing rules differently, making business model impact geographically specific. Assess per exposure class the incremental effort and benefit of using SA, A-IRB or F-IRB. Create a standardized nomenclature across all derivative and long dated settlement products to facilitate integration with the rest of the ecosystem. )o0oyzA0`*b8^OO#X pSW_}8Hr ?Xw{M]'d*L&[mV2r_]UL+/DG*7 163, [3] European Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No. Inconsistent and redundant data infrastructure and lack of data lineage across market risk, credit risk, business unit risk and profit / loss controller groups. 11 0 obj In its impact study accompanying the legislative proposal[17], the Commission provides its own estimates of the quantitative impact of additional EU-specific adjustments that were not considered in the EBAs analysis but are included in the legislative proposal. 13 0 obj Email | LinkedIn, Alejandro Johnston Development of an allocation methodology and the ability to run what-if analysis can help to understand the capital charge of a trade beforeit is booked. 1337, [16] Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No. PwC US There is considerable uncertainty aroundimplementation of the operational risk frameworkinto the US rules. If bank has material CVAhedging program, investing inupgrading infrastructure andgovernance to utilize CVA-SAis desirable. New exposure classesrequire banks to updatetheir exposure classificationsystems, processes and data.

575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor, and Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU, SWD (2021) 320 (final), 27 October 2021, [18] In some markets, including Belgium, the Netherlands and the Baltic member states, the five largest institutions account for between 75% and 95%, with Greece as the member state with the highest degree of concentration, at 97%. Compared to the undiluted implementation of the Basel III standards, EU-specific adjustments foreseen in the legislative proposal would decrease the total capital shortfall by ca. The BCBS published the results of a cumulative quantitative impact study (QIS) conducted while developing the finalised standards, which shows that the finalisation of Basel III results in no significant increase in overall capital requirements. 10 0 obj [8] In particular, the finalisation of BaselIII comprises measures to, Cracks in the pillars Financialstability loses out in the EUs Basel III endgame. stream Approach to addressing these issuesApproach to addressing these issuesEnhance and streamline data governance across front-office and risk systems. This allows for optimization of exposures classes in effort and capital requirements, within supervisory expectations. c@ *'t0\XBQfx$HQP1HaRa&l,Fm1L nW1yx$u= !0gL_,c A4&x0%pxGu3q,ItN' W.!$r! Implement development framework to accelerate release process. Credit cards). Governance around marketdata will require upgradesto related processes andpotential streamlining of front-to-back market data. Establish roll-out plans for exposure classes where the approach changes and assess the need for systems, processes, data and reporting requirements going forward. reduce institutions administrative costs related to public disclosures and to improve access to institutions prudential data. >aloLEs^NnaI9 The Commissions explanatory notes set out four main objectives: In its implementation, the Commission is proposing a number of deviations from the original Basel III standards. %PDF-1.7

4 0 obj Email | LinkedIn, Steve Pearson implement the Basel III agreement faithfully; take into account European specificities; avoid a significant increase in capital requirements; balance the concerns of home/ and host member states in line with the logic of the Banking Union. Changes in PDs, LGDs resulting in higher RWAmay result in the Advanced Approach becomingthe RWA floor under the Collins Amendment,shifting capital planning and allocation practices. Under A-IRB, guarantees and credit derivatives must apply method used to determine the RW % for a direct exposure to the guarantor or protection seller. PwC US In order to faithfully implement the Basel III framework, and achieve its original objectives, the EU co-legislators should take a long, hard look at the Commissions EU-specific adjustments and, [1] European Commission, Banking Package 2021: new EU rules to strengthen banks resilience and better prepare for the future, IP 21-5401, 27 October 2021; (, [2] Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No. Include annual assessments of operational risk capital modeling within the scope of internal audit plans, model validation plans and third-party assessments. Netting of offsetting exposures will shift the focusof portfolio optimization from reducing gross notional exposures to reducing net exposure. Refine suite of existing operational risk capital policies and procedures. endobj F e8IoiI8qfA,/aA A\lQS G Benchmark operational risk RWA against peer institutions to confirm efficacy of operational loss modeling. Based on 25 years of experience in regulation and more than 10 years in managed services, we offer a unique portfolio of regulatory reporting, regulatory management, tax reporting, and supervisory software solutions and services from a single source. The BCBS did not reach a consensus to change the treatment of sovereign exposures, and has therefore decided not to consult on the ideas presented in its discussion paper (DP), based on the report of the BCBS Task Force on Sovereign Exposures; however, comments are welcome until 9 March 2018. <> Reclassification of counterparties to align to more granular risk weight categories, new categories and corresponding updates to systems.

Products with pricing gaps during stress periods are problematic. 558, April 2016; (, [13] Committee on Banking Supervision, Basel III Monitoring Report (Fn 12 above), pg. Constraints to the use of IRB allows banks to apply IRB per exposure class. Based on the current proposal, the implementation of Basel III in the EU would be completed when the last transitional arrangements expire, i.e. <> Start collecting essential data elements for areas where the most relief can be achieved (e.g. 18.5% by 2028 to comply with the final Basel III standards (without EU-specific adjustments). We are happy to share our expert knowledge with you. Increased complexity with multiple data sources. A small number of banks (8 G-SIIs) accounted for virtually all (83%) of the estimated shortfall. Nor does it reflect any additional capital requirements under Pillar 2 of the Basel II framework, any higher loss absorbency requirements for domestic systemically important banks (D-SIBs) or any countercyclical capital (CCyC) buffer requirements. Develop capabilities within existing operational loss systems to capture required data elements. For SA, harmonizing sensitivity calculations across all systems/business units and conforming to BCBS prescribed risk buckets. 12 month repayment data for credit cards).

In this base case scenario, the total capital shortfall for a sample of 100 of the largest EU banks was estimated at ca. This extended transition does not only dilute the benefits of the Basel III reforms, leaving the European public exposed for even longer to the risk of another financial crisis, but also diminishes the EUs global status as a principled and reliable partner who abides by its international commitments. Again, the eight G-SIIs accounted for the majority (82%) of the shortfall. 5 and 36; (; see also: Gambacorta, Leonardo / Shin, Hyung Song, Why bank capital matters for monetary policy, BIS Working Paper No. In its legislative proposal, the Commission invokes, time and again, its commitment to avoid any significant increase in capital requirements, particularly for the largest EU banking groups. Please see for further details. Prudential regulation should not be instrumentalised to distort the banking competitive landscape,,,,, a regulation amending the Capital Requirements Regulation (CRR II), a regulation amending the Capital Requirements Regulation (CRR II) and the Capital Requirements Directive (CRD V). Leverage a third party Challenger SA-CCR calculator to validate test results from the SA-CCR calculator. x]oF"_ $ k]>J"Ukq3KIHg/K &={]"nlvmgwk}1[eUyiswyoxg? 2022 Global Digital Trust Insights Survey, Business applications: Functional and industry apps, Application Security and Controls Monitoring Managed Services, Controls Testing and Monitoring Managed Services, Financial Crimes Compliance Managed Services, Virtual Business Office services for healthcare. We provide a unique product and service offering in the area of regulation, ranging from consulting to managed end-to-end services, from proprietary specialist reporting software to ongoing training. $d?bDYj' !XZuP,Ha(Ru|\=e]0d!B0F&Ca'} Y|{=\UJOH|qq81c[OB}FUH\{VU(8Kob^\:dS8E&g[o[&Fp} a9H#*! Normalize database layers to remove data redundancy and develop a data lineage document to identify single source of truth for a data element. It will allow a review of the calibrations of the standardised and internal model approaches to ensure consistency with the BCBS's original expectations. % Principal, Data and Analytics Technology These adjustments further reduce the incremental capital requirements by another 30% to 45% from the EBAs EU-specific scenario, primarily by neutralising the impact of the output floor. Gap analysis for PLA tests for key products/desks/models.

With our unrivalled experience in regulatory reporting and regulatory management and our product and service offering for financial services, we contribute decisively to transparent and stable financial markets. Robust data management practices for sourcing this granular data can improve the precision of the calculation and reduce exposure. Lack of end-to-end testing plan buildout for User Acceptance Testing of all product type from each data source. <> real estate secured), Segregates real estate exposure risk weights based on Loan-To-Value (LTV), Credit card impact will be driven by customer behavior, Corporate impact will be driven by counterparty type, New exposure classes require system changes, Impact will vary based upon business model. SA-CR is the starting point for CCAR stress tests. Find out more about how we can assist you in your daily work through our managed services, regulatory utilities, consulting as well as our software support and training offerings. FRTB is significantly morecomplex in calculations,governance and data needs,especially for IMA tradingand CVA-SA. The Banking Package is intended to complete the implementation of the Basel III framework into EU law. Linkage of transaction data to client reference data such as netting, collateral, margin information, etc. Netting of offsetting exposures may change therelative costs of some products, e.g., reducingthe exposure from interest rate swaps but increasing the exposure from foreign exchange products.

7 0 obj 4-17, [17] European Commission, Commission Staff Working Document: Impact Assessment Report accompanying the documents Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No. Financial regulation is vital for a stable, sustainable financial world. Introduction of risk weightsscaled based on LTVband for commercial andresidential real estatemortgages will likely providea significant RWA benefit forbanks real estate portfolioswith lower LTVs. 2017 - 2022 PwC. Using the F-IRB approach or SA generally leadsto higher RWA. SA-CCR, Securitizations, IRB approach) mean full impact will only be known when all parts have been Implemented.

CVA-SA allows for morecapital efficiency if the bankcan demonstrate propergovernance around CVAtrading desk set up andmodels/calculations on parwith industry standard. in 2033. Changes will impact other regulations besides RWA (e.g. We provide a full-service offering across the Regulatory Value Chain to the industry players across the globe. Request regulatory approval for using five years of operational loss data, if needed. endstream Netting of offsetting transactions makes itno longer possible to see the capital charge associated with each trade. Finance Watch regrets that the so-called draft Banking Package 2021 (finalising the implementation of the Basel III prudential framework for banks in Europe) leaves European banks insufficiently capitalised, and taxpayers exposed. 3 0 obj Introduces restrictions on which type of counterparties the IRB Approach may be used, Applies floors to Probability of Default (PD), Loss Given Default (LGD) and Credit Conversion Factor (CCF) to the portfolios that remain eligible for the use of the advanced approach, Uncertain if US regulators will allow F-IRB approach, A reduced scope in IRB may lead to higher RWA. Understanding the full impact of the changes requires assessing the impact on CCAR as well. Computational needs, e.g. Getting and maintaining IMAapproval requires carefulselection of risk factorsthat has appropriate depthto explain PnL in PLA/backtesting and also hassufficient market observableprice discovery per FRTBprescription (RFET). 12 0 obj Financial stability does no longer appear to be a priority a reflection of the (questionable) assumption that EU banks are already adequately capitalised (see 1.4.3). A number of EU-specific adjustments were introduced already as part of the so-called CoVid-19 CRR Quick Fix regulation[10], which was put into place in April 2020 to provide regulatory relief for EU banks during the Covid-19 crisis. /0)8MaRp %PDF-1.7 % The ability to forecast expectations on both of these aspects should be a part of capital planning. #/ 7*Bc;vK/RQkr#/`-G,G-Wh(j$= k_%z8S Banks must continue to implement robust processes for appropriately capturing operational risk loss data, including loss dates, accounting dates and recovery (legal and insurance) data. *[~.P@)5m:rsOb65 nV3!u]Mt3r!H$W "1PXrFk5KcG^ 8&1)F("yYQ4Pk/[,}Efgvl0fGxtYy~"AIby> J') 465 CRR, which pave the way for a permanent, material, and unjustified deviation from the Basel III standards; apply the higher risk weights for equity exposures in accordance with the Basel III standards, in line with the original deadline and phasing-in arrangements agreed by the Basel Committee; apply the output floor to all elements of the capital stack, including Pillar 2 and the Combined Buffer Requirement, with adjustments strictly limited to the elimination of double-counting for model risk; accelerate the adoption of a specific, and binding, prudential framework to address environmental, social and governance (ESG) risks in general, and climate-related risks in particular; and. US regulators never implemented F-IRB underBasel II, so there is significant uncertaintyregarding implementation. Judging by its content, the legislative proposal seeks to do justice, just about, to the letter rather than the spirit of the agreement. Technology systems should be comprehensiveand linked to the General Ledger to facilitate thecapture of operational loss data, including the required operational loss data elements. Banks will also be required to disclose their SA RWAs. To keep up to date with the latest industry developments, we stay in close contact with regulators, standard-setters and industry experts, scan and sort through numerous official publications, leverage experience from our client projects and conduct our own research. Banks may not have a full ten years of high-quality operational loss data.

Principal, Risk & Regulatory - Financial Services 50% to 75%. x]#M)L Change models, e.g. Inconsistent and redundant data infrastructure across market risk, credit risk, BU Risk and PnL controller groups. 2 0 obj Build a SA-CCR data interface layer with a standardized list of data elements for standard derivative and long dated settlement product types from all data sources. Assess and develop a plan to procure additional computing resources to manage the data volume demands. Certain exposure classes see significant changes in RWA (e.g.

PwC US Nearly half of that shortfall (42%) was attributable to the output floor.[13].