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Basel III/IV in Australia

Finalised Basel III ("Basel IV") standards will present both challenges and opportunities

The Australian Prudential Regulation Authority (APRA) is making a significant revision to the capital framework, which will take effect on 1 January 2023. APRA’s key objectives of the Basel reforms are to align the Australian framework to the finalised BCBS standards, and to improve flexibility, risk sensitivity, transparency and (international) comparability along with enhancing competition in the Australian Banking industry.

APRA’s Basel III/IV reform for Pillar 1 impacts all risk categories in the capital framework:

Market Risk
Operational Risk
Counterparty Credit Risk
CVA
Securitisation
IRRBB

Capital and Credit Risk

 APRA has released draft Prudential Standards for Capital Adequacy and Credit Risk:

  • APS 110: Capital Adequacy

  • APS 112: Standardised Approach to Credit Risk

  • APS 113: Internal Ratings-based Approach to Credit Risk

 

The Capital and Credit Risk standards come into effect on 1 January 2023.

High level summary of changes

APRA is aligning the presentation of capital ratios to the international definitions which will improve comparability and supervisory flexibility. The total minimum CET1 PCR and CCB ratio requirements will increase from 7% to 8% of RWA for standardised banks; from 7% to 9.5% for IRB ADIs; and from 8% to 10.5% of RWA for D-SIB ADIs.

A capital floor is introduced for IRB approved banks. IRB RWA requirements cannot fall below 72.5% of RWA calculated under standardised approaches. The floor is calculated at the aggregate RWA level and applies from 1 January 2023.

A more detailed breakdown of exposure classes and revisions to RWA for all exposure classes to improve the risk sensitivity of risk weights under both standardised and advanced approaches. More granular risk weight allocations across all portfolio’s and in particular mortgages (e.g. owner occupied vs investment), commercial properties (cashflow dependent), corporate, leasing and defaulted exposures.

Impact on Capital

APRA does not anticipate additional capital will need to be raised, because ADIs already meet ‘unquestionably strong’ benchmarks. By aligning RWA calculations more closely to BCBS standards, capital ratios of Australian banks will increase and be more comparable vs international peers.

Impact on Return on Capital

The Basel reform will impact return on capital at business unit, portfolio, product and customer level. To optimise returns on capital, ADIs will review product and pricing strategies across all exposure classes.

Impact on Operations & policies

Increased serviceability assessment requirements and new data points in the risk weight allocations will result in updated lending policies and procedures. Additional data points will be required to be captured during the credit application process, impacting operations teams.

Impact on Data and Systems

Legacy and tactical capital and credit risk engines have proven costly to run and hard to maintain. Basel IV provides the opportunity for ADIs to future-proof their Credit Risk analytics and reporting architectures.

Opportunities under Basel IV

The Basel reform can act as a catalyst for a strategic review of your capital, credit risk and data governance, processes, technology and people capabilities. When done right, your Basel IV project will deliver

 

  • Efficient, cost-effective and sustainable compliance with APRA prudential and reporting standards; 

  • Improved portfolio and customer analytics,

  • Optimised capital allocation for improved business performance and stakeholder value.

Challenges to overcome

Banks face common challenges on their road to Basel IV. A wide range of stakeholders, outdated systems and technology, a siloed data landscape, lack of internal availability of Subject Matter Expertise, competing priorities for Data and IT teams are just some of the key challenges faced by industry. With the regulator's increased focus on quality, an intensified supervision and enforcement approach and a heightened focus on accountability and transparency, banks simply cannot afford not get this right.  

Recent experience across regulatory programs, including the Economic and Financial Statistics (EFS) has highlighted some these key challenges:

Limited SME availability

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Shortage of Subject Matter Expertise – understanding regulations and their overlaps; and the impacts of Basel IV across Governance - Process - Data - Technology - People.

Data Trust and Transparency

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Limited governance and (documented) controls across the end-to-end data lifecycle. Lack of common definitions, consistency and alignment with APRA standards and data quality issues. 

Outdated Risk Systems

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Legacy Systems that are inflexible and costly to change. End-of-Life Vendor Technology. Tactical solutions which are no longer fit for purpose.

Batch Driven Technology 

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Overnight Batch Processing based IT and Process Landscape leading to information delay & delayed decision making through the value chain.

Our Approach

RegCentric supports ADI's cost-efficiently implement the Basel III (IV) changes. From understanding the impact across the enterprise, defining the strategy and planning the execution and ultimately the timely delivery of the change program - our consultants support the full program lifecycle. 

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Taking a holistic approach to various regulations pertaining to risk – understanding overlaps and thereby ensuring synergies in how they are implemented.

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Leveraging NextGen streaming technology to implement real-time risk management.

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Re-engineering Risk Management Processes and Operating Model to ensure it is Business Led as opposed to Regulation Led

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Ensuring Risk Data Management is embedded throughout the data lifecycle for critical data elements.

How we can help

Combining deep domain expertise with technical know-how to deliver optimal solutions

Our team has decades of experience implementing projects, providing subject matter expertise on regulations & data management, and driving strategic business transformation in risk management and regulatory reporting functions. We can support you by filling any gaps in both capability or capacity to ensure a successful implementation of your Basel program. 

 
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