In December 2020, APRA issued a consultation package on changes to the Basel III (IV) framework for capital and credit risk. In a recent webinar RegCentric presented a practical approach to assessing your organisation's readiness for Basel IV and prepare the QIS in a strategic way. In this session we focussed on the standardised approach to credit risk (APS 112). A recording of the session is available for on demand viewing.
The upcoming capital reforms introduced by APRA aim to align to the BASEL III revisions from the BCBS (colloquially known as BASEL IV). This reform introduces major revisions to the prudential and reporting standards for capital adequacy in Australia.
Basel reform is not just about about calculating RWA’s under the new standards. It fundamentally impacts the risk vs reward ratio on bank's assets. If under the new rules additional capital needs to be held for a given exposure, all else being equal – the return on capital reduces. Apart from the significant effort required to close data gaps, implement calculation and reporting solutions, banks will also need to assess impact on profitability across asset classes and adjust product pricing strategies to optimise their return on capital. They will also need to ensure policies and procedures are adjusted to ensure the organisation adheres to the increased regulatory requirements. IRB banks will be subjected to the RWA floor of 72.5% and therefore all local ADIs in Australia are impacted by the standardised approach to credit risk reform.
Regardless whether an ADI participates in the QIS or not, all entities will need to assess the impact of the reform early to avoid being caught out.
In the webinar session we covered a practical approach to how entities can:
Efficiently interpret the revisions to the standards and identify the delta (utilising decision trees)
Assess impacts across business, operations, process, systems and data
Quickly identify additional data required for revised calculations (utilising our BASELIV data model)
Efficiently perform BASEL IV RWA calculations, leveraging existing technology or a next generation Basel engine.
Run simulations by changing supervisory rules to enable a more fact based response to APRA as part of industry consultation.
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