In conjunction with a consultation on new floors for its risk-based capital (RBC) rules, the Basel Committee has proposed an extensive rewrite of the standardized method for measuring credit risk left largely unchanged from the Basel II rules in the Basel III rewrite. This proposal is part of a broader effort to toughen all of Basel’s standardized options, including a new one addressing operational risk and pending revisions to the market-risk rules. This consultation does not address weightings for sovereign and certain related obligors, as well as those for past-due exposures and collateral haircuts; these will be taken up in a separate consultation at a date not made clear by the Committee. The final amount of capital banks would be required to hold for adequate capitalization will be determined once the entire new standardized framework is completed, with Basel also not making clear if final sovereign RWAs are necessary before calibration is provided. If implemented as proposed, the standardized approach would require considerably more capital for assets like residential mortgages, commercial real estate, and corporate loans. In conjunction with the proposed capital floor, this would prevent model arbitrage and increase comparability across the industry and nations, but increase the distance between actual risk at individual banks and regulatory-capital requirements. Banks would likely further reduce holdings of non-governmental low-risk assets and perhaps play a diminished overall role in financial intermediation. Exposures to other banks and, especially to non-banks, would generally be subject to higher capital, with the proposed approach disadvantaging banks subject to higher leverage charges.
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