On Friday, the American Banker http://bit.ly/1I9mZPa focused on our previous advisory to you: Even though Basel III is incomplete in key respects, Basel IV is about to launch. In Client Report REFORM109, we laid out key elements of the new approach:
- a rewrite of the standardized Basel II credit-risk framework (see FSM Report CAPITAL136);
- higher minimum capital requirements; and
- lots more restriction on model reliance by banks using the advanced internal-ratings based (A-IRB) approach.
Much here was presaged in Basel’s effort to contain the complexity of its capital framework (see FSM Report COMPLEXITY). However, it remains thoroughly uncertain whether the new requirements will reduce variance or hew bank capital requirements to regulatory ones. While these regulatory requirements would be based on models that are less complex, they would still be opaque and hard to predict when applied to individual banks in different countries under varying conditions.
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