In an effort to simplify and strengthen the global capital adequacy framework, global banking regulators are proposing a series of changes to the capital rules for banks that use the standardized approach to calculating their capital requirements, rather than an internal model.
The Basel Committee on Banking Supervision proposed revisions Monday to the standardized approach for credit risk under the capital rules. The committee says that it’s seeking to toughen the existing regulatory capital standard by reducing its reliance on external credit ratings; enhancing granularity and risk sensitivity; updating risk weights; and enhancing comparability between banks that use the standardized approach and those that use an internally modelled approach.
Separately, the committee also published a consultation paper on the design of a capital floor framework based on standardized approaches to calculating capital. The proposed floor aims to ensure that the level of capital across the banking system does not fall below a certain level. It is also meant to mitigate model risk and measurement error by following a standardized approach, rather than internal models. It would also enhance the comparability of capital outcomes across banks.
The committee says that the proposed capital floor framework will be based on the finalized versions of the standardized approaches that were announced today too. The calibration of the actual floor will take place alongside work to finalize the standardized approaches to credit risk, market risk and operational risk.
In the proposed revisions to the standardized approach to credit risk the Basel Committee says that it is considering replacing references to external ratings with a set of risk drivers. This idea is still at an early stage, the committee says, given the challenges associated with identifying risk drivers that can be applied globally but which also reflect the local nature of certain exposures, such as retail credit and mortgages.
Comments on both sets of proposals are due by Mar. 27, 2015.
In response to the Basel Committee’s proposals, U.S. banking regulators (including the U.S. Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC)) said they will consider the proposals “with the goal of developing a stronger and more transparent risk-based capital framework for the largest institutions.” Any change to the U.S. risk-based capital rules as a result of these proposals would be subject to the usual comment process, they note.