Martin NeisenStefan Röth - Basel IV: The Next Generation of Risk Weighted Assets

1. 2 The Future of the IRB approach
2. 3 The New Standardised Approach for measuring Counterparty Credit Risk Exposures (SA-CCR)
3. 4 The New Basel Securitisation Framework
4. 5 Basel IV for funds
5. 6 Fundamental Review of the Trading Book: New Framework for Market Risks
6. 7 CVA Risk Capital Charge Framework
7. 8 Operational risk
8. 10 New Basel Framework for Large Exposures
9. 11 Disclosure
10. 14 TLAC and MREL Two initiatives, one goal

1. 1 Revision of the Standardised Approach for Credit Risk
2. 2 The Future of the IRB approach
3. 3 The New Standardised Approach for measuring Counterparty Credit Risk Exposures (SA-CCR)
4. 4 The New Basel Securitisation Framework
5. 5 Basel IV for funds
6. 6 Fundamental Review of the Trading Book: New Framework for Market Risks
7. 7 CVA Risk Capital Charge Framework
8. 8 Operational risk
9. 9 Capital Floors
10. 10 New Basel Framework for Large Exposures
11. 11 Disclosure
12. 12 Interest Rate Risk in the Banking Book (IRRBB)
13. 13 Corporate Governance
14. 14 TLAC and MREL Two initiatives, one goal

Martin Neisen and Stefan Rth

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ISBN: 978-3-527-50918-8

Unimpressed by John M. Keynes motto I would rather be roughly right than precisely wrong, the Basel Committee on Banking Supervision is putting in motion the most comprehensive reform package in its entire supervisory history under the term Basel IV. The banking and financial market is a highly interconnected and dynamic system in which the strong connections make it almost impossible to assess the risks of the system under certain conditions. Moreover, supervision keeps pace with the financial sectors increasing complexity by penning more and progressively detailed rules for determining the minimum capital requirement for a banks risk positions.

Currently, every European bank must observe approximately 40,000 legally binding requirements of the European Union. In the field of banking supervision, four thousand and one different rules have been set down on 34,019 pages. With a reading speed of 50 words per minute and one hour reading time per working day, you would need around 32 years to read all the pages! And because the rules are constantly changing, they can never be fully read and understood. Today it is almost impossible to find any banking supervisor or bank practitioner who is able to explain exactly the supervisory rules and their consequences. The scope and complexity of the rules are just too great.

Behind this book is a highly qualified, expert team committed to a necessary reduction of regulatory complexity by providing this important companion volume to the reams of legislation. Broad knowledge is an especially crucial characteristic for dealing with complex systems. The authors come from pertinent sectors and have many years of consulting experience. The team of authors is led by Martin Neisen and Stefan Rth, two publishers whose experience and reputation are a guarantee of quality.

This book presents the innovations of the Basel IV package in a concise, understandable and practice-oriented way. It is committed to an optimised view by focusing on all relevant aspects. It is an outstanding work which, thanks to its clear structure and intellectual rigour, allows the reader to see the wood for the trees.

I strongly recommended this volume to all scientific readers concerned with the development of banking supervision and risk management, as well as for practitioners interested in these issues. I hope this book will be openly received and widely distributed, and that the reader will find much of interest within these pages.

Dortmund, February 2016

Professor Dr Hermann Schulte-Mattler

In response to the financial crisis of 2007 and over the ensuing years, the Basel Committee on Banking Supervision has extensively revised its existing framework regarding regulation, supervision and risk management in the banking sector. This revision was published in the form of the so-called Basel III framework in December of 2010. It essentially comprises a strengthening of the quality of the capital that banks are required to hold as well as new requirements regarding the amount of capital. It also introduces new ratios to limit debt levels (Leverage Ratio) and new liquidity ratios (Liquidity Coverage Ratio LCR, Net Stable Funding Ratio NSFR). The measurement of credit, market and operational risks which need to be backed by capital according to banking regulations, however, remained largely untouched by the Basel III reform, with the exception of the newly introduced CVA Risk Capital Charge for credit risks associated with counterparties of derivative transactions.

But, at least since 2012, the Basel Committee has been increasingly dedicated to the revision of the methods for assessing risk-weighted assets (RWAs). Initially, risk types and products such as market risk and securitisations, whose regulatory treatment had proven to be problematic in the course of the financial crisis, were at the forefront, the reform proposals now include virtually all procedures and risk types, such as (among others) credit risks, counterparty risks and operational risks, in addition to those mentioned above. Due to these wide-ranging reform proposals it is already foreseeable that the risk measuring methods under Pillar I will change radically until 2019. The scope of these changes goes far beyond the original Basel III framework.

Although the term Basel IV has not yet found its way into the official language of banking supervisors, and has often been met with rejection, we believe that the scope of the reform proposals justifies its use in the title of our book. The following pages are intended to outline the current status of the Basel Committees reform proposals regarding Pillars I and III at the time of the books publication. Whilst, from the perspective of the Basel Committee, a few of the featured papers are already in their final form, their respective implementation in the EU is still pending. In other cases they are, more or less, advanced consultation papers, in which future changes cannot be excluded or are indeed very likely.