Basel III and the integrated regulatory capital framework

What are the Regulatory Frameworks?

Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. In Basel III, a more formal scenario analysis is applied.

In the United States, current regulatory capital rules have been incorporated into a harmonized, comprehensive framework, and would revise the capital requirements to make them consistent with the Basel III capital and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Who is impacted?

All financial institutions, but the impact may differ by jurisdiction, types and size. Global Systemic Important Banks (G-SIBs) will be subject to higher core tier 1 capital requirements.

How are financial institutions in the United States impacted?

The Integrated Regulatory Capital Framework was be implemented in the United States beginning on January 1, 2014 with the largest financial institutions.

Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions.

The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.  On the quality of capital side, the final rule emphasizes common equity tier 1 capital, and implements strict eligibility criteria for regulatory capital instruments. The final rule also changes the methodology for calculating risk-weighted assets to enhance risk sensitivity.

How can we help your financial institution?

We can review and assess your portfolio(s) and provide a gap analysis and project design that meets Basel III and the Integrated Regulatory Capital Framework requirements, followed by data prep, development, integration, and validation of loss projections using the following models:

  • Probability of Default (PD)
  • Loss Given Default (LGD)
  • Exposure at Default (EAD)

Additionally, we can evaluate strategic initiatives to help offset the potential impact by optimizing risk-weighted assets (RWA) strategies and capital usage.

Stress Testing and Capital Assessment

We understand the importance of measuring capital adequacy, stress testing and loss reserve estimation reporting, bringing an extensive background in modeling, banking, risk management and simulation to our clients. Click the button below to learn more about our stress testing and capital assessment services and analytics.

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