BCBS Proposes Measures to Reduce Variation in Credit Risk-Weighted Assets

Last Thursday, March 24th, the Basel Committee on Banking Supervision (“BCBS”) released a consultative documententitled “Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches.”

According to the BCBS, the document introduces a proposed set of changes to the Basel framework's advanced internal ratings-based approach and the foundation internal ratings-based approach. The proposed changes aim to: (i) reduce the complexity of the regulatory framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk.

Under the proposal, banks would have to use a more conservative standard approach set by regulators and would not be allowed to use models for credit valuation adjustment risks from counterparties to their derivatives trades.

Reuters recently reported that banks fear a “Basel IV,” or step change in capital requirements, but the BCBS has said the proposed rules would not significantly increase overall capital requirements.

Comments on this consultative document are due by June 24, 2016 and the BCBS is aiming to finalize the rules by the end of this year.

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