GHOS endorse capital accord

  • 8 December 2017

The oversight body for the Basel Committee, The Group of Central Bank Governors and Heads of Supervision (GHOS), last week (7 December 2017) endorsed the ‘Basel III’ package of capital reforms at a meeting in Frankfurt.

The agreement follows a protracted delay, with approval initially scheduled for November 2016. The overall output floor, designed to restrict internal model usage by dictating a minimum level of capital, proved very contentious. The past year saw the US advocating a minimum overall output floor set at 75% while in Europe, particularly in France and Germany, initial opposition to the concept of an output floor evolved into negotiations around the exact level. A compromise of 72.5% has now been agreed.

On operational risk

As was widely expected, a new standardised approach will replace all existing approaches (BIA, TSA, ASA and AMA) for calculation of Pillar I capital.

Compared to the 2016 version, published as the SMA, some simplification has taken place. Notably:

  • Only three business indicator (BI) buckets are used (down from five), with coefficients of 12%, 15% and 18%
  • At national supervisory discretion (for all banks) option to disregard loss component
  • The removal of a lease component from the "interest, lease and dividend" part of the BI 

Loss data treatment:

  • A simplified loss component (LC) = 15 x historical average loss
  • Slight modification to dampen the effect of a large LC and reduce the benefit of a small LC
  • Loss threshold can be increased from €20k up to €100k (addresses the issues of large expected losses)
  • Inclusion of insurance recovery in loss data
  • Use of date of accounting for loss data (rather than first discovery date)
  • Some options to remove the loss component, modify the loss history and to exclude divested business – all subject to supervisory approval

ORX plans to offer an impact benchmark based on the finalised Basel III framework.

With a deadline for implementing the rules set at 1 January 2022, concerns remain over different jurisdictions’ appetite for adopting the reforms.

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