ISDA hosted a bank capital conference in Brussels, wherein it highlighted that prudential regulators face a challenging balancing act between global and local interests in implementing the final Basel III rules. This balance between global and local interests is about to rise up the agenda with publication of proposals for the third Capital Requirements Regulation (CRR III) expected in June, which will implement, in EU, the key Basel III standards, including the Fundamental Review of the Trading Book (FRTB).
One of the most significant changes in this next phase of Basel III will be the reduced use of internal models. A recent survey by ECB found that only 40% of the banks that are using internal models intend to seek approval to continue to use them under the FRTB rules. A further 40% expect to rely entirely on the new standardized approach. Moving to a world in which only four out of 10 banks in Europe persist in using internal models represents a significant change. For a standardized model to be effective in calculating capital requirements, it needs to be implemented both accurately and comparably across the industry.
To this end, ISDA is working with a group of more than 30 banks on a benchmarking initiative to support accurate, efficient, and consistent implementation of the FRTB standardized approach. Recognizing the increased importance of standardized approaches, ISDA will look to expand this work to support other parts of the capital framework where standardized models are used. These will include credit valuation adjustment (SA-CVA) and the standardized approach for measuring counterparty credit risk (SA-CCR).
Related Link: Notification
Keywords: International, Europe, EU, Banking, CRR II, Basel III, FRTB, Internal Model, SA-CCR, SA-CVA, Standardized Approach, Credit Risk, Benchmarking, ECB, ISDA
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