The BCBS in Different Frameworks and Their Difference - Management Assignment Help

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Question 2

a.The changes proposed by the BCBS in different frameworks and their difference from current Basel III agreements are discussed as follows:
1. Credit risk: disallowing the use of advance IRB for certain asset classes and implying the use of Foundation IRB with supervisory permission for those assets. Now, a fixed value is assigned to the parameters of loss-given-default (LGD) and exposure-at- default (EAD) ("Implementation of the final Basel III reforms in Canada", 2018). Hence, as compared to earlier, now the risk weights for certain assets have increased.

2. Leverage ratio: for the global “systemically-important banks”, a buffer in the form of the leverage ratio is introduced. The buffer has to be a minimum of 50% of the “risk- weighted higher-loss” absorbency requirements of G-SIB ("High-level summary of Basel III reforms", 2017).
Hence, a change is brought in the manner of treating the exposures lying off-balance sheet and derivatives.
3. Operational risk: For computing operational risks, the bank’s income (Business indicator component) and its historical losses (Internal Loss Multiplier) shall be considered ("High-level summary of Basel III reforms", 2017), i.e. Resultant, the earlier approach of using “advanced measurement approaches” (AMA) as well as three existing standards for computing operational risk is replaced by the above discussed single approach.
4. Credit Valuation Adjustment: the capital charge of CVA shall now include CVA risk’s exposure component and the AMA approach shall be removed by adopting a single standardized option based on fair values.
5. Output floor: using Basel III’s standardized method for computing output floor by lowering the level to 72.5% from 80% of accumulated risk-weighted assets.

b. The impact of each change on Canadian banks is as follows:
1. Credit Risk: now, the banks have to replace the IRB approach with SA-CCR (Standardised approach for measuring counterparty credit risk) ("Basel III: Finalising post-crisis reforms", 2017) and then apply risk weight on the resultant amount to compute the amount of credit risk.
2. Leverage ratio: for the G-SIB, the buffer leverage ratio is set to match 50% of the bank’s risk-based “capital buffer” and it must meet the capital set in Tier-1.
3. Operational risk: this computation being solely dependent on the business income and historical losses shall eventually lead to a risk in a bank’s operational risk even if either of the factors increases ("Basel III: Finalising post-crisis reforms", 2017).
4. CVA: the impact upon Canadian banks is almost related to the impact cast by changes in the framework of credit risk.
5. Output floor: banks are now required to reveal clearly the risk-weighted assets they have as per the reviewed standardized method leading to an increase in disclosure requirements.

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