JAMES OKARIMIA - A Summary Of Top 28 Areas Covered By EC Proposed Regulation and CRDIV for Basel III Implementation

1. James Okarimia ‐ A Summary of Top 28 areas covered by EC Proposed Regulation for CRR, CRD IV and
Basel III Regulatory Compliance and Implementation of the proposal: A publication by James Jeffrey
Okarimia
Partner at RM associates: Partners in Enterprise Risk Managements
The proposals are structured around the following regulatory objectives, with the key changes and
implications listed below:
1. Increased Quality of Capital
2. Increased Quantity of Capital
3. Reduced leverage through introduction of backstop Leverage Ratio
4. Increased short term Liquidity Coverage
5. Increased stable long term Balance Sheet Funding
6. Strengthen risk capture notably Counterparty Risk
7. Enhancing risk coverage
8. Supplementing the risk‐based capital requirement with a leverage ratio
9. Reducing procyclicality and promoting countercyclical buffers
10. Addressing systemic risk and interconnectedness
11. Platform to enhance risk management, disclosures and supervisory practices
12. Enhanced capital requirements and new liquidity standards will contribute to resilient financial system
13. Macro prudential approach will improve oversight of system‐wide risks
14. Reduce opportunities for capital arbitrage in certain areas and promote a level playing field.
15. Core Tier one capital as central measure
16. Capital Conservation buffer
17. Net Stable Funding Ratio
18. Liquidity Coverage Ratio
19. Leverage Ratio
20. Counterparty Risk RWA
21. Trading Book RWA
22. Securitization RWA
23. Deductions from Capital
24. Eligibility criteria for Tier 1 and Tier 2 Capital
25. Eligibility of capital instruments and application of regulatory adjustments
26. Concentration Risk
27. Large exposures Risk
28. Single Rule book in Banking
Strengthen risk capture notably Counterparty Risk
 Calibration of counterparty credit risk modeling approaches such as Internal Model Methods (IMM) to stressed periods
 Increased correlation for certain financial institutions in the IRB formula to reflect experience of recent crisis and new capital charge
for CVA and wrong‐way risk
 “Carrot and Stick” approach to encouraging use of Central Counterparties (CCPs) for Standard Derivatives

2.  Improved Counterparty risk management standards in the area of Collateral Management and Stress‐Testing
Specific Dutch Central Bank DNB Rules prescription on implementation of CRD IV
Counterparty Credit Risk CCR rules applied:
 CCR rules cover OTC derivatives, repos, stock lending and borrowing and other securities financing transactions (SFTs)
 EAD is an input into the credit risk capital calculation under either the credit risk standardized or IRB approach
What is calculated under CCR Rules?
 A loan equivalent exposure at Default (EAD)
 Approaches:
1. (Original Exposure Method)
2. Current Exposure Method (CEM)
3. Standardized method
4. Internal Model method (IMM)
DNB Policy Proposals:
1. Impact of Capital charge for Credit Value adjustments (CVA)
2. Impact of higher Asset value Correlation (AVC)
3. Capital held for CCPs
Trading Book – Market risk Requirements for trading book
Key Issues
 Substantial losses in trading book due to downgrades and defaults
 For some VaR‐firms: Losses ≥ Capital charges
 Considerable volatility in equities
New capital charges for Trading Book
 SA Banks:
- Specific risk for equity
- Specific risk charge for securitizations/correlation trading
 IM Banks
- Incremental Risk Charge (IRC)
- Stress‐ VaR
- Specific risk charge for securitizations/correlation trading
Securitization treatments
 Higher risk weights for re‐securitization exposure (SA & IRB)
 Resecuritisation: a securitization where one of the underlying exposures is a securitization position
 Senior resecuritisation refers to those exposures that (i) are senior and (ii) none of the underlying exposures are
themselves re‐securititsation exposures
 Neither materiality thresholds nor carve outs
DNB Policy takes on Securitizations:
 Securitization of revolving exposures
- Trigger events followed by subordination of originator
 First loss guarantee schemes

3. - With and without rebates
- `Non‐economic` premiums
 Supervisory formula/dependency CRAs
 Update risk weights for RBA (IRB & SA)