Looking ahead
Changes to risk management and regulatory reporting brought about by regulatory change is proceeding at a rapid pace and on an unprecedented scale. Keeping up with the changing regulatory requirements imposes a high degree of complexity and a key challenge for small- and medium-sized banks. Katalysys can be your partner in managing this change. We can assist the bank’s risk management and regulatory reporting functions to stay ahead with these changes.
Basel 3.1
On 12 December 2023, the Prudential Regulation Authority (PRA) published near-final rules on the implementation of Basel 3.1 standards through Policy Statement 17/23 (PS17/23). PS17/23 covers near-final rules on market risk; credit valuation adjustment (CVA) and counterparty credit risk (CCR); operational risk; interactions with the PRA’s Pillar 2 framework; and, re-denominate currency references to pound sterling (GBP).
This article outlines an overview of the proposed changes, as part of UK’s implementation of Basel 3.1 (CP16/22).
This article outlines the key changes to the calculation of market risk capital requirements as part of the implementation of Basel 3.1 standards (PS17/23).
Regulatory updates
In this webinar, we will provide an overview of the key requirements banks must take account of with respect to their current or planned future relationships with deposit aggregators. Specifically, this will include: Prudential risk: liquidity risk management and liquidity stress testing implications; Liquidity regulatory reporting: implications for calculation and treatment of deposits; and, Depositor protection (Financial Services Compensation Scheme coverage), and third party and outsourcing risk.
NMD are liabilities whereby the depositor is free to withdraw their deposit at any time since there is no defined contractual maturity date. Similarly, banks are typically able to adjust the interest rate attached to NMD on a unilateral basis. Despite the contractually short-term nature (using a repricing basis) of NMD, certain NMD or portions thereof may behave like longer-term, interest rate-insensitive positions. The inherent characteristics of NMD create complexities from the perspective of measuring, and in turn managing, IRRBB, meaning that a more involved approach is necessary.
Interest Rate Risk in the Banking Book (IRRBB) relates to both present and future risks to a bank’s capital and earnings arising from fluctuations in market interest rates. In recent years, IRRBB has become an area of increased focus for regulators: this has coincided with significant changes in the interest rate environment across major economies, the ending of an extended period of near-zero rates, high inflation, and industry events such as the failure of Silicon Valley Bank.
Effective 1 January 2022, the PRA implemented new requirements and expectations for banks, including creation of a regulatory limit for IRRBB and implementation of a Standardised Framework (SF) that banks may elect to follow.
CRR2
A common question we are asked is the basis on which own funds requirement has to be calculated for the various types of exposures on the non-trading and trading book.
The approach to evaluating risk weight for Collective Investment Undertaking (CIU) exposures has changed under the new CRR2 rules. There are three approaches outlined, and banks can select the specific approach based on the amount of information available about the underlying exposures of the CIUs.
Prudently valued software assets no longer needs to be deducted from CET-1 capital, but can be risk weighted.
The large exposure limits are set based on the bank’s Tier-1 Capital Only.
As part of Covid-19 quick fix, the existing IFRS9 transitional arrangement for CET-1 capital adjustment has been extended by 2 years and the additional adjustment for ECL provisions recognised in 2020 and 2021 has also been provided.
SME support factor of 0.7619 for exposures up to €2.5 million and 0.85 for exposures above €2.5 million, for entities with turnover of up to €50 million.
How can we help you?
Katalysys can assist in all aspects of prudential risk management and regulatory reporting requirements caused by the increasing changes to the regulatory environment and the introduction of newer rules. A few of the areas where we have assisted in the past are listed below:-
Identify changes to the bank’s capital and liquidity calculations due to the new rules (e.g. changes to SME support factor introduced in CRR2) and provide guidance as to how the bank can incorporate these in the existing processes and control environment
Advisory and workshops about the new requirement and industry benchmarks
Review of the bank’s existing policies and interpretation in light of the new changes
Analyse the impact on regulatory reporting, and assist in regulatory change management