Basel Committee proposes measures to reduce the variation in credit risk-weighted assets

24 March 2016

The BCBS released a consultative document entitled "Reducing variation in credit risk-weighted assets - constraints on the use of internal model approaches", which sets out a proposed set of changes to the Basel framework's advanced IRB approach and the foundation internal ratings-based approach.

The proposed changes to the internal ratings-based (IRB) approaches set out in this consultative document include a number of complementary measures that aim to: (i) reduce the complexity of the regulatory framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk. Specifically, the Basel Committee on Banking Supervision (BCBS) proposes to:

• remove the option to use the IRB approaches for certain exposure categories, such as loans to financial institutions, since - in the Committee's view - the model inputs required to calculate regulatory capital for such exposures cannot be estimated with sufficient reliability;
• adopt exposure-level, model-parameter floors to ensure a minimum level of conservatism for portfolios where the IRB approaches remain available; and
• provide greater specification of parameter estimation practices to reduce variability in risk-weighted assets for portfolios where the IRB approaches remain available.

The BCBS has previously consulted on the design of capital floors based on standardised approaches and is still considering the design and calibration. This would complement the proposed constraints discussed in this consultation paper. The final design and calibration of the proposals will be informed by a comprehensive quantitative impact study and by the Committee's aim to not significantly increase overall capital requirements.

As set out in its work programme and in its reports to G20 leaders, the Committee releases proposed measures to reduce excessive variability in credit risk-weighted assets. With the release of these proposals, the Committee has now consulted on all key elements of its post-crisis regulatory reform programme.

The Committee welcomes comments by Friday 24 June 2016.

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