Analytics-University
The video discusses the impact of Basel IV regulations on credit risk management in banks, which will result in stricter regulations and significantly impact the banks' capital position, profitability, and risk management frameworks. The regulations introduce new rules, including the floor to ensure banks' RWA is at least 72.5% of the standardized approach capital, impacting EU banks more than US banks. The standardized approach calculation for banks and corporates is now based on credit ratings, and there are many changes made, including an increase in the PD side. Overall, Basel IV will strengthen the capital level of banks, but it will also pose challenges for many, including raising more capital, updating IT systems, and gathering rating data.
In this section, the focus is on the Basel IV reforms for credit risk, which are stricter than Basel III, with more stringent regulations that will significantly impact the banks in terms of their capital position, profitability, etc. It was felt that there was a huge variability in the capital assessment by banks using internal models, which necessitated harmonization and caps on the capital level and RWA level. The new rules will harmonize the regulatory capital, and floors will mitigate model risk. Some portfolios will be impacted more than others, with the large corporate portfolio having a higher impact on pricing and making some banks less competitive in the market. The European Union banks will have a higher impact compared to counterparts in the US, where not many are using internally developed models.
In this section, we learn about the impact of Basel IV regulations on credit risk management in banks. The regulations introduce new rules, including a floor to ensure that the RWA from banks' internal models is at least 72.5% of the standardized approach capital. This increase in capital for banks could be as much as 19% for European Union banks, resulting in decreased return on capital and higher funding issues. Corporates above 500 million in turnover will not be able to use internal models for HDD and EAD and must use foundational level FIRB and standardized approach capital for capital assessment. The new regulations will have a significant impact on various risks, including the credit value adjustment and operational risk frameworks.
In this section of the video, the speaker explains that the standardized approach calculation for banks and corporates is now based on credit ratings. There are many changes made to the standardized approach, including the introduction of the standardized credit risk assessment approach, risk weights for small and medium-sized enterprises and investment corporates, and an LTV ratio approach to replace the flat weighting of 100 in some cases. The speaker notes that there is also an increase in the PD side, so it's not that a decrease in the lgd floor will have a positive impact on the banks.
In this section, the speaker explains that the impact of Basel 4 on banks' capital levels will depend on the situation; some banks may experience a decrease while others may experience an increase in capital. However, most banks will need to raise more capital to fund their businesses due to the higher capital requirements. This will be a challenge for many European banks, which already face high capital levels due to the supervisory review and evaluation process. Furthermore, implementing the changes under Basel 4 will require a massive effort, including updating IT systems, calculation steps, and gathering rating data. Despite these challenges, the speaker notes that Basel 4 will strengthen the capital level of banks and make the banking system more robust.
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