KPMG professionals estimate that if the revised standards were implemented in full for the 128 European banks in the KPMG Peer Bank tool...
KPMG professionals estimate that if the revised standards were implemented in full for the 128 European banks in the KPMG Peer Bank tool:
Banks using internal model approaches for credit risk will need to (a) apply the constraints on the use of the IRB approach for credit risk; (b) calculate the output floor as 72.5 percent of the total of the revised standardised approach (SA) calculations for all credit and market risk exposures and the new standardised approach for operational risk; and (c) apply the output floor if the use of internal model approaches for credit and market risk would otherwise drive overall risk weighted exposures below the output floor.
The largest impacts on these banks will be where:
Banks using the Standardised Approach (SA) for credit risk will need to move to the revised SA for credit risk. This will drive higher capital requirements for some types of lending, including buy-to-let and similar exposures to property where repayment relies on income from the property. However, for some banks the lower risk weights on high quality credit exposures under the revised SA may result in reduced capital requirements.
The impact on banks will be cushioned by the long transitional period, in particular for the output floor, although – as with earlier elements of Basel 3 - they may face pressure from supervisors, rating agencies and market analysts to meet the ‘fully loaded’ revised standards ahead of schedule.
Banks may also gain some offset to higher Pillar 1 capital requirements through national supervisors agreeing to reduce Pillar 2 requirements or other capital buffers – on the basis that these add-ons in part reflected the risks posed by the use of internal models. In addition, banks that can demonstrate good internal modelling and strong systems and controls for operational risk could potentially gain a partial Pillar 2 offset to higher Pillar 1 requirements.
Equally, however, the impact of the revised standards will add to the reductions (on average of around 0.5 percentage points) in CET1 capital ratios driven by the introduction of IFRS 9, and many European banks could be vulnerable to prospective changes in the capital treatment of sovereign exposures.