Is the output floor a game changer?
The new capital requirement standards issued by the Basel Committee in December 2017 have three main implications for market risk. First, the confirmation of an output floor that will potentially constrain the benefits from the use of internal models when determining a bank's risk weighted assets (RWAs). Second, the implementation date of the revised framework for market risk has been pushed back to 1 January 2022. Finally, notwithstanding the introduction of output floor, there are still benefits for banks moving to an internal model approach for market risk.
In this article, we discuss the many implications that this could have on banks' systems and processes, business models and capital. We also include an analysis to highlight the capital impact of the output floor on moving from Standardised Approach to Internal Models Approach, with an example of the capital benefit vs. the implementation cost.
This article is part of our Basel 4: The way ahead discussing the Basel 4 standards. To assess the full impact of these final rules, we are leveraging the insights of our global network to publish a series of articles that focus on specific areas affected by the standards. Find the latest articles online here.