Further enhancements of the Basel framework („Basel IV“)

t
Regulatory Capital Concept
Principles Mechanisms
Calibration

Global (FSB)/G-SIB:
TLAC:
common Pillar 1
requirement
MREL: resolution plan (Pillar 2)
Own Funds     
Eligible instruments
• A ll liabilities, if not
explicitly excluded
Excluded liabilities
• Covered deposits
• Secured liabilities
• Critical service
liab.
• Tax and social
Additional criteria
• Not owed to the institution
itself
• No preferential treatment
by national insolvency law
• Bail-in evidence for
Impact
• Minimum ratio including regular reporting and disclosure

f
1. L
 oss absorption, 2. Recapitalisation of 3. Liabilities excluded from 4. D
 eposit guarantee 5. Assessment of size, 6. Size and systemic risk: • Additional criteria • Fiduciary liab. security • Not funded directly/ liabilities subject to third requirements
• Loss-absorbing and recapitalization capacity • Conversion into equity TLAC Term Sheet
18% of RWA especially by own funds non-resolvable business bail-in due to operative scheme contribution business/funding model, effects on the financial defined for MREL/ • Institution and authorities liab. indirectly by the institution country law • Depending on resolution scenario, requirements on
Own Funds TLAC/MREL
• Continuity of functions, orderly resolution • Write-down
(2022) functions importance or difficult considered risk profile, based on system TLAC (Art 44, system (operator) • DGS liab. (MREL) • Remaining maturity of at • Not subject to set off/ group and solo level
Common Additional (BCBS 342, FSB, BRRD) Eligible
• Stability of financial system
• No recourse to tax money + Capital buffers valuation SREP results 45 BRRD, TLAC liabilities < 7 days • Short term least one year netting rights (TLAC only) • Integration in capital planning processes; consideration
EU/all CRR institutions:
Tier 2 • Total Loss-absorbing Capacity Termsheet) • Employee liab. deposits (TLAC) • Does not arise from a of higher funding costs
Equity Tier 1 Tier 1 • M inimum requirement for own Liabilities MREL/BRRD
derivative
Bottom line: 6,75% of LR exposure (TLAC) / double LR requirement (MREL) Resolution fund access: 8% of total liability
funds and eligible liabilities
Criteria

Capital Requirements Max (Capital RequirementsIM  ; Capital RequirementsSA x floor factor )

Capital Floors (BCBS 306, 362) Two alternatives possible: Risk-category based floor or overall floor

a
Credit Risk Investments in funds (BCBS 266) Trading-book definition (BCBS 352) Operational risk (BCBS 355)
Banking Book Trading Book Standards for the Allocation of Instruments para.12–17 Trading desk para. 22–26, App. A
The Standardised Measurement Approach (SMA)
Exposure value for derivatives and off balance sheet positions Banking book Trading book Trading book Trading book • Defined group of traders or trading accounts
• Well defined and documented business strategy
(mandatory) (mandatory) (approved deviation possible) (instruments being held for
mandatory reasons) • A clear risk management structure Business Indicator (BI)5 = ILDC + SC + FC
Off-balance sheet Look-Through Approach (SA and IRB) Per definiton • Approved by supervisor
Standardised Approach (SA-CCR) (BCBS 279) Internal methods (IMM)
items (SA) para. 64 ff • Equity investments in a fund in Instruments … • Equity investment with daily All instruments for one of the Interest, operating lease and dividend component (ILDC) = Min [|II – IE|, 0.035 x IEA] + |LI – LE| + DI
Leverage which the bank cannot look- • Managed on a trading desk look-through following purposes, not listed Moving instruments between regulatory books para. 27–30
EAD = 1.4 x (Replacement Cost + Potential Future Exposure)
Modified Standardised Approach (IRB) + Adjustment Standardised Approach through daily • in the correlation trading • Listed equity before:
Direct credit substitutes 100% + CVA • Compliance with bank’s policies Services component (SC) = Max [OOI, OOE] + Max [|FI – FE|, Min{Max(FI, FE), 0.5 x uBI+0.1 x (Max (FI, FE) – 0.5 x uBI)}]
Under consideration of wrong-way-risk • Unlisted equity portfolio • Accounting trading asset • Short-term resale
and CVA • Securitisation warehousing • Giving rise to a net short or liability • Profiting from short-term price • Approval by senior management and supervisor
Unmargined Transactions: (Variation margin is not exchanged) Other Commitments 50–75% Mandate-Based Approach (SA and IRB) = |Net P&L on Trading Book| + |Net P&L on Banking Book|
• Retail and SME credit credit or equity position in • Market-making activities movements Financial component (FC)
RC = max{V – C; 0} Internal Models
Multiplier × AddOn aggregate • Retail and Derivative the banking book • Traded repo-style • Locking in arbitrage profits Internal Risk Transfer para. 31–39
Approach • Underwriting commitment II = Interest Income LE = Lease Expenses FI = Fee Income uBI = ILDC+Max(OOI;OOE)+Max(FI;FE)+FC

r
Short-term self-liq. trade letters 20% – Derivatives that have the above transactions • Hedging risk that arise from
Margined Transactions: (Variation margin is exchanged) Max (effective EPE; Outsourcing instruments as underlying asset • Options the instruments mentioned • Only fromm BB to TB IE = Interest Expense DI = Dividend income FE = Fee Expenses ILDC = Interest, operating lease and dividend component
Fall-Back Approach (1,250%)
RC = max{V – C; TH + MTA – NICA; 0} ∑ AddOn (a) for each asset class (a) effective EPE under Stress) possible • Hedging Positions • credit/equity risk: only, when external hedge in TB IEA = Interest Earning Assets OOI = Other Operating Income uBI = unadjusted BI FC = Financial Component
Retail commitments 10–20% above
LI = Lease Income OOE = Other Operating Expenses
V =M TM value of the derivative transaction in a netting set
C
TH
=C ollateral Value per netting set, after haircut
= Threshold Amount related to collateral min {1; Floor + (1 – Floor) x exp ( V–C
2 x (1 – Floor) x AddOn aggregate )} Buckets in the BI Component
MTA =M inimum Transfer Amount related to collateral
NICA = Net Independent Collateral Amount Floor = 5%
Market Risk (BCBS 352)
BI Range (€ Mln)
Buckets
0–1,000
1
1,000–3,000
2
3,000–10,000
3
10,000–30,000
4
>30,000
5

{
• Banks should comply with minimum
RWA under Standardised Approach (BCBS 347) Standardised Approach BI Component, if Bucket 1
loss data standards under Pillar 1.

( )
SMA Capital = Loss Component • Loss data calculations must be of
110 Mln + (BI Component – 110 Mln) x Ln exp (1) – 1 + , if Buckets 2 – 5
BI Component good-quality and based on a
10-year observation period.
Ratings not available/permitted1,2 Financing secured by Real Estate (RE) para. 49 ff Total Capital Charge Loss Component • In the transition period, good-quality
Ratings available 1
Standardised Credit Risk Assessment Approach = 7 x Average Total Annual Loss loss data of minimum 5 years may
External Credit Risk Assessment Approach (ECRA)
(SCRA) Other Real estate Income-Producing RE ADC + 7 x Average Total Annual Loss only including loss events above € 10 milion be used, until the number of years

{
Rating AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Grade A Grade B Grade C Sensitivities based Approach + 5 x Average Total Annual Loss only including loss events above € 100 milion reaches 10.
Operational req.3,4 met RW = 150% • Banks must have documented
Eligibility Default Risk Residual Risk Add-on 0.11 x BI, if Bucket 1 procedures and processes for the
criteria (AAA- LTV ≤ 40% 25% 110 Mln + 0.15 x (BI –   1,000 Mln), if Bucket 2 identification, collection and treatment
MDB 0% Delta Risk Vega Risk Curvature Risk
rating, capital LTV 40%–60% 30% BI Component = 410 Mln + 0.19 x (BI –   3,000 Mln), if Bucket 3 of internal loss data.
para. 10 ff etc.) are met: LTV 60%–80% 35% LTV ≤ 60% 70% 1,740 Mln + 0.23 x (BI – 10,000 Mln), if Bucket 4 • Banks should adhere to the criteria for

Residential
Base RW 20% 50% 100% 150% 50% LTV 80%–90% 45% LTV 60%–80% 90% • Based on sensitivities of a bank’s trading book to delta risk • Based on sensitivities to regulatory vega risk factors • Measures the incremental non-linear risk which is not Captures jump-to-default-risk • Separately calculated for all 6,340 Mln + 0.29 x (BI – 30,000 Mln), if Bucket 5 building “SMA loss data set”
LTV 90%–100% 55% LTV > 80 120% factors defined by the supervisor • Similar aggregation formula as for delta risks captured by the delta risk of an option (JtD-risk) instruments bearing residual
Banks Base RW 20% 50% 100% 150% 50% 100% 150% LTV > 100% RW cp Relevant Risk • Delta sensitivities are used as inputs in the aggregation • Curvature risk charge (CVR) is first calculated across risk 5
Banks must determine the three-year average of the BI, as the sum of the three-year average of its components.
para. 13 ff Classes formula below instruments for each risk factor • Simple sum of gross notional
Short-term RW 20% 50% 150% 20% 50% 150%
• CVRs are then aggregated first within and then across Separate calculation of amounts of the instruments
Operational requirements 3,4 not met
Corporates General SME Inv. Grade buckets JtD-risk of each instrument • RW = 1% for instruments with
GIRR Instrument Aggregation

Step-in Risk
para. 31 ff Sensitivity an exotic underlying, 0.1% for “Risk that a bank may provide financial support to an entity beyond or in the absence
Base RW 20% 50% 100% 150% 100% 85% 75% Max. (100%; RW cp) 150% assignment to Risk factor Bucket across buckets
risk classes and sensitivities
weighting
aggregation within asset other instruments (BCBS 349) of any contractual obligations, should the entity experience financial stress.”

D
Obj./Com. fin. 20% 50% 100% 150% Object/Commodity finance 120% per bucket
Operational requirements 3,4
met CSR non-sec risk factors class Specific offsetting rules
Specialized Relevant entities include e.g.: • MM funds and other investment funds

Trading Book
Lending Contractual obligation RWA
20% 50% 100% 150% Pre-operational 150% • Mortgage or finance companies • Asset management companies
LTV ≤ 60% RWcp/60% LTV ≤ 60% 80%
Commercial

para. 38 ff Project finance Bank

Operational 100% LTV > 60% RW cp LTV 60%–80% 100% CSR sec CTP • Funding vehicles • Commercial entities providing critical
LTV > 80% 130% Bucket allocation and Non-contractual obligation Step-in Risk • Securitisation vehicles services exclusively to the bank
e.g.: (GIRR) weighting
Equity Operational requirements3,4 not met
para. 42 f
250% Sovereigns out of scope Defaulted para. 75 CSR sec nCTP Risk Risk WSk = RWksk
classes factors
Subordinated RW cp 150% Hedge benefit recognition Identification of step-in risk Measurement of step-in risk
150% PSE out of scope RRE (not mat. dependant) 100% Other (secured) 100% 0.0001
0.0001
para. 44 and capital charge
Equity aggregation
RRE (other) 150% Other (unsecured) 150% 3 
Operational requiremens for the treatment as secured by real estate:
• Finished property Sponsorship Consolidation approach Conversion approach
Add-on risk weight due to currency mismatch • Legal enforceability • Positions  ensitivities
S • Risk weights Risk position for bucket  he risk charge is determined
T • Only for risk positions with explicit or embedded options
General requirements:
Retail para. 45 ff Other Assets para. 80 ff
para. 62 f • Claims over the property Commodity are grouped defined by (RW) defined by determined by aggregating from risk positions • Two stress scenarios per risk factor: upward and downward
1 D ecision- • When step-in would lead to Appropriate when step-in is not

TB + BB
50% Add-On
4
Ability

of the borrower to repay together by supervisor supervisor weighted sensitivities for aggregated between the shock
• Sensitivities based Approach requires calculation of capital charge
under three correlation scenarios, highest of which is the final Making 2 F inancial accounting consolidation expected to result in accounting
Regulatory retail • Product criterion met?
• Low value of individual
75% Cash/gold 0% Lending curr. < > borrower curr.
(Max 150%) • Prudent value of the property
FX
common
characteristics
• RW differ
between risk
risk factors using
corresponding prescribed
buckets within each risk
class
• The potential loss, after deduction of the delta risk positions,
is the outcome of the scenario
capital charge Support 3 O perations • E xcept where Basel rules
inappropriate
consolidation once materialised
exposures? • Required documentation • Standardised approach capital charge is the sum of Sensitivities
Other retail 100% Cash items in collection 20% No curr. mismatch No Add-On • Risk factors are classes and correlation
• Granularity criterion met? mapped to risk different risk based appr. capital charge, Default Risk charge and Residual Risk
Primary Indicators Secondary Indicators
1
(Additional) due diligence analysis required classes factors Add-on
Other 100%
2
No fallback such as sovereign RWs intended • Capital ties • Branding
• Upfront facilities • Investor base/expectations
• Decision making • Purpose, originator interests

RWA under IRB-Approach (BCBS 362) Internal Models Approach

PD LGD EAD/CCF Qual. Requirements Model approval process Total Capital Charge
CVA Capital Charge (BCBS 325, 362)
Derivatives with counterparty default risk, SFT (fair value), exemptions for derivatives cleared through a QCCP
• A ll derivative transactions that are subject to the risk that a counterparty could default
Risk Mitigation Regulatory trading desk definition and nomination Modellable Risk Factors Non-modellable Risk Factors Default Risk Charge • SFTs that are fair-valued by a bank for accounting purposes
Sovereigns (under review)
Uncollateralised Senior: 45% • Protection by guarantees only as full • E xemption: Transactions cleared through a qualified CCP
Overall Assessment
Uncollateralised subordinated: 75% substitution approach Mandatory nomination Approval by
Secured with receivables, CRE/RRE: 20% • No double default approach Aggregating capital Surcharges for risk
Banks (including insurances) of reg. trading desks supervisors Expected Shortfall Using the reduced Adjusting for different Taking the possibility Basic CVA Framework (BA-CVA)
Secured with other ph. Coll: 25% • No recognition of conditional guarantees requirements across factors with insufficient
Supervisory provided as Risk Measure risk factor approach liquidity of risk factors of default into account
FIRB (clarification will be provided) desks data
Corporates (consolidated groups as • No internal estimation of haircuts Model evaluation on trading desk level Requirement:
reported in financial statements) • First-to-default CDS only eligible under AIRB All banks without approval or unwilling to use the FRTB-CVA Framework
· · • n-th-to default CDS not eligible
1. Expected Shortfall at 97,5% Full ESB may be calculated Liquidity horizons LHj used Capital charge calculated • Stress scenarios used • A separate internal
Assets > € 50 bn
from ESR,S using a from desk level ESi,B and Input Parameter: Eligible Hedges:
Requirements to be satisfied

quantile for a 10 days to scale ES to the regulatory • Different treatment of credit (two-factor) model to
Min: 0.05% LGD P&L RW b(c)
2. Individual risk factor holding period representative set of risk liquidityadjusted Expected overall ESB with a correlation and other risk factors capture default risk Mitigation of Counterparty Credit Spread Risk only:
• Spervisory ES – Sc = x ∑M NS x EADNS
parameter of р 0.5:
• Haircut for receivables, CRE/RRE = 50% attribution analysis
Assets ≤ € 50 bn/rev. > € 200 m QRRE revolvers: 0.1%) factors in stress period Shortfall (ESreg): • Default risk must be 1.4 • Single-Name CDS or single-Name Contingent CDS
• No minimum level of required collateral (direct or indirect)
• b (c) – supervisory risk bucket of counterparty c
on desk level

Corp: Min. 25% where standard deviation measured using a

Secured: • Gross-up requirement for non cash • Index CDS
Undrawn revolving commitment to VaR-model • RW b(c) – supervisory risk weight for risk bucket b
Financial: 0% exposures secured by any type of collateral
Assets ≤ € 50 bn/rev. ≤ € 200 m QRRE:
extend credit, purchase assets or issue & · • E ADNS – EAD of nettingset using SA-CCR or IMM
Min. 50% Receivables: 15% • LGD for non-defaulted assets as long-run
credit substitutes Approval • M NS – effective maturity of nettingset
AIRB CRE or RRE: 15% average + add-on for downturn conditions
Other physical collateral: 20% SA CCF < 100% No more exceptions than:
Other retail:
Min. 30% Retail Mortg.: 10% Backtesting • 30 for the 97,5% quantile Non-approval
Retail
• 12 for 99% quantile Capital charge for exposure risk
Standardised Approach
· · exposure The capital requirement CA for approved trading desks is the maximum of the previous day’s aggregate capital charge (CCt–1 + SESt–1)
Equities
Value at risk ES and the average of the previous 60 business days scaled by a multiplier (mc · CCavg + SESavg)

VaR_ Capital requirement for counterparty credit spread risk

Specialised lending (RWSM) Risk weight slotting method

• the capital requirements for approved trading desk (CA),

The total aggregate capital charge for Market Risk (ACC) is • the charge for default risk (DRC) and FRTB-CVA Framework
the sum of: • the charge for unapproved trading desk (CU) according to
the Standardized Approach for Market Risk
Eligibility criteria: • Calculation of the Credit Spreads of illiquid counterparties

Securitisation Framework (BCBS 374) BB

TB
= Banking Book
= Trading Book
CSR non-sec = Credit spread excl. Securitisations
CSR sec CTP = CSR sec correlation trading portfolio
• Calculation of CVA sensitivities to a minimum set of market risk factors • CVA desk responsible for risk management and hedging of CVA

GIRR = General Interest Rate Risk CSR sec nCTP = CSR sec non-CTP SA-CVA IMA (eliminated by BCBS 362)
• A given hierarchy of the approaches; SEC-IRBA para. 48 ff SEC-ERBA para. 65 ff SEC-SA para. 78 ff
applicability of approach depends on Securitisation Internal Ratings-Based Approach Securitisation External Ratings-Based Approach Securitisation Standardised Approach FX = Foreign Exchange
available data and permissibility in a
jurisdiction • A supervisory formula (SF) approach for a securitisation Calculation of risk weights by means of external ratings, • SF approach to calculate cap. Req. for a sec. exp. to a SA pool
• Caps for senior and originator positions exposure to an IRB pool seniority, thickness and maturity (MT ) of the securitization • Only available approach for re-securitisations
General Provisions

• Criteria for identification of “simple, • Coverage of KIRB for at least 95% of the underlying portfolio tranche • Coverage of W for 100% of portfolio (special conditions apply
transparent and comparable” (STC) required if W is unknown for < 5%)
securitisations are classified in
four categories:
1. Asset Risk RWtable
Disclosure (BCBS 356, 309, 368) IRRBB (BCBS 368)
1,250% RW

2. Structural Risk .

3. Fiduciary and Servicer Risk RWtable = RW from table depending on rating and maturity
4. Additional criteria for STC RWtable = RWtable after adjustment of maturities >1
Principles for banks
and< 5 years (by linear interpolation) Risk management, key Linkages between financial Composition of Capital and Macroprudential Supervisory Leverage ratio/
Liquidity Credit Risk Counterparty credit risk Securitization/IRRBB Market Risk
.
prudential metrics and RWA Statements and exposures TLAC/Remuneration Measures Operational Risk
Management of IRRBB and CSRBB
Importance of IRRBB for all banks. Identification, measurement,
monitoring and controlling of IRRBB, monitoring and assessment of CSRBB
} D–A = T (Thickness)
• Key metrics of bank’s No requirements No requirements No requirements Leverage ratio Liquidity Coverage Ratio RWA flow statements of credit RWA flow statement of CCR No requirements RWA flow statements of market
A = Attachment Point
prudential regulatory • Summary comparison of risk exposures under IRB exposures under the Internal risk exposures under an IMA
D = Detachment Point
Quarterly

situation (at consolidated accounting Model Method (IMM) Responsibility of governing body
K IRB = IRB capital charge of underlying pool • For nor-STC securitisations p=1, group level) assets vs leverage ratio Governing body responsible for oversight of IRRBB management
• For non-STC securitizations, factor x =1 in the calculation of p • Floor of 15% for non-STC securitizations • For re-securitisations p = 1,5 and floor of 100% • Key metrics – TLAC exposure measure framework and risk appetite
A, B, C, D, E = parameters from look-up table • For STC securitizations, factor x = 0,5 • Floor of 10% for STC securitizations • For STC sec. p = 0,5 (requirements at resolution • Leverage ratio disclosure
group level) template Risk appetite for IRBB
• Overview of RWA Risk appetite to be articulated in terms to economic value and earnings

• Hypothetical RWA calculated No requirements Capital, TLAC Geographical distribution of No requirements Net Stable Funding Ratio • Credit quality of assets; • A nalysis of CCR exposures Securitisation • Market risk under Effect of shocks and stress-testing on EVE and NII
according to STA as • Composition of regulatory credit exposures used in the • Changes in stock of by approach • E xposures in the banking standardised approach SA Measurement off IRRBB to be based on EVE and NII effects arising
benchmarks to IRB modelled capital countercyclical capital buffer defaulted loans and debt • CVA capital charge book • Desks’ structure for banks from shock and stress scenarios
RWA • Reconciliation regulatory securities; • STA: CCR exposures by • E xposures in the trading using market risk IMA
• Hypothetical RWA calculated capital to balance sheet • CRM techniques – overview regulatory portfolio and risk book (tb) • Market risk IMA per desk Assumptions for modelling IRRBB
• Main features of capital/other • E xposures in the banking • Market risk IMA per risk type
Semi-Annual

according to the STA for • STA: Credit risk exposure weights Key modelling assumptions to be understood, conceptually sound
credit risk (excluding TLACinstruments +CRM effects; Exposures • IRB: CCR exposure by book and associated and documented
counterparty credit risk) at • TLAC disclosure for G-SIBs by asset classes and risk portfolio and PD scale regiulatory capital
asset class level • Material subgroup entity weights • Composition of collateral for requirements – bank acting
Date: – creditor ranking at legal • IRB: Credit risk exposures CRR exposures as originator or as sponsor Measurement systems including validation
Use of accuate data, appropriate documentation, testing and controls.
September 2016 entity level
• Resolution entity – credit
by portfolio and PD range;
Effect on RWA of CD in CRM
• Credit derivatives exposures
• E xposures to central
• E xposures in the banking
book, associated capital Use of comprehensive models including validation function that is
ranking at legal entity level techniques; specialised counterparties requirements – bank acting independent from the development process
lending and equities under as investor
Global Basel IV Leader: the simple risk weight method Reporting of measurement outcomes
Measurement outcomes to be reported to the governing body on a
Martin Neisen regular basis

E-mail: martin.neisen@de.pwc.com Risk management approach

of the bank
• Diff. in scope of consolidation,
mapping of fin. statements
Remuneration
• Remuneration policy
Disclosure on G-SIB indicators Operational risk
• General qualitative
Liquidity risk management • General information about
credit risk
Qualitative disclosure related
to counterparty credit risk
Securitisation
• Q ualitative disclosure
• General qualitative disclosure
requirements related to Disclosure of information on IRRBB
with regulatory risk cat. • Remuneration awarded information about operational • Disclosure of the credit requirements related to market risk Information on the level of IRRBB exposure and practice for measuring
• Sources for differences during the financial year risk management quality of assets securitisation exposures • Q ualitative disclosures for and controlling to be published on a regular basis
For further information and your national PwC contacts please visit: between reg. exp. and • Special payments • Historical losses used for • Qualitative disclosure banks using the IMA
carrying values in financial • Deferred remuneration SMA calculation requirements related to the IRRBB
www.pwc.de/basel-iv-international-contacts IRRBB as part of ICAAP
Annually

statements • SMA – business indicators CRM techniques • Q ualitative + quantitative Capital adequacy for IRRBB to be part of ICAAP, in line with risk appetite
• E xplanations of differences and • STA: Qualitative disclosures information of the risk mgmt.
between accounting and subcomponents on banks’ use of external objectives and policies
regulatory exposure amounts • Historical losses credit ratings concerning IRRBB
• Prudential valuation • IRB: Qualitative disclosures • Impact of interest rate Principles for supervisors
adjustments related to IRB models; shocks on their change in
backtesting of PD per EVE and NII based on a set Collection of information on IRRBB

Mu s portfolio of prescribed interest rate

te r
shock scenarios
Regular assessment of bank’s IRRBB
© September 2016 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. All rights reserved.
In this document, “PwC” refers to PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, which is a member firm of PricewaterhouseCoopers
International Limited (PwCIL). Each member firm of PwCIL is a separate and independent legal entity.