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The Latest Basel IV Regulatory Requirements

A detailed review of the Basel accords issued by the BIS

Advanced Business Valuations Training Course

A one-day course

  • Practical workshop by an experienced trainer, an ex-FIG M&A banker with years of bank analysis in Europe and the Middle East
  • Comprehensive valuation material covering all fundamentals aspects of Basel IV
  • Step-by-step, easy to follow Excel models illustrating key concepts
  • Delegates are encouraged to bring their own Basel challenges to ‘solve’ during the session

Participants will achieve a detailed understanding of the latest Basel guidelines, specifically on the following technical topics:
  • Latest changes to the Basel requirements, namely credit risk, market and operational risk RWAs;
  • Components of Tier I and Tier II instruments;
  • G-SIBs and the impact of TLAC
  • European banks and MREL;
  • Leverage, LCR and NSFR ratios.

Session 1 - Introduction

  • How much capital do banks need?
  • Overview of the regulatory banking framework
  • Global rules for local implementation
  • From Basel I to Basel IV
  • Capital requirements directive IV (CRD IV)
  • Stress testing of European banks
  • The 3 pillars approach
  • Pillar 1 available capital
  • Pillar 1 risk-weighted assets: credit risk, counterparty risk, market risk, and operations risk
  • Pillar 2A ICAAP and risks not covered by Pillar 1 (strategic, reputational risks, etc.)

 Session 2 – Available Capital

  • Common Equity Tier I (CET 1), Tier I, Tier II and Total Capital
  • From accounting equity to common equity Tier 1
  • Overview of key accounting adjustments
    • Goodwill and intangibles
    • Non-controlling interests
    • Deferred taxes
  • Additional Tier 1 (AT1)
    • Perpetual preference shares
    • Non-cumulative dividend
    • No step-ups
    • Subordinated debt, mandatory and contingent convertibles
  • Tier 2
    • Subordinated debt
    • Over 5 years of maturity
    • No accelerated repayment
  • Case Study: participants will reconcile an IFRS book equity of a European bank to compute Tier I and Tier II capital

Session 3 – Capital Ratios

  • Minimum capital ratios: Basel III phasing from 2013 to 2019
    • 5% CET 1 , 1.5% AT1 and 2.0% T2
  • Capital conservation buffer (CCB): 2.5%
  • Countercyclical buffer (CCB) up to 2.5%
    • Based on national supervisor discretion
  • Capital surcharge for Global Systemically Important Banks (G-SIBs)
    • Based on BIS list update every November up to 3.5%
  • Total Loss Absorbency Capital (TLAC)
    • Global standard applicable to G-SIB banks only
  • Minimum Requirement for own funds and Eligible Liabilities (MREL)
    • Applicable to credit institutions & investment firms in the EU

Session 4 – Basel IV Changes       

  • Analysis of banks’ impact
    • Aggregate increase of €1.0 to €2.5 trillion in additional RWAs expected
    • Sweden/Denmark/Netherland most affected by credit risk floor cap
    • France and United Kingdom impacted by change in operational risk
  • Capital floors
    • RWAs floored by a percentage based on a standardised approach
    • Phase-in from 50.0% in 2022 to 72.5% in 2027
  • Revised credit risk from a standardised approach
    • RWAs floored by a percentage based on the standardised approach
    • Constraints on the use of internal models
    • LGD floor to be applied
  • Counterparty credit risk
    • Introduction of a standardised approach for Credit Value Adjustment (CVA)
    • A new standardised approach for calculating Exposure at Defaults (EAD) for derivatives exposures
  • Market risk
    • Finalised in 2016
    • The revised boundary of the trading book
    • Sensitivities based on the new standardised approach
    • Internal models based on expected shortfalls
  • Operational risk
    • A new standardised approach to replace all prior methodologies
    • Based on the size and historical operational loss data

Session 5 – Output Floors    

  • Highest impact on banks who relied on internal models for credit risk calculation (low Pd and LGD)
  • Phase-in from 50.0% in 2022 to 72.5% in 2027
    • National regulator to cap incremental increase
    • The increase could be capped at 25% of RWAs before the floor
  • Case Study: participants compute the impact of the output floors on RWAs for a European bank

Session 6 – Credit Risk – Standardised Approach

  • RWA grid for sovereign and Public Sector Entities (PSEs)
  • Discussion on multilateral development banks
  • RWAs table for banks
    • Difference explained between external and standardised credit risk
    • Grade A to C for standardised assessment
  • RWAs for general corporate exposures and specialised lending
  • RWAs for residential real estate (cash-flow and non-cash-flow based repayments)
  • RWAs for off-balance sheet items and credit equivalent exposures
  • RWAs for default exposures
  • Credit risk mitigation (CRM) approaches
  • Case Study: participants compute the credit risk RWAs of a European bank based on a standardised approach

Session 7 – Credit Risk – IRB Approach

  • Standardised to the foundation (F-IRB) and advanced approach (A-IRB)
  • Understanding probability of default (Pd), loss given default (LGD) and exposure at default (EAD)
  • Limitation on use of methods
    • Large corporates and banks A-IRB no longer permitted
    • Retail F-IRB and equity disallowed
  • Parameter floors in A-IRB for LGD for corporates and retail exposures
  • Case Study: participants compute the EL of a European bank and then review the complex formula for calculating RWAs (based on asset class) from Pd, LGD, and EAD

Session 8 – Counterparty Credit Risk (CCR)

  • Risk of a counterparty defaulting prior to the final settlement of a transaction
    • OTC derivatives
    • Financial assets designated at fair value
    • Reverse repurchase agreements and other secured lendings
  • A standardised approach for CCR (SA-CCR) measures EAD
    • Based on replacement cost and potential future exposure
  • Risk of mark-to-market loss due to counterparty credit risk (CVA)
    • A basic and standardised approach
    • Standardise based on the value at risk (VaR)

Session 9 – Market Risk

  • Risk of loss from movement in market prices
    • Interest rate, credit spread, equity, foreign exchange, and commodities

Revised standardised more complex approach

  • Sensitivities-based (delta, vega and curvature risks)
  • Default-risk charges and residual add-ons
  • Internal models
    • Approval required from the supervisory authority
    • Financial models based on globally expected shortfalls, default risk charge and stressed capital add-on

Session 10 – Operational Risk

  • Risk of loss from inadequate or failed internal processes, people and systems or from external events
  • Revised standardised approach
    • Based on Business Indicator (BI), marginal coefficient and scaling factor
  • Case Study: participants compute the operational RWAs of a European bank based on the last three years P&L

Session 11 – Pillar 2 and 3

  • Pillar 2: risks not covered by Pillar 1 (credit concentration risk, stress testing, etc)
  • Pillar 3 focuses on the disclosure requirements

Session 12 – Leverage and Liquidity Ratios

  • Back-stop leverage ratio based on non-risk weighted exposure
    • G-SIBs buffer
  • Liquidity coverage ratio (LCR)
  • Net stable funding ratio (NSFR)
  • Case Study: participants calculate the Capital Requirements Directive leverage ratio of a European bank

The trainer has more than 20 years of experience in accounting and investment banking. He is an experienced financial trainer who has delivered courses for leading financial institutions and central banks in the City of London, Wall Street and around the world in the areas of Corporate Finance, Valuation (Industrials and Banks), Financial Modelling, M&A, LBO, Financial Accounting, Capital Markets, Bank Regulatory Capital and Financial Risks, both in English and French.

He began his career as a Credit Analyst at Banque Continentale in Luxembourg, where he conducted credit analyses for short and long-term credits and participation in loan syndications. He then worked as a Senior Auditor for Deloitte & Touche in Luxembourg companies, auditing and preparing financial statements for a variety of banks, insurance, investment funds, venture capital and commercial companies.

He continued his career in Investment Banking at Citigroup (ex-Salomon Smith Barney) in London and New York where he worked on a variety of M&A, LBO and debt offerings, mainly for financial services clients. He was involved in the EUR 20 billion public offer of Crédit Lyonnais by Crédit Agricole, one of the largest European banking transactions.

He then worked as a Vice-President in the internal M&A department of Barclays Bank in London where his experience included the acquisition of ABSA for US$ 5 billion, one of the leading South African banks, the purchase of ING Private Banking in France and the failed acquisition of Banco Atlantico in Spain.

Recently, he was a Director in the Investment Banking department of Commercial International Bank (CIB), the largest non-government bank in Egypt, where he has successfully completed several transactions including two sell-side M&A deals, one follow-on equity offering and a delisting. He worked extensively with leading sovereign wealth funds, private equity firms and prominent families in the UAE, Qatar, Kuwait and Saudi Arabia.

The trainer is currently a senior advisor to an M&A practice based in Paris and focuses on buy-side and sell-side transactions, mainly in the technology sector.

The trainer has an MBA in Finance from the Kellogg School of Management in Chicago and a Bachelor of Science in Finance from Groupe INSEEC (“International Management Institute of Paris”). He also holds « Series 7 » and « Series 63 » US licenses.

Basel III is a global regulatory framework on bank capital adequacystress testing, and market liquidity risk. It was developed in response to the deficiencies in financial regulation revealed by the global financial crisis of 2007–08. Basel III, which is currently implemented until 2019, is intended to strengthen bank capital requirements across the world and avoid another systemic banking crisis.

Basel IV is a contested term describing the latest 2016 to 2017 changes made to the Basel accords. Regulators simply consider it as an extension to the Basel III reforms.

This session provides participants with a detailed tour and review of the Basel accords issued by the Bank for International Settlement (BIS) and the ever-evolving regulation stemming from Basel II and Basel III proposals and the Capital Requirements Directive IV (CRD IV) in Europe.

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  • Topics expanded or deleted to your bespoke requirements

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