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The Latest Basel IV Regulatory Requirements

Learn a detailed review of the Basel IV accords issued by the BIS

Advanced Business Valuations Online Training Course

A one-day course

  • Practical Basel IV 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 4 challenges to solve during the session.

Participants will achieve a detailed understanding of the latest Basel IV guidelines, specifically on the following technical topics:

  • Latest changes to the Basel IV requirements, namely credit risk management, market and operational risk RWAs;
  • Components of Tier I and Tier II instruments;
  • G-SIBs and the Basel IV impact of TLAC
  • European banks and MREL;
  • Leverage, LCR and NSFR ratios.

Session 1 – Introduction to Basel IV

  • How many Basel IV capital requirements do banks need?
  • Overview of the Basel IV regulatory banking framework
  • Global rules for local Basel IV implementation
  • From Basel I to Basel 4
  • Capital Requirements Directive IV in short CRD IV
  • Stress testing of European banks
  • The 3 pillars approach
  • Pillar 1 available capital
  • Pillar 1 risk-weighted asset: 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 the BIS list updates 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
    • An aggregate increase of €1.0 to €2.5 trillion in additional RWAs (Risk Weighted-Assets) expected
    • Sweden/Denmark/Netherland most affected by credit risk floor cap
    • A change in operational risk impacted France and United Kingdom
  • 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    

  • The highest Basel IV impact on banks that 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 – Basel IV Credit Risk – Standardised Approach

  • RWA grid for sovereign and Public Sector Entities (PSEs)
  • Discussion on multilateral development banks
  • RWAs table for banks
    • The 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 equivalent credit 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)
  • Limitations 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 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 charges and stressed capital add-on

Session 10 – Basel IV Operational Risk Management

  • Risk of loss from inadequate or failed internal processes, people and systems or 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 Basel 4 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 various 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 most significant 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. He has 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 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 holds « Series 7 » and « Series 63 » US licenses.

Basel IV 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 IV, currently implemented until 2019, is intended to strengthen bank capital requirements worldwide 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 consider it an extension of the Basel III reforms.

This latest Basel IV regulatory requirements 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 Basel IV regulation stemming from Basel II and Basel III proposals and the Capital Requirements Directive IV (CRD IV) in Europe. 

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