5/16/2023 0 Comments Basel timing![]() The key to a successful solution is efficient planning and implementation. Innovative solutions such as the tokenization of high-risk assets or AI-driven credit risk modeling form a sustainable basis for dealing with the new regulatory requirements. Nevertheless, this challenge can be addressed by optimizing the processes used for the calculation of capital requirements, or even redesigning them. As a result, the proportion of high-risk assets in the balance sheet may decrease, leading to a reduction in RWAs.Īs mentioned above, the new Basel IV framework poses a challenge for banks by forcing them to update the ways they calculate their capital requirements. The use of tokens enables a more flexible and quicker sale of risky positions on blockchain technology than it is possible with a direct sale of assets. ![]() ![]() The second option is to issue blockchain tokens that divide and securitize high-risk assets.This is achieved by continuously recalibrating the risk models while simultaneously maximizing their separation power. In such a case, RWAs are optimized by AI so that they are at most 27.5% below the capital requirements calculated using the standard rating approach. The first option is to develop new internal risk models supported by artificial intelligence (AI) technologies.Both solutions involve the use of innovative technologies, which is a part of our DNA. In the context of Basel IV in particular, lowering RWAs may seem impossible, but Capgemini Invent has worked out two solutions. Since a rapid capital increase is hardly possible due to current low profitability and high levels of competition, banks have only one option to meet new capital requirements: reduction of the risk-weighted assets. Big financial institutions are affected by Basel IV to a larger extent than smaller banks, as they mostly use internal models. At the same time, they make it more difficult for banks to save capital. Both output and input floors aim to increase comparability and transparency of RWA calculations across the banking industry. These minimum levels are called “input floors”. ![]() Additionally, the input parameters in the banks´ internal risk models cannot be smaller than certain minimum levels required by Basel IV. This restriction is called an “output floor”. The Basel Committee on Banking Supervision (BCBS), which is responsible for the creation of Basel IV framework, proposed that the calculation of a bank’s RWAs using an internal ratings-based approach should not be less than 27.5 percent below the requirements as calculated using the standardized approach. Accordingly, the banks are concerned with one question: How can the increased capital requirements be met?Ī decisive reform in connection with Basel IV is application of a more conservative calculation of risk-weighted assets (RWA) than was used under the Basel III regime. As a result of the new requirements associated with Basel IV, there is a capital shortage of over 135 billion euros at European banks. In particular, the new package of reforms increases capital requirements. The Basel IV framework, which will come into force in 2023, poses major challenges for the European banking landscape. ![]()
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