THE NEW “BASEL IV” WHAT CHANGED? - Deloitte

1 THE NEW BASEL IV . Standardised Approach for Credit Risk Market Risk Leverage Ratio Framework The revision by BCBS seeks to improve the granularity and risk sensitivity of the standardised approach. In summary: Changes made to the Leverage Ratio Framework includes refinements to the leverage ratio exposure measure and introduction of a new leverage ratio bugger for G-SIBs. More Defined Regulatory Boundary Between banking and Trading Book WHAT CHANGED? Improvements New The committee have further set our guidance to help banks with the classification of the instruments in the trading and banking book based on liquidity of Tier 1 Capital.

2 Exposure to Banks introduction to the Standardised Credit Risk Assessment Approach (SCRA). Exposure to Corporates introduction of risk weights for Small and Medium-sized Enterprise (SME) and investment Exposure to Covered Bonds new risk weights for rated and unrated exposure instruments and the ability to value them on a daily basis. Additional classification guidelines were introduced. Leverage Ratio =. Exposure Measure > = 3% + Leverage Ratio Buffer grade corporates Exposure to Project Finance, Object and Trading Book banking Book Stringent approach for the movement of instruments between books Residential Real Estate Exposure - risk weights will vary based on the LTV ratio of the mortgage to replace a flat Commodities Finance - risk weights for weighting of 35% rated exposures will follow the general A instrument have to be included in the trading Instruments classified under the banking Capital benefit from re-designation is not allowed.

3 Bank must calculate Retail Exposure a more granular table have been introduce to distinguish different type of regulatory retail exposures corporates and three subcategories of book if it: book: the total capital charge (across banking book and trading book) before specialised lending is introduced to Exposure to commercial Real Estate introduction of the LTV ratio approach to replace a flat weighting of 100% is in the correlation trading portfolio Unlisted equities and immediately after the switch and the difference will be imposed improve granularity Exposure to Subordinated Debts and Equity existing flat risk weight of 100% or 250% will be replaced by 150% is managed on a trading desk Instrument designated for securitisation on the bank as a disclosed Pillar 1 capital surcharge where surcharge Refinements to the Leverage Ratio Exposure Measure Introduction of

4 New Leverage Ratio Buffer for G-SIBs subordinated debt and capital other than equities, 100% for equity holdings made pursuant to national legislated results to a net short credit or equity warehousing will be allowed to run off as the positions mature or expire subjected position in the banking book Real estate holdings to agreement with the supervisor.. programmes, 400% to speculative unlisted equity exposures and 250% for all other equity exposures Exposure to Off-Balance Sheet Items A 100% CCF will now apply for commitment referring to any contractual results from underwriting commitments and used for the following purpose(s): Retail and SME credit Equity investments in a fund Approval by senior management, documented and in compliance with policies and procedures that are updated yearly.

5 The leverage ratio will restrict the accumulation of leverage that risk downward The leverage ratio buffer seeks to mitigate externalities created by G- Securitisation Framework arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue pressure on asset prices as banks rush to deleverage in times of financial crisis and SIBs and is in line with the risk-weighted G-SIB buffer. The table below short-term resale Derivative instruments that have the Approval by the supervisor based on supporting documentation shows how to calculate the leverage ratio buffer: credit substitutes.

6 This is compared to the 20% and 50% set out in BSBC 128 for one year and more than one year maturity strengthen the risk based capital requirements with a simple measure providing a last profiting from short-term price movements above instrument as underlying asset provided by the bank The Securitisation Framework sets out revised methodologies for the calculation of regulatory capital requirements for securitisation exposures held by banks in their banking book. respectively. A 10% CCF will replace the 0% CCF for commitments that are unconditionally cancellable at any time by the resort security. locking in arbitrage profits Hedging instrument Publicly disclosed bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's hedging risks creditworthiness.

7 Various refinements were made to the definition of the leverage ratio exposure CET 1 Risk Weight Requirements Introduction of Simple, Transparent and Comparable Criteria Revised Hierarchy of Approaches measure: by 2019. Capital recognition for internal transfer from the trading book to the banking book. However, clearly defined requirements for treatment of risk transfers from the banking book to 1. Treatment for derivatives exposure The criteria covers asset risk, structural risk, fiduciary and servicer risk in a securitization as Multiple approaches streamlined into three approaches and the criteria Rating approach is permitted: the trading book were outlined by the committee: (a) Treatment of derivatives: for the purpose of the leverage ratio exposure CET1 well as for capital purposes.

8 For determining the approach shifted from the role of the bank to the For exposures rated A+ to A- and BBB to BBB- is adjusted from 50% to 30% External Rating AAA to AA- A+ to A- BBB+ to Bb+ to B- Below B- Capital Conservation Buffer measure, exposures to derivatives are included by means of two reliance of information available. and 100% to 50% respectively. BBB- banking book equity risk exposures using a hedge banking book credit risk exposures using internal banking book interest risk exposures using components: Risk weights for unrated exposures will be based on the Standardised Credit Risk weight instrument purchase from the marker through its Is the bank's IRB model supervisory- 20% 30% 50% 100% 150% risk transfer with trading book internal risk transfer with trading book (i) replacement cost (RC) and (ii) potential future Higher Loss Absorbency Requirement Risk Assessment Approach (SCRA) below.

9 Trading book G-SIB Fiduciary and Servicer Asset Risk Structural Risk Yes approved for the type of underlying Risk weight (Short Risk 20% 20% 20% 50% 150% 2. Treatment of off-balance sheet exposures to ensure consistency with exposures in the securitisation pool? Term exposure) Minimum Tier 1 Leverage Ratio at 3%. Exposure their measurement in the standardised approach to credit risk. Rating approach is not permitted and unrated exposure where rating approach is permitted: to Banks (a) On-balance sheet, non-derivative assets are included in the leverage ratio Nature of assets Redemption cash Fiduciary and Standardised Approach for Market Risk (Revised).

10 Leverage Can the bank The existing flat risk weight of 50% (excluding short term exposure) and 20% SCRA A B C exposure measure at their accounting values less deductions for Ratio Leverage Ratio Buffer for G-SIBs Asset flows contractual estimate the (short term exposure) will be replaced by three different risk weights Risk weight associated specific provisions. General provisions or general loan loss 50% of Risk Weighted Higher performance Currency and responsibilities No 40% 75% 150% capital charge for No according to their grade. Using elements from the former standardised measurement method, the Sensitivities based method builds on the elements and expand the use of delta, vega and curvature risk to factor reserves as defined in paragraph 60 of the Basel III framework which Absorbency Requirement history interest rate asset Transparency to For SCRA grade A, exposures may receive a risk weight of 30%, provided that the underlying sensitivities.