The Basel Committee on Banking Supervision on Thursday published its latest update to the capital rules for large, global banks, which restores the use of external credit ratings, among other changes.
The proposed revisions focus on calculating credit risk when determining how much capital banks must set aside. An earlier proposal in this area, which was published by the Basel Committee in December 2014, proposed removing all references to external credit ratings. However, in response to concerns about this move, the Basel Committee has decided to reintroduce the use of external credit ratings, “in a non-mechanistic manner, for exposures to banks and corporates,” the Basel Committee says in a statement.
In the wake of the financial crisis, regulators around the world have been moving the reduce the reliance on credit ratings, both by firms, and within the rules themselves, after the crisis revealed that some firms blindly relied on ratings in the run up to the crisis and didn’t fully understand their credit risks.
The proposed revisions include alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes — amid concerns that reintroducing ratings will harm comparability between banks in jurisdictions that allow the use of ratings — and those that don’t.
The proposed risk weighting for real estate loans has also been modified. As well the latest proposals also includes revisions for exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items.
“The revised proposals form part of the Committee’s broader review of the capital framework to balance simplicity and risk sensitivity, and to promote comparability by reducing variability in risk-weighted assets across banks and jurisdictions,” the Basel Committee statement says.
The regulators are planning to carry out a quantitative impact study on these new proposals in 2016, before it finalizes the rules in this area. Comments are due by March 11, 2016.