Navigating Basel III Reforms in the Banking Sector #S2E7

FinTalk by VERMEG

Welcome to FinTalk, the leading podcast in Financial Services that addresses the most pressing topics in the FinTech and RegTech.

In this episode, our host Jawad Akhtar talks with Paul Whitmore, Global Head - Counterparty Risk Solutions at Fitch to illuminate the Basel III final reforms and their global banking implications. They discuss the SCRA and ECRA approaches, the surge in interest in Basel III reforms amidst the COVID-19 pandemic, the role of different ratings, grades, and agencies in shaping banks' strategies, and much more.

This episode of FinTalk covers:

• Understanding the Basel III reforms and their impact on banking, particularly focusing on SCRA and ECRA approaches.

• The importance of quantitative impact studies in understanding and managing the implications of these reforms.

• The role of ratings, grades, and agencies in helping banks devise effective strategies.

• Exploring the unique implications for unrated banks within the Basel III regulatory framework.

• An in-depth discussion on the different interpretations and implementations of Basel III reforms across various jurisdictions like the EU, UK, and US.
Episode highlights:

“I'll give you an example. So the Canadian regulators that came into effect this year, they've given banks an option of how to treat unrated banks. You can use the simplified approach. Soone risk weight for all unrated banks, but you've got to stick with it. You can't swap and choose or you can adopt the SCRA. So most Canadian banks have opted for the simplified approach. "Let's just stick with I think it's 50% risk weight. That's not a bad compromise. We might not benefit from a 30% or a 40% risk weight, but we are avoiding the 150% risk way." So it was the regulators of Canada to make that decision on what's best for their country. And every country will implement something slightly different I think.” - Paul Whitmore (09:32)

“So this will probably have the largest impact. I think what people have to try and think about is it's not just this unrated bank thing. It's how bank exposures are being treated by all of the Basel proposals. So no longer can you estimate your own LGD. Okay, you could use your own rating assessment previously.” - Paul Whitmore (13:11):

“Okay, so that again, the framework is still being adopted, but there's nuances and every jurisdiction is going to have a slightly different flavor to it. Australia didn't implement the SCRA. They're fully on board with the Basel III final reforms, but decided on a simplified approach again. They felt after speaking to three or four of the larger banks in Australia, they said APRA felt that the SCRA was too complicated, which I don't think it is. As these banks were laughing at that saying, "Well, we all said it was a great approach, that APRA decided that it was too complicated to implement at this time." So they've gone for a simplified approach again.” Paul Whitmore (16:56):

Links & references:

VERMEG:

https://www.vermeg.com/

https://www.linkedin.com/company/vermeg/

Jawad Akhtar:

https://www.linkedin.com/in/jawad-akhtar-313562b/

https://www.linkedin.com/in/paul-whitmore-92a90412/

Fitch Solutions: Data, Research & Analytics for Credit Risk & Strategy