CRR III

Martin Neisen is a Partner at PwC in Frankfurt and leads PwC's global Basel IV initiative. He is also responsible for the FS Risk & Regulation department at PwC Germany. He has extensive experience and technical expertise in the German and European banking industry. Mr. Neisen has 20 years of project and auditing experience at banks and financial service providers. This applies in particular to advising institutions on questions relating to the entire spectrum of banking supervisory law and risk management.He is involved in PwC's international project teams and is regarded throughout Germany as the expert in the implementation of regulatory requirements and challenges that simultaneously affect supervisory law, risk management and accounting.Stefan Röth has worked for PwC since 2008 and, as Director in the FS Risk & Regulation department, advises banks and financial service providers on all issues relating to banking supervisory law. Mr. Röth has managed numerous projects for the implementation of banking regulatory requirements, including the implementation of CRD IV/CRR, CRD V/CRR II and the corresponding COREP & FINREP reporting. In addition, Mr. Röth supported banks in preparing for Basel IV / CRR III, for example in the context of test calculations and impact analyses.

• Foreword 11Preface 131. Chapter: Introduction 15Literature 172 Chapter: Revision of the Standardised Approach for Credit Risk (SA-CR) 192.1 Introduction 192.2 General aspects 232.3 Determination of the exposure value 252.4 Exposures to institutions 262.5 Exposures to corporates 292.6 Specialised lending exposures 302.7 Subordinated debt and equity exposures 322.8 Retail exposures 332.9 Exposures secured by mortgages on immovable property 342.9.1 General requirements 352.9.2 Calculation of the exposure-to-value (ETV) 362.9.3 Exposures secured by mortgages on residential immovable property 372.9.4 Risk positions secured by mortgages on commercial immovable property 402.9.5 Receivables related to land acquisition, development and construction (ADC) 412.9.6 Changes compared to the current CRR regulations 422.10 Defaulted receivables 432.11 Other assets 432.12 Additional risk weights for risk positions with currency mismatches 432.13 Use of external ratings 442.13.1 General aspects 442.14 Credit risk mitigation techniques 462.14.1 The financial collateral simple method 462.14.2 The financial collateral comprehensive method 472.14.3 Eligibility of repurchase agreements and similar transactions 482.14.4 Consideration of guarantees and credit derivatives 492.15 Summary 50Literature 513 Chapter: The future of the IRB Approach 533.1 Introduction to the fundamentals of the IRB approach in accordance with CRR 533.1.1 Introduction to the IRB risk weight formula 543.1.2 The adoption of the IRB approach 603.1.3 Calculation of RWA and EL 603.1.4 Minimum requirements for the entry and ongoing use of the IRBA 663.1.5 Approval process: home/host coordination 733.1.6 Decision on the application 733.2 The implementation of the Basel Committee’s initiative to improve the IRB approach in the EU 743.2.1 Introduction 743.2.2 Scope of the internal models 763.2.3 Partial use of the IRB approach 803.2.4 Risk parameter floors as an instrument RWA variability reduction 823.2.5 Parameter estimation procedure 843.2.6 Credit risk mitigation 873.2.7 Changes in the modelling specifications 883.2.8 Expected impact on banks 903.2.9 Conclusions 93Literature 944 Chapter: Supervisory treatment of market risks 954.1 Introduction 954.2 General and overarching adjustments 964.3 Revised trading book boundary 974.4 Adjustments to the requirements for reclassifications (Article 104a CRR 3) 994.5 Adjustments to the requirements for internal risk transfers (Article 106 CRR 3) 1004.6 Revised treatment of investments in funds in the trading book 1014.7 Adjustments to the Alternative Standardised Approach for market risk 1034.7.1 Adaptation to the qualitative requirements of the A-SA 1044.7.2 Technical adjustments to the Alternative Standardised Approach for market risk (A-SA) 1044.8 Simplified standardized approach for market risk (S-SA) 1074.9 Alternative Internal Model Approach for market risk (A-IMA) 1074.9.1 Permission and own funds requirements 1084.9.2 General requirements 1084.9.3 Internal model for default risks 1094.10 Conclusion 110Literature 110Contents 75 Chapter: The CVA risk capital charge framework 1135.1 Introduction 1135.2 Hierarchy of approaches 1145.3 CVA exemptions and securities financing transactions 1165.4 Standardised approach for CVA 1175.4.1 Regulatory CVA model 1175.4.2 Calculation of own funds requirements 1185.5 Basic approach for CVA 1225.5.1 Determination of the regulatory capital requirements on the basis of the basic CVA 1225.5.2 Determination of the reduced version of the BA-CVA in detail 1225.5.3 Determination of the full version of the BA-CVA in detail 1245.6 Conclusion and expected impact 126Literature 1266 Chapter: Operational risks 1296.1 Background 1296.2 Methods for Determining OpRisk According to Basel II 1306.2.1 Basic indicator approach and standardised approach 1316.2.2 Advanced measurement approaches 1326.2.3 Criticism of existing approaches 1336.3 Overview: From Basel II to CRR 3 1336.4 Standardised approach to operational risk (BCBS 424) 1356.4.1 Functioning of the revised standardised approach 1356.4.2 Calculation of annual OpRisk-related losses 1406.4.3 Management of operational risks 1426.4.4 Disclosure 1436.5 Outlook 1446.5.1 Capital requirements for OpRisk 1446.5.2 Further consideration 1446.6 Summary and conclusion 145Literature 1477 Chapter: The output floor 1497.1 Introduction 1497.2 Reasons for the introduction of the output floor 1517.2.1 Outdated or no Basel I calculation systems 1517.2.2 National deviations in the implementation of Basel I and the Basel I capital floor 1527.2.3 The scope of application of the Basel I floor 1527.2.4 Development of new standard approaches 1527.3 The CRR 3 output floor 1557.3.1 Scope of CRR 3 output floors 1557.3.2 Calculation of the CRR 3 output floor 1557.3.3 Transitional arrangements for the output floor pursuant to CRR 3 1587.3.4 Selection of the right standardised approach 1597.3.5 Deviations from Basel IV capital floor 1597.4 Objectives and effects of the output floor 1607.4.1 Impact of the output floor on standard approaches and their implementation 1607.4.2 Optimization of the standardised approaches 1617.4.3 Influence of the output floor on valuation models 1647.4.4 Interaction between the floor and the scope of the IRB approach 1677.5 Conclusion 168Literature 1698. Chapter: Disclosure 1718.1 Introduction 1718.2 Proportionality principle 1728.3 Risk management objectives and policy 1748.4 Scope of disclosure 1748.5 Own funds 1758.6 Capital requirements and risk-weighted exposure amounts 1768.7 Counterparty credit risk 1778.8 Countercyclical capital buffer 1788.9 Indicators of global systemic importance 1788.10 Credit risk 1788.10.1 Credit risk mitigation 1808.10.2 Credit risk in the standardised approach 1808.11 Asset encumbrance 1818.12 Market risk 1818.13 CVA risk 1818.14 Operational risk 1828.15 Disclosure of key parameters (“key metrics”) 1838.16 Interest rate risk of the banking book (IRRBB) 1838.17 Securitisations 1848.18 Environmental, social and governance risks – ESG risks 1848.19 Remuneration policy 1878.20 Leverage ratio 1888.21 Liquidity ratios 1888.22 Conclusion and expected impact 189Literature 1899. Chapter: MREL and TLAC as part of the resolution regime 1919.1 Introduction 1919.2 Key requirements for resolution capability 1939.2.1 Minimum requirements of the EBA 1939.2.2 Minimum requirements of the SRB 1939.3 TLAC 1979.3.1 TLAC implementation 1979.3.2 TLAC calibration 1989.3.3 TLAC-eligible liabilities 1989.3.4 Resolution units and internal TLAC 1989.3.5 TLAC holdings 2029.3.6 TLAC reporting requirements 2029.3.7 TLAC disclosure 2039.4 MREL 2039.4.1 MREL implementation 2039.4.2 MREL calibration 2049.4.3 MREL-eligible liabilities 2059.4.4 Resolution units and internal MREL 2089.4.5 MREL holdings 2109.4.6 MREL reporting requirements 2109.4.7 MREL disclosure 2139.5 Outlook and conclusion 214Literature 21610 Chapter: ESG: Regulatory overview for dealing with sustainability risks 21910.1 Sustainability risks in the financial sector 21910.2 Consideration of sustainability aspects in SREP 21910.2.1 Regulatory background 21910.2.2 Overview of the expectations of European banking supervision 22210.2.3 Consideration of ESG in the Supervisory Review and Evaluation Process (SREP) 22510.3 ESG ratings – methodology and comparison 22610.3.1 Introduction to the subject of ESG ratings 22610.3.2 Overview of the ESG rating market 22910.3.3 Methodological approaches and problems 23210.4 Adjustment of capital requirements to cover sustainability risks 23810.4.1 A possible adjustment of the minimum capital requirements on the basis of ESG ratings 23810.4.2 Privileging of infrastructure projects under Pillar I 24010.4.3 “Green Supporting Factor” and “Brown Penalty Factor” as adjustment factors 24110.4.4 Sustainability Factor (SF) and Sustainability Weight (SW) as alternatives to the binary approach 24310.4.5 Outlook 245Literature 24711. Chapter: Cryptoassets 24911.1 Definition and types of cryptoassets 24911.2 Development of a prudential framework 25011.3 Classification procedure for cryptoassets 25111.4 Regulatory requirements in relation to Group 1 cryptoassets 25311.4.1 Credit risk 25311.4.2 Market price risk 25611.4.3 Add-on factor for infrastructure risk 25711.4.4 Credit valuation adjustment (CVA) 25711.4.5 Determination of counterparty default risk 25811.5 Regulatory requirements in relation to Group 2a cryptoassets 25811.5.1 Minimum capital requirements for credit and market risk 25911.5.2 Credit valuation adjustment 26011.5.3 Determination of counterparty default risk 26011.6 Regulatory requirements in relation to Group 2b cryptoassets 26111.6.1 Minimum capital requirements for credit and market risk 26111.6.2 Credit valuation adjustment 26111.6.3 Determination of counterparty default risk 26111.7 Final BCBS standard 26211.8 Conclusion 263Literature 26312. Chapter: Further requirements of CRD 6 26512.1 Introduction 26512.2 Supervisory powers 26512.2.1 Requirements for the independence of competent authorities 26512.2.2 Extension of supervisory powers in the case of acquisitions, disposals, mergers and divisions 26612.2.3 Professional qualification and personal reliability (Fit & Proper) 26712.3 Branches from third countries 26912.3.1 Approval 27012.3.2 Minimum regulatory requirements 27012.3.3 Reporting requirements 27212.3.4 Supervision 27212.3.5 Conclusion 273Literature 273