In what should be my last post on the US implementation until the final determination of what the heck they are doing is made, I thought a quick look around the (so-called) Basel IA framework is might be useful – and show why several banks want to use this approach rather than the advanced approach of the Basel II framework.
Firstly, as stated in another post, Basel IA is not a BCBS output, and should not, therefore, be called “Basel” in any case – you cannot blame the BCBS for it. What it is, on the other hand, is an attempt by the big 4 US regulators to get a more risk sensitive framework for US banks without requiring them to adopt even the simplest of the Basel II methodologies. The end result, as contained within the relevant ANPR is an attempt to create some middle ground between Basel I and Basel II standardised – improve the risk sensitivity of the credit risk calculations without doing anything substantive on the operational risk side or the other risks.
If you are interested, please read the full document. The important matters, though, are:
- An increase in the number of risk weight categories from 5 to 9;
- Inceased recognition of collateral;
- A change in the the way that corporate risk weighting is used to one that is similar to the Basel II Standardised risk weights – with some weights being less in the area around BBB, but penalises more in the sub-investment grades;
- Asking some questions about other areas, including those classified “other retail”; and
- Some tinkering with other areas.
The reason why this is fairly attractive? For most institutions, this may well result in a drop in capital required to a level more similar to the Basel II Advanced approach, without the costs of compliance or the greater understanding of risks that this brings.
Having gone through it in some detail I can now see why the banks want this approach rather than the full Basel II advanced approach. The question is why would regulators propose this? Suggestions, please.