Credit Risk – Standardised Approach

What banks should consider:

• Revised expectations around data and judgements of data materiality are likely to result in firms having to refine their data collection processes to meet new standards. There are likely to be material impacts on disclosures due to the removal of the SME factor, the increased risk-sensitivity of weightings and the additional reporting templates affecting how data is presented to the regulator. Firms will need to ensure that collected data is accurate, consistent, and compliant across different systems and sources. In order to achieve this firms may need to seek external assurance.
• Firms will need to perform a gap analysis to understand the implications of the changes in the underlying risk weight calculations and impact this will have on their Pillar 1 requirements.
• This may be a time for banks to revisit their strategies and consider developing new SME products that are more capital efficient. For example, banks may consider focusing on facilities where obligors are incentivised to repay in full at scheduled periods and not carry a balance, such as charge cards. By incorporating these products in their portfolios, they would lower their cost of capital.
• While significant focus has been on the removal of the SME support factor, there is a strong likelihood that alterations to the definition of Residential vs. Commercial mortgages will have a more material impact on capital requirements. Understanding this should receive priority when it is business model appropriate.
• Given the increased granularity of the Standardised Approach, firms should assess their data and risk management capabilities to understand whether any changes will need to be made to optimise risk weight exposures under the new regime.