Sector developments and company hires

RWA overhaul mooted under Basel 3.1

The PRA has released a consultation paper on the UK implementation of Basel 3.1 rules, covering the parts of the Basel 3 standards that remain unimplemented in the country. Indeed, the proposals mainly seek to revise the calculation of RWAs by improving both the measurement of risk in internal models (IMs) and standardised approaches (SAs), as well as the comparability of risk measurement across firms.

In particular, the paper sets out the PRA’s proposed rules and expectations with respect to: a revised SA for credit risk; revisions to the internal ratings-based (IRB) approach for credit risk; revisions to the use of credit risk mitigation (CRM) techniques; removal of the use of IMs for calculating operational risk capital requirements, and a new SA to replace existing approaches; a revised approach to market risk; the removal of the use of IMs for credit valuation adjustment (CVA) risk, replaced by new standardised and basic approaches; and the introduction of an aggregate ‘output floor’ to ensure total RWAs for firms using IMs and subject to the floor cannot fall below 72.5% of RWAs derived under SAs, to be phased in over five years. The revised set of SAs aim to introduce more granular requirements that better reflect the risk of firms’ exposures and make them a more credible alternative to using IMs.

Meanwhile, the proposed new output floor aims to limit the extent to which firms using the IM approaches can lower their RWAs relative to the revised SAs used by SA firms. This floors IM firm RWAs at 72.5% of their SA RWAs on average across all exposures.

The PRA proposes that IM firms apply the same revised SAs in the output floor calculation to those used by SA firms. The objective is to ensure that the output floor is a consistent and transparent backstop to modelled risk weights.

Caroline Liesegang, head of prudential regulation and research at AFME, comments: “AFME is pleased to see the PRA has struck a good balance in its approach to implementing the international Basel standards. It is positive that the UK regulator has sought to ensure a coordinated approach through the proposal of a 1 January 2025 deadline, which is in line with the EU’s proposed timeline. It is also good to see that the proposal addresses certain UK-specific issues in the implementation, a regional approach the EU has also taken to address its own requirements.”

However, the association suggests that the positive adjustments in the proposals have been offset by the removal of preferential treatment elsewhere in the framework, including the SME supporting factor and the increase in capital requirements for trade finance. “AFME believes that risk sensitivity and preferential treatment for certain asset types should be retained, as they enable banks to support the real economy at a time when the financial, corporate and retail mortgage sectors are under enormous economic strain. The combined effect of all these changes will need to be carefully assessed to ensure that the overall calibration of UK regulation is appropriate,” Liesegang says.

The PRA consultation closes on 31 March 2023.

In other news….

APAC

The Ministry of Justice in Korea has approved a joint venture between Ashurst and full-service local law firm HwaHyun. Once established, Ashurst - through the JV - will become the first global firm permitted to practise Korean law since the legal market opened in 2011.

Currently led by John Kim and Huiyeon Kim, Ashurst's outbound Korean practice operates across a number of offices, with clients including Hyundai Motor Group, Samsung Group, SK Group, POSCO and Hanwha Group. HwaHyun is led by co-managing partners Kyung-Shik Shin and Nak Song Sung.

Climate risk partnership inked

Moody’s Analytics and McKinsey Sustainability have partnered to help banks identify, measure and act on risks and opportunities related to climate change. The agreement brings together the two firms’ data, analytics, software and consulting services, with the aim of providing tools to integrate climate risk into banks’ decision-making.

The collaboration combines the climate risk and analytics capabilities of Moody’s Analytics, RMS and McKinsey Sustainability’s Planetrics solution. The suite of solutions augments existing processes with climate information and projections, including climate-risk-aware credit assessment, climate stress testing and scenario analysis, and climate disclosures.

North America

Hildene Capital Management has entered into a strategic relationship with CrossCountry Mortgage (CCM), one of the largest retail residential mortgage originators in the US and CrossCountry Capital (CCC), a company focused on housing-related principal investments. Under the terms of a multi-year agreement, Hildene will gain exclusive access to certain non-qualified mortgage (non-QM) originations from the CCM platform, while CCC representatives will commit to invest in an account managed by Hildene. The relationship between Hildene and CrossCountry provides Hildene with direct access to scalable, high credit quality non-QM loans, and all parties with the opportunity to seek to securitise non-QM loans on a programmatic basis.