CRR III Impact on Credit Institutions' Risk Assessment

Extract

[...] There are also new risks anticipated by CRR 3 such as the climate risk which is taken into account by credit institutions in a quantitative manner. That's what needs to be accounted for. There are current risks and potential risks. The The current risk is not too complicated to evaluate. For example, a bank has a portfolio of real estate loans for 10 billion euros. By 2035, some loans are guaranteed and others are not. We need to try to establish actuarially a default rate, which is not so obvious because the default of borrowers is probably not related to their situation at the time when we lent them. [...]

[...] In fact, the more the risk decreases, the less the equity requirements are important. Bankers are not happy, this is understandable, but it is to avoid litigation over the interpretation of CRR rules here implement the weighting of assets according to the asset class or category. It is a matter of making the burgeoning contentious issues before the Court of the European Union and in appeal before the Court of Justice of the European Union. What are the main elements of the denominator? [...]

[...] The use of the internal risk assessment method by credit institutions requires a prior authorization of the European Central Bank. This requirement obliges the institutions to justify the statistical elements making up the matrix that allows the total amount of risk exposure to be estimated. In general, this authorization is granted without great difficulties. However, with the CRR III, the objective is no longer to encourage the use of this internal method, but rather to restrict the scope. The CRR III impose thus a output floor, that is to say a minimum threshold below which credit institutions can no longer take into account, for determining the amount of their own funds, the results of their own internal rating method. [...]

[...] A bank is exposed to counterparty risk, that is, the risk of default by its own clients (borrowers do not repay). A bank is also faced with market risk. The bank invested in company X or the stock price fell, it lost money, it anticipated unfavorable situations that did not turn out to be unfavorable, it is forced to pay. This is an operational risk related to the operations that the bank concludes. A bank is also exposed to human risks, techniques or technological. For example, Kerviel and his superiors almost blew up Societe Generale. [...]

[...] - Between 72.5% and 100% of the standard method, the establishments can adapt their own equity requirements based on their own internal risk rating. - Below this 72.5% floor of total risk that would have been identified through the implementation of the standard method, the margin of maneuver and, in other words, the equity, cannot be updated anymore. Before CRR III, certain establishments were below 72.5%. On average, they were between 65% and this threshold. This is what makes that the margin of maneuver for establishments to adapt their own funds is today cramped. [...]