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      Basel IV, as the term we use to refer to the set of capital rules finalized by the Basel Committee in December 2017, is one of the biggest regulatory reforms brought by the Committee.

      The Hong Kong Monetary Authority (“HKMA”) has launched their industry consultation and is committed to the implementation deadline of January 2023.

      The Basel Committee finalised the latest set of capital rules in December 2017 and referred this to be the finalisation of Basel III, which aims at enhancing bank’s capital framework following the financial tsunami in 2008-2009. The new rules are widely referred to be Basel IV in the industry as they are much more than just finalising the Basel III rules introduced in 2010-2011.

      The new rules include substantial amendments to capital treatment of credit risk, market risk, operational risk and credit valuation adjustment risk, and for a new output floor to limit the extent to which banks will be able to use internal models for credit and market risk to drive down capital requirements. The revised capital standards were due to be implemented in January 2022, but due to COVID-19 the timeline has been deferred by 1 year to January 2023, both locally by the HKMA and internationally by other major regulators.

      KPMG has been following the evolvement of Basel IV closely over the past 5 years. We have been involved in a lot of discussions with the industry and the regulators that drove the finalization of the rules. Our local and international teams worked hand-in-hand in developing our Basel IV solutions and tools that we perceive will help banks implement the new rules cost efficiently and follow market best practices.

      Implementation Progress for Basel IV - Asia Pacific

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      Key implications for banks

      Some banks may face significantly higher minimum capital requirements as a result of the new Basel Committee standards, although the impacts will be cushioned by the long transition period, in particular for the output floor.

      Credit Risk

      For banks using the internal ratings based (IRB) approach to credit risk the output floor can have a significant impact. Some banks using the IRB approach will also be affected by the constraints on the use of internal models to measure credit risk – these constraints will force banks to apply higher risk weights to exposures where no internal model approach can be used. Banks moving from the current to the revised standardised approach for credit risk will face higher capital requirements for some types of lending, including buy-to-let and similar exposures to property where repayment relies on income from the property.

      How KPMG can help?
      • Advise you on data collection and operational requirements for the CR-SA, for example documentation requirements for secured loans, and on the design of due diligence procedures;
      • Assessing the implications of the interplay between the restrictions on the use of the IRB approach, the output floor and the revised Standardised Approach, and to assess corresponding business decisions. This can also be extended to cover the combined impact across risk types (credit, market and operational).
      Validating Risk Rating Systems under the IRB Approach

      Update on HKMA CA-G-4

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      rate Credit Risk For banks using the internal ratings based (IRB) approach to credit risk the output floor can have a significant impact. Some banks using the IRB approach will also be affected by the constraints on the use of internal models to measure credit risk – these constraints will force banks to apply higher risk weights to exposures where no internal model approach can be used. Banks moving from the current to the revised standardised approach for credit risk will face higher capital requirements for some types of lending, including buy-to-let and similar exposures to property where repayment relies on income from the property. How KPMG can help? Advise you on data collection and operational requirements for the CR-SA, for example documentation requirements for secured loans, and on the design of due diligence procedures; Assessing the implications of the interplay between the restrictions on the use of the IRB approach, the output floor and the revised Standardised Approach, and to assess corresponding business decisions. This can also be extended to cover the combined impact across risk types (credit, market and operational). BASEL IV Credit Risk Standardised Approach... 2021 Opens in a new window BASEL IV Credit Risk Internal Ratings-Based... 2021 Opens in a new window Basel IV Update: SA and IRB 2024

      Basel IV Update: SA and IRB

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      Market Risk

      Fundamental Review of the Trading Book (“FRTB”) redefines the boundary between the banking book and the trading book. The new standardized approach and internal model approach are significant overhaul to existing practices. Capital requirements under either approach is expected to go up.

      How KPMG can help?
      • KPMG has been assisting local banks on FRTB implementation; our hands-on experiences can help you quickly understand the new requirements and implementation pain points.
      • KPMG professionals have developed FRTB implementation and validation tools to help banks adopt the new rules. These tools are well validated internally and externally and can offer quick wins.
      Implementation of FRTB in Hong Kong

      HKMA Statutory Consultation on MR 1 and MR 2

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      Operational Risk

      We anticipate a high level of variability in capital impact across banks and across jurisdictions under the new standardised approach for operational risk. There will be contrasting impacts between smaller banks and larger banks, as well as between banks currently adopting BIA or TSO/ASA in Hong Kong.

      How KPMG can help?
      • KPMG can assist you on reviewing and enhancing your operational risk frameworks to incorporate the new requirements while helping to ensure they remain fit for purpose for current regulatory requirements;
      • KPMG operational specialists can assist you on refining loss-data collection standards and processes to meet the requirements for usage in the internal loss multiplier.

      Credit Valuation Adjustment

      Banks may choose to adopt 1 out of 3 approaches for CVA capital calculations, namely, 100% of counterparty credit risk capital charge as calculated based on SA-CCR if the total notional for OTC trades is less than HKD 1 trillion, the basic approach (BA-CVA) and the standardized approach (SA-CVA). The new standardized approach for credit valuation adjustment (“SA-CVA”) will require a lot of implementation efforts in relation to data, modelling of sensitivities and model governance.

      How KPMG can help?
      • KPMG can assist you on SA-CCR implementation with our hands-on experiences and well tested SA-CCR tools.
      • We will use our CVA tools to help you quickly understand the capital impacts under the new framework.
      • Our CVA experts can help you analysis the pros and cons of adopting the BA-CVA or the SA-CVA approaches; and provide comprehensive roadmap for implementations.

      Leverage Ratio

      The Leverage Ratio Framework of Basel Committee on Banking Supervision (BCBS) intends to restrict the build-up of leverage in the banking system, enhance bank stability and reinforce the risk-based requirements with a simple, non-risk-based "backstop" measure. The current leverage ratio was defined in January 2018; with the new rules the calculation of the exposure measure will need to be revised to align with the overall Basel IV standards. On the other hand, exemption on central bank reserves and extra buffer for G-SIBs will not be applicable in Hong Kong.

      How KPMG can help?
      • KPMG specialists can assist you on performing a gap analysis to understand a detailed breakdown of the new requirements and help you come up with an implementation plan. Banks will need to pay special attention to the new exposure calculation requirements and alignment with the broader Basel IV requirements such as those for credit risk and counterparty credit risk;
      • KPMG experts can help you analyze the business and strategic implications of implementing the new leverage ratio requirements; and
      • KPMG team can assist you on system enhancements to fulfill the new calculation requirements and help you fulfill new banking return and disclosure requirements.

      Interest Rate Risk Management

      Banks and other financial services firms need to consider the risks associated with fluctuating interest rates. We have expertise and insights to help our clients manage these risks.

      Strengthening Interest Rate Risk Management

      Strengthening Interest Rate Risk Management

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      Recalibration of shocks for IRRBB

      Recalibration of shocks for IRRBB

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      Other related topics

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      Implementation of the initial margin rules brings end-to-end impacts on the OTC derivative trading lifecycle – ranging from deal initiation, contracting to initial margin calculations to a whole lot of risk mitigation standards.

      From our experiences with previous phases’ implementation, we have well noticed the common challenges faced by covered entities and we have developed ready to deploy toolkits to assist you in the initial margin journey.

      How KPMG can help?
      • KPMG has assisted numerous local and international banks in implementing initial margin rules, thereby defining best-in class processes. We have a dedicated local team with an added benefit of our global talent sharing regional and market practices, benchmarking and SME support.
      • KPMG can offer a suite of tools and services to help you in your journey of building an implementation framework for initial margin rules, e.g. validation of the SIMM model and back-testing the SIMM model. We will also advise you on system implementation, use of data, enhancing your OTC trading target operating model and overall compliance with both local and international initial margin rules.

      LIBOR Reform

      The transition from Libor to a new risk-free rate has revealed a number of challenges for all financial institutions – the nature and scope of what lies ahead is vast, impacting businesses, operations and support functions.

      We have been working closely with major market participants on LIBOR reform over the past 2 years and we are well positioned to assist you throughout this journey.

      Contact us

      Michael Monteforte
      Michael Monteforte

      Partner, Co-Head of Financial Risk Management

      KPMG China

      Robert Zhao
      Robert Zhao

      Partner, Co-Head of Financial Risk Management

      KPMG China

      Gemini Yang
      Gemini Yang

      Partner, Financial Risk Management / Climate & Nature Services Lead

      KPMG China

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