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Objectives and challenges in regulating credit risk – two financial experts interviewed
Regulations are a constant topic in the financial field. We interviewed two industry experts: Ottmar Bongers, Special Advisor at BaFin, who is an expert on European Model Supervision and the global regulatory framework. The other expert is Abdul Islam, IFRS 9 Lead from the IFRS regulatory body to provide insight into new accounting standards.
Technical Accounting and IFRS 9
The post-crisis banking world has been subject to significant regulatory changes, up to the point where being pro-active towards new regulations is a competitive necessity. The field of credit risk management is no exception. Which are the regulations that will impact credit risk management the most? Ottmar Bongers, Special Advisor at BaFin, mentioned one document in particular when we asked him about the recent trends of regulating credit risk:
“The BCBS Consultative Document on changes to IRB approaches issued in March discusses a broad range of restrictions to the use of internal models.”
These "restrictions" aim to improve the standardization of credit risk, citing overreliance on external credit ratings, lack of granularity and out-of-date calibrations as the main points. At the same time, it is vital for this new internal ratings framework to be as simple as possible and take the goals of the banks into account. Mr. Bongers remarks:
“Now it’s essential that the regulator finds the right balance between the reduction of unwanted RWA variability and the risk sensitivity of capital measurement. We should not throw out the 'use test baby' with the regulatory bath water.”
However, putting the IRB changes into practice is a task for the institutions themselves. What should banks be prepared for regarding modelling? Are standardized methods sufficient for large financial corporations? Those are just two of the many questions that arise in the ongoing "IRB vs. standardized" debate. Reducing the aforementioned external credit risk assessments, making a strong link between the standardized approach and the IRB approach and increasing risk sensitivity – those are the declared main objectives, but the path to efficient implementation remains rocky.
At the same time, banks are preparing for a change in accounting standards, with the IAS 39 giving way to IFRS 9. As a whole, the main objective of the IFRS 9 will align measurement of financial assets with the bank’s business model, contractual cash flow of instruments, and future economic scenarios. We interviewed Abdul Islam, IFRS 9 Lead, about the most impactful changes with regards to the field of credit risk:
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