Banks cut budgets for maths and models as rules change

The FT covered a piece on a regulatory crackdown that it claims removes the key incentive for measuring risk – view the full article here.  Here is our response – this certainly covers the impact for investment banks as rather than retail.  What BCBS have announced is that they are potentially withdrawing IRB treatments for exposures against large corporates and other banks. For most retail banks this won’t be the prime driver of going IRB and will be a bit of a relief in terms of complexity – in fact it will encourage more banks to go IRB as a result.

The article also alludes to the fact that BCBS are intending to limit the benefit you can take from IRB but they haven’t announced by how much yet? But this does imply there is still some benefit.  At the same time they are proposing to make standardised even more penal for most mortgage banks so to stand still, many banks and building societies might want to consider IRB.

In any event, IFRS9 is going to require many banks to have the same underlying models as used in IRB anyway so the marginal cost is actually getting lower.  At the same time the PRA has an initiative to make it easier for challenger banks to compete on a level playfield by considering ways they can provide IRB approvals to smaller institutions.

The flow for retail banks remains firmly towards IRB for their most material portfolios.