EBF advisor: Lukas Bornemann
Publication date: 10 March 2020
The new Standardised Approach for Counterparty Credit Risk (SA-CCR) is considered to be overly conservative by the industry. The SA-CCR addresses the risk of a counterparty to a derivatives transaction defaulting. However, the way how the Basel standard is designed imposes an undue burden on banks and, ultimately, under consideration of the implementation in other jurisdictions will negatively impact the level-playing field. This will put EU banks at a disadvantage vis-à-vis their competitors from, i.e. the United States. Moreover, the interlinkages between the SA-CCR and other parts of the prudential framework, such as the output floor, will amplify the effect of SA-CCR and lead to a capital increase that is not justified.
In particular, the SA-CCR includes a parameter called the alpha-factor, which was originally designed to account for model risk in internal model methods (IMM). However, evidence suggests that the alpha-factor is set too high and that it would be appropriate to remove the alpha-factor from the SA-CCR for all transactions. If the SA-CCR remains mis-calibrated, the capital requirements for banks using IMM will triple and the costs associated with it may be passed on to businesses who use derivatives to hedge, for example, their interest or foreign exchange risk.
Moreover, the US regulator already removed the alpha-factor from transactions with commercial end-users, which means that EU banks will be at a competitive disadvantage in comparison to their US peers if the issue is not addressed in an appropriate and timely manner. Therefore, the EBF requests policy makers to assess the impact of the new regulation and to seek further refinements also with regard to other parts of the prudential framework.