Basel I I Post Crisis Reform (Basel IV):

Implementation & Impact

BARAthRisk Forum
June 9 2022
With you today

Al Baaqi Khadafi (Dafi)

Senior Manager
Financial Risk Management
Dian Maya Listya
Director
Financial Risk Management

Denny Adrian Hanafy

Partner
Head of Risk Consulting

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Topics
01 Overview Basel III: Post Crisis Reform (Basel IV)

02 Observation from quantitative study

03 Adoption status in several countries

04 Basel III Reform & COVID

Impact to surrounding model & common

05
implementation issues

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Overview Basel I I: Post Crisis
Reform (Basel IV)
 Basel I I reforms aim to restore credibility in the RWA
calculation in four ways
Constraining the use of
internally modelled
approaches by ensuring
Enhancing the robustness that modelled
and risk sensitivity of the parameters are subject
standardised approaches Enhance Constrain to greater safeguards
for credit risk, market risk and that advanced
and operational risk. modelling approaches
are not used for
portfolios with limited
historical data.

Complementing the risk-

weighted framework with a
finalised leverage ratio. The Introducing a robust
leverage ratio provides a risk-sensitive output
safeguard against floor. The output floor
unsustainable levels of provides a risk-based
leverage and mitigates backstop that limits the
model risk across both Complement Introduce extent to which banks
internal models and can lower their capital
standardised risk requirements relative to
measurement approaches. the standardised
approaches.

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Overview Basel I I Reform
Basel III: Finalising Post-Crisis Reform has been adopted in Indonesia within several regulations.

Minimum capital SE OJK No.6/SEOJK.03/2020 tentang ATMR untuk risiko operasional dengan
requirements for operational menggunakan pendekatan standar bagi bank umum
risk

Internal ratings-based
approach for credit risk

Minimum capital requirements for Consultative paper revisi persyaratan modal minimum
CVA risk untuk CVA

Standardised approach for SE OJK No.24/SEOJK.03/2021 tentang ATMR untuk risiko kredit dengan
credit risk menggunakan pendekatan standar bagi bank umum

POJK 31/POJK.03/2019 Kewajiban Pemenuhan Rasio Pengungkit Bagi Bank

Leverage ratio
Umum

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Changes in Basel I I Reform for Operational Risk
The revisions to the standardized approach for operational risk, relative to the existing
standardised approach, are as follows:

Minimum capital SE OJK No.6/SEOJK.03/2020 tentang ATMR untuk risiko operasional dengan
requirements for operational menggunakan pendekatan standar bagi bank umum
risk

Basic Indicator
Approach (BIA)
New
Standardized
Measurement
BIA, SA, and AMA has Approach
Standardized
been removed under
Approach (SA)
BASEL III Reform

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑹𝒊𝒔𝒌 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑩𝑰𝑪 𝒙 𝑰𝑳𝑴

Advance
Measurement
Approach (AMA)

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 Operational Risk Formula under BASEL I I Reform
New Standardized Measurement Approach

It assumes that the operational risk increases in an increasing rate with bank’s business and the likelihood of incurring
operational risk losses increases in the future if the bank has higher historical operational risk losses.

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑹𝒊𝒔𝒌 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = Business Indicator (𝐵𝐼) × ⍺ × Indicator Loss Multiplier (ILM)

Business Indicator (BI) Internal Loss Multiplier (ILM)

• Interest Leases and Dividend Component (IDLC) Marginal BI Coefficient (⍺) Loss component = 15x average annual
• Service Component (SC) operational risk losses incurred over the
• Financial Component (FC) past 10 years
Marginal BI
BI Bucket BI Range* 𝑙𝑜𝑠𝑠 𝑐𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡 0.8
Coeficient
𝐼𝐿𝑀 = 𝐿𝑛 [exp(1)- 1 + [ 𝐵𝐼𝐶
] ]
1 ≤ 15 12%
2 15 < IB ≤ 450 15%
3 > 450 18%

*this range is adjusted by SEOJK’s range.

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7 Loss Data Types
Loss event must be grouped into (minimum) 7 loss data types. Regulator has define 3 levels of agregation, level 1 and level 2
are standardized, while level 3 needs to be updated based on bank’s internal loss event case.

7 loss data
types
Process,
delivery BASEL III
management reforms Internal Fraud

7 1

System disruption 6 2 External Fraud

5 3
4

Loss on physical
asset Labor loss
Client, product
and business
practice

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Transition on the New BASEL I I Reform
Existing
Basic Indicator Approach Standard New Standardized Approach 1st Januari 2023

RWA = 12.5 x Operational Risk Capital RWA = 12.5 x Operational Risk Capital

Operational risk capital is the average of the ORC Formula = (BI x ⍺) x ILM
positive annual gross income (gross income)
in December (January to the month) in the Business Indicator (BI) which is a financial-
last 3 (three) years multiplied by 15% (fifteen statement-based proxy for operational risk
percent) Business Indicator Component (BIC) which is
Operational Risk Capital Formula: calculated by multiplying the BI by a set of
regulatory determined marginal coefficients;
σ(𝑮𝒓𝒐𝒔𝒔 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆𝟏−𝟑 𝒙 ⍺)
and
𝟑

Marginal Coefficient (⍺) = 15% Bucket Category

Bucket Range
(⍺)
(IDR Trilion)

1 ≤ 15 12%
2 15 < BI ≤ 450 15%
3 > 450 18%

Quantitative Impact
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Observation from quantitative
study
Tier 1 Ratio over the time
The graph shows the fully phased-in initial Basel III framework for the data points up to and including the
end of 2018 and the actual framework in place at the reporting date for all data points thereafter.

Basel III start

Europe Americas Rest of the world
20.0%

17.5%

15.0%

12.5%

10.0%

7.5%

5.0%

The decrease in the average Tier 1 ratio in H1 2021 mainly comes from the growth rate in the
RWA on the denominator: +3.7% for Group 1 banks, +4.2% for G-SIBs and +12.0% for Group 2
banks. The growth rate of the Tier 1 amount on the numerator, respectively (+2.8% for Group 1
banks, +2.4% for GSIBs and +11.6% for Group 2 banks) is insufficient to compensate.

Source: Basel Monitoring Report as of February 2022, page 24 graph 15.

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Cumulative impact analysis of the final Basel I I reform: point
in-time analysis (December 2020 only)
Source: EBA Report on Basel III Monitoring (data as of 31 December 2020), figure 1 page 15.

Distribution of changes in total T1 MRC

Distribution of changes in total T1 MRC shows the distribution of T1 MRC

across all banks: Group 1 banks (large, internationally active banks), Group 2
banks (other banks), and G-SIIs. Group 1 and Group 2 banks exhibit median
values close to their respective averages but consistently lower. The
dispersion of changes in T1 MRC, measured as the interquartile range, is
wider for Group 1 banks than for Group 2 banks.

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QIS Basel I I Reform EBA Operational Risk
Source: EBA Report on Basel III Monitoring (data as of 31 December 2020), figure 5 page 30.

Distribution of changes in T1 MRC assigned to operational risk only (in % of

operational risk MRC)

The average change in the operational risk capital requirements for AMA
banks is clearly higher than the corresponding value for banks that currently
apply other methods. The differences between AMA banks and other banks
are more pronounced when comparing the 75th percentiles of the changes in
the operational risk capital requirements.

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QIS Basel I I Reform EBA Operational Risk by Type
Source: BASEL III Reforms – Impact Study and Key Recommendations

Institutions that currently make use of the BIA experience the lowest impact
(RWA increase by 7%), whereas for SA and AMA institutions the impact is
more material (RWA increase by 37% and 40%, respectively).

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QIS Basel I I Reform EBA Operational Risk by Size
Source: BASEL III Reforms – Impact Study and Key Recommendations

The new operational risk framework tends to have a different impacts on different business models:
• The auto and consumer credit business model is the business model that shows the largest
impact, with operational risk RWA increasing by around 80%. This is followed by the cross-
border universal business model, for which the increase in RWA is around 40%, and the local
universal and building society business models, whose RWA increase by between 20% and 30%.
• Most of the business models that in the current framework mostly rely on the BIA method
experience a decrease in RWA (Leasing, Custody, Private, Mortgage, S&L Coop). Notable
exceptions are building societies and public development banks, for which the RWA increase on
average.

On average, operational risk RWA in the sample increase by 37%.

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QIS Basel I I Reform EBA Operational Risk by Bucket
Source: BASEL III Reforms – Impact Study and Key Recommendations

Due to the construction of the BCBS SA formula, which applies higher

coefficients to institutions falling into higher BI buckets, the reform has a
disproportionately greater impact on institutions in BI buckets 2 and 3
disproportionally more than bucket 1 institutions. As a result, while the
changes in operational risk RWA are approximately 30% and 50%,
respectively, for bucket 2 and bucket 3 institutions, the change in RWA is
close to zero for bucket 1 institutions

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QIS Basel I I Reform EBA Operational Risk by Business Model
Source: BASEL III Reforms – Impact Study and Key Recommendations

The new operational risk framework tends to have a different impacts on different
business models:
• The auto and consumer credit business model is the business model that shows the
largest impact, with operational risk RWA increasing by around 80%. This is followed
by the cross-border universal business model, for which the increase in RWA is around
40%, and the local universal and building society business models, whose RWA
increase by between 20% and 30%.
• Most of the business models that in the current framework mostly rely on the BIA
method experience a decrease in RWA (Leasing, Custody, Private, Mortgage, S&L
Coop). Notable exceptions are building societies and public development banks, for
which the RWA increase on average. 157

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Adoption Status In Several
Jurisdiction
Basel I I Reform Implementation Status
Source: RCAP on consistency: jurisdictional assessments Legends
https://www.bis.org/bcbs/implementation/rcap_jurisdictional.htm?m=3_14_656_60
1 Draft regulation not published
Credit Credit Ops Market
Negara STD IRB STD FRTB 2 Draft regulation published

Indonesia 3 n/a 3 2 3 Final regulation published

4 Final regulation in force
Argentina 1 n/a 1 1
* Implementation status mixed
Australia 2 2 3 1
Brazil 2 1 1 *
Canada 2 2 2 2
China 1 1 1 1
Hong Kong 1 1 1 1
India 1 1 1 1
Japan 2 2 2 2
Korea 3 3 3 1
Mexico 4 1 4 1
Russia 2 4 4 1
Saudi Arabia 1 1 2 2
Singapore 2 2 2 2
South Africa 1 1 1 1
Swiss 1 1 1 1
Turkey 1 1 1 1
United States 1 1 1 1
EU 1
private English company limited by guarantee.
1 * *
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Basel I I Reform & COVID
Basel I I Reform & COVID

The overall
The usability of capital
resilience of the
buffers and price
banking system Liquidity buffers
movements of AT1
during the
capital instruments
pandemic

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Basel I I Reform & COVID: The overall resilience of the
banking system during the pandemic

Banks have
generally
managed to Able to
The banking absorb temporary More strongly complement and
system has increases in the capitalized banks support monetary
remained resilient costs of liquidity showed greater and fiscal
through the and higher credit increases in authorities’
pandemic. risk. lending efforts

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Basel I I Reform & COVID: The usability of capital buffers
and price movements of AT1 capital instruments

A study from BIS Most authorities An analysis from BIS

within the euro reduced indicates that there’re
Most banks area, indicate that countercyclical increment in AT1 yield
maintained capital banks that had capital buffer for both preferred
ratios well above less headroom (CCyB) in order to stock and contingent
their minimum tended to lend provide banks with convertible securities
requirements and less during the additional relative to unsecured
buffers. pandemic. headroom. debt.

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Basel I I Reform & COVID: Liquidity buffers

An increase in the
amount of HQLA that
For banks who Banks with stable the Liquidity Coverage
rely on unsecured deposit franchises Ratio (LCR) requires
wholesale money experienced banks to hold helped
Certain banks faced markets were negligible liquidity banks absorb this
liquidity pressure in more likely to pressure even at liquidity pressure, has
the early phase of have experienced the peak of the significantly reduced
the pandemic. pressure. stress. liquidity pressures.

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Impact to surrounding model &
other implementation issues
Impact to surrounding model
Changes in Basel III reform approach will cause some domino effect to several related model both risk and business.

Operational Risk Stress Test Financial Modelling

Market Risk Stress Test Fund transfer pricing

Credit Risk Stress Test IFRS9/ PSAK71

Recovery plan & resolution plan Risk appetite & tolerance

RWA: Credit, Market, & Operational

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 Typical Model Transmission Impact
𝑘

𝑃𝑒𝑛𝑑𝑎𝑝𝑎𝑡𝑎𝑛. 𝑏𝑢𝑛𝑔𝑎𝑡 = ෍ 𝑁𝑖𝑙𝑎𝑖. 𝑡𝑒𝑟𝑐𝑎𝑡𝑎𝑡. 𝑙𝑎𝑛𝑐𝑎𝑟𝑡,𝑘 ∗ 𝑊𝐴𝐼𝑅𝑘

Bank need to perform series of adjustment in 𝑖=1

order to ensure the key risk driver transmission 𝑘

𝐵𝑒𝑏𝑎𝑛. 𝑝𝑒𝑛𝑗𝑢𝑎𝑙𝑎𝑛. 𝑁𝑃𝐿𝑡 = ෍ 𝑁𝑖𝑙𝑎𝑖. 𝑡𝑒𝑟𝑐𝑎𝑡𝑎𝑡. 𝑁𝑃𝐿. 𝑡𝑒𝑟𝑗𝑢𝑎𝑙𝑡,𝑖 ∗ 𝑐𝑢𝑡. 𝑙𝑜𝑠𝑠%𝑖

within its model inventories are aligned with 𝑖=1

Basel III Reform new standards. 𝑘

𝐵𝑒𝑏𝑎𝑛. 𝑟𝑒𝑠𝑡𝑟𝑢𝑘𝑡𝑢𝑟𝑡 = ෍ 𝑁𝑖𝑙𝑎𝑖. 𝑡𝑒𝑟𝑐𝑎𝑡𝑎𝑡. 𝑟𝑒𝑠𝑡𝑟𝑢𝑘𝑡𝑢𝑟𝑡,𝑖 ∗ 𝑚𝑜𝑑𝑖𝑓𝑖𝑒𝑑. 𝑙𝑜𝑠𝑠%𝑖

𝑖=1

𝐿𝑎𝑏𝑎. 𝑡𝑎ℎ𝑢𝑛. 𝑏𝑒𝑟𝑗𝑎𝑙𝑎𝑛𝑡

= 𝑃𝑒𝑛𝑑𝑎𝑝𝑎𝑡𝑎𝑛. 𝑏𝑢𝑛𝑔𝑎𝑡 − 𝐵𝑒𝑏𝑎𝑛. 𝑝𝑒𝑛𝑗𝑢𝑎𝑙𝑎𝑛. 𝑁𝑃𝐿𝑡 − 𝐵𝑒𝑏𝑎𝑛. 𝑟𝑒𝑠𝑡𝑟𝑢𝑘𝑡𝑢𝑟𝑡 − ∆𝐶𝐾𝑃𝑁𝑡
+ 𝐹𝑎𝑘𝑡𝑜𝑟. 𝐶𝑒𝑡𝑒𝑟𝑖𝑠. 𝑃𝑎𝑟𝑖𝑏𝑢𝑠 𝑏𝑒𝑏𝑎𝑛. 𝑏𝑢𝑛𝑔𝑎, 𝑓𝑒𝑒𝑏𝑎𝑠𝑒𝑑. 𝑖𝑛𝑐, 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑, 𝑑𝑠𝑏 + ∆𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑠𝑖. 𝐹𝑉𝑇𝑃𝐿𝑡

𝑀𝑜𝑑𝑎𝑙. 𝐴𝑑𝑗𝑡 = ∆𝐿𝑎𝑏𝑎. 𝑡𝑎ℎ𝑢𝑛. 𝑏𝑒𝑟𝑗𝑎𝑙𝑎𝑛𝑡 + 𝑀𝑜𝑑𝑎𝑙. 𝐴𝑑𝑗𝑡−1 − ∆𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑠𝑖. 𝐹𝑉𝑂𝐶𝐼𝑡

𝑀𝑜𝑑𝑎𝑙. 𝐴𝑑𝑗𝑡 𝑵𝒊𝒍𝒂𝒊. 𝒕𝒆𝒓𝒄𝒂𝒕𝒂𝒕. 𝑵𝑷𝑳𝒕 − 𝐶𝐾𝑃𝑁. 𝑁𝑃𝐿𝑡

𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑨𝒅𝒆𝒒𝒖𝒂𝒄𝒚 𝑹𝒂𝒕𝒊𝒐𝑡 = %𝑵𝑷𝑳. 𝒏𝒆𝒕𝒕𝑡 =
𝐴𝑇𝑀𝑅𝑡 𝑁𝑖𝑙𝑎𝑖. 𝑡𝑒𝑟𝑐𝑎𝑡𝑎𝑡 − 𝐶𝐾𝑃𝑁. 𝑁𝑃𝐿𝑡
𝑘

𝐴𝑇𝑀𝑅. 𝑃𝑎𝑠𝑎𝑟𝑡 = ෍ 𝑵𝒊𝒍𝒂𝒊. 𝒕𝒆𝒓𝒄𝒂𝒕𝒂𝒕𝒕,𝒊 ∗ 𝐵𝑜𝑏𝑜𝑡. 𝑟𝑖𝑠𝑖𝑘𝑜𝑖

𝑖=1

𝐴𝑇𝑀𝑅𝑡 = 𝐴𝑇𝑀𝑅. 𝐾𝑟𝑒𝑑𝑖𝑡𝑡 + 𝐴𝑇𝑀𝑅. 𝑃𝑎𝑠𝑎𝑟𝑡 + 𝐴𝑇𝑀𝑅. 𝑂𝑝𝑒𝑟𝑎𝑠𝑖𝑜𝑛𝑎𝑙𝑡 𝐴𝑇𝑀𝑅. 𝑂𝑝𝑒𝑟𝑎𝑠𝑖𝑜𝑛𝑎𝑙𝑡 = 𝐼𝐵 ∗ α ∗ 𝐹𝑃𝐾𝐼
𝑘

𝐴𝑇𝑀𝑅. 𝐾𝑟𝑒𝑑𝑖𝑡𝑡 = ෍ 𝑵𝒊𝒍𝒂𝒊. 𝒕𝒆𝒓𝒄𝒂𝒕𝒂𝒕𝒕,𝒊 − 𝑪𝑲𝑷𝑵𝒕,𝒊 ∗ 𝐵𝑜𝑏𝑜𝑡. 𝑟𝑖𝑠𝑖𝑘𝑜𝑖

𝑖=1

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Implementation Issues & Consideration

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Implementation Issues for Operational Risk
Data, Systems and Processes

01 Bank need to ensure completeness of qualitative requirements for OpRisk management

Banks currently using the AMA, may already have in place the data, systems and processes to meet the
new standards on loss data 02

03 Banks required to calculate the internal loss multiplier (ILM) will have to ensure that their internal LDC processes
are sufficiently robust and cover the required ten-year history.

Banks will also need to have proper documentation to ensure that the data is sufficiently high quality.
04

05
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Implementation Issues for Operational Risk
Data, Systems and Processes

05 Many banks may scrutinize their loss data in order to apply for the exclusion of certain operational
loss events “no longer relevant” to their risk profile, thereby achieving some capital reduction

Risk management teams will need to work together with finance to define exactly how the components
of the business indicator are derived from the profit and loss accounts. 06
Risk mitigation should also be given priority, as reducing losses will also lead to reductions in the
07 ILM. However, due to the lengths of the loss data history, those benefits will not materialize on the
short terms

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Implementation for Operational Risk
Business Model

The definition of the business indicator components generates higher

capital requirements for some business activities. Banks should
analyze their different business lines to ensure they remain sustainable
in all aspects (including profitability, capital usage, customer

1
expectations, etc).

2
Due to the bucketing of the business indicator,
larger banks will face much higher capital charges
compared to smaller ones, which might have an
influence on strategic decisions (especially non-
organic growth through merger and acquisition
activities).

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Implementation for Operational Risk
Capital

KPMG experts anticipate a high level of variability in capital impact across banks and
across jurisdictions under the new SA. There will be contrasting impacts between
smaller banks and larger banks, as well as between banks currently adopting BIA or
TSA/ASA compared to those adopting AMA.

While a BCBS quantitative impact study shows significant decreases in OpRisk capital
requirements on average for the largest banks globally, and a small increase for
smaller banks, in the EU it is expected that banks will have a significant increase in
OpRisk capital requirements, with an EBA analysis predicting a 20-30 percent
increase.

Although the SA is not in force until 2022, all banks should ensure they are
incorporating the future SA into teir capital planning process as well as in risk
adjusted return measures at an early stage.

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Closing & Recap
Closing & Recap

• Basel III reform intended to ensure banking industry readiness to overcome

future economic shock, by increasing prudentially in measuring capital
requirement.
• Indonesia has adopt Basel lIl reform policy, especially for credit risk RWA and
operational risk RWA.
• COVID19 has shown that the resiliency within banking industry is strong and
manage to support loan demand from retail market.
• Bank need to consider Basel III reform impact to surrounding model, especially
RWA related measurement.

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Thank you for your attention

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Thank you!

Denny Hanafy
Partner
Wisma GKBI 35 Floor
Jl Jendral Sudirman Kav. 28
Jakarta 10210 Indonesia
Tel: +62 21 5799 0877
Fax: +62 21 574 0313
Email: denny.hanafy@kpmg.co.id

kpmg.com/socialmedia

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guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act on such information without appropriate professional advice after a thorough examination of
the particular situation.

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