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RegulatoryConsistencyAsssmentProgram(RCAP):

Propodguidanceforasssingmaterialityofgapsandassigning

gradings

Purpo

ToreviewandapproveguidanceontheassignmentofgradeswithinLevel2asssmentreports

Background

InDecember2012theBalCommitteeaskedtheSecretariattodevelopguidancethattheRCAP

teamscouldu,includingsomequantitativebenchmarks,toasssthematerialityofgaps

betweenlocalrulesandBalstandardsandtoassigngradeswithregardtokeycomponentofthe

capitalstandardsandoverallimplementation.

Theattachedpropodguidancestartswiththeprinciplethatwhereverrelevantquantitativedata

isavailable,danceleavesittoeachRCAPteamto

makeitscalculationsandprovidesbenchmarksfortranslatingsuchcalculationsintomateriality

ataisnotavailable,theguidanceproposthatthe

RCAPteamsshouldkeepthesamebenchmarksinmindastheyframetheirjudgementson

specificgapsandgrades.

ThepropodguidancerecognisthatallRCAPasssmentsareultimatelybadonthe

tfocusonbenchmarks,itisnotmeantto

,RCAPteamsareexpectedto

u“regulatoryandsupervisorycommonn”ouldfeelfreetoadaptit

asneeded,providedtheydescribeandexplaintheiradjustmentsintheRCAPreport.

mberscautionedagainst

excessivequantificationwheretheprospectivematerialityofgapsoruncertainqualityofthedata

supportedthe

consistencyandobjectivitythatspecificbenchmarksandaggregationprocesscouldbringto

futureasssments.

Beyondthisguidance,theRCAPasssmentprocesshasbuiltinchecksandbalancestoensure

thatmncludethe

RCAPscopingnote,1the“foureyes”bythe

RCAPReviewTeam,thesign-offbythePeerReviewBoard,andthefinaldiscussionintheBal

Committee.

1ThescopingnotelaysdowntheapproachudbytheRCAPteamandissharedwiththe

assdauthoritiesandtheRCAPReviewTeam.

TheSecretariatpropostoapplytheguidanceinon-goingandupcomingasssments,while

keepingitundercontinuingreview.

Q:DoestheCommitteeagreewiththeuofthepropodguidanceintheupcomingRCAP

asssments

RegulatoryConsistencyAsssmentProgramme(RCAP)

GuidancenoteforRCAPteamsonasssingmaterialityofgapsand

assigninggradings

Purpo

ThisnoteprovidesgeneralguidanceforRCAPteamstodeterminethematerialityofgapsbetween

localrulesandBalIIIstandardsandtoassigngradeswithregardtokeycomponentsofthe

standardsandtheoverallimplementationframework.2

Approach

Gradeassignmentshouldbebadlargelyonthematerialityofidentifiedgaps;thatis,theimpact

oftheidentifieddeviationsbetweentheformalpublishedtextsoflocalrulesandregulations,and

theBalstandards.3Quantitativethresholdsarerecommendedinthisnotethatdefinemateriality

amsshoulduthewheretheidentifiedgapscanbe

quantifiedforcoveredbanks.4

Whilethisguidanceisspecific,itisnotmeanttoimplythatRCAPasssmentteamsshoulduit

mechanisticallyandforegoexercisingtheirjudgement(“regulatoryandsupervisorycommon

n”).Inareaswherequantitativeevidenceislackingoritisofdoubtfulrelevanceorquality,

wheretheasssmentteambelievesitisappropriatetotakelocalcircumstancesintoaccount,or

whengapsarepotentiallymaterialevenwhentheyarenotcurrentlymaterial,judgementwillbe

ecas,theRCAPasssmentteamwouldbeexpectedtoadoptaconrvative

view.

2Atprent,pewillextendtootherstandardsunder

mentaryguidancewillbeissuedforRCAPteamsas

thocomponentsareintegrated.

3Roughlyspeaking,materialitycanbeinterpretedalongtwodimensions:(i)confidenceinbanks’

capitalratiosandcapitalbuffers(financialstabilitydimension)and(ii)anadequatecalculationof

boththecapitalstock(numerator)andRWAs(denominator)byinternationallyactivebanks(level

playingfielddimension).Inaddition,aviewonmaterialitycanbeformedthatistime-independent

pliesthatteamsshouldconsiderthatthe

materialityofgapscanchangeovertime,drivenbyfactorssuchasrefinementstotheregulatory

regime,theeconomiccycle,financialtrends,andshiftsinbankingpracticessuchasfrom

standardidtoadvancedregulatoryapproaches.

4ThesampleofbankscoveredduringanasssmentshouldbeagreedbetweentheRCAPteam

andtheassdjurisdictionwellinadvanceofmaterialityasssmentandgradeassignment.

Equally,inaggregatingresultsfordifferentgapswithinandacrosskeycomponents,judgement

willbecriticalinasssingtheirpotentialinteractionsandrelativeimportance.

Theasssmentteamsareexpectedtoutherelevantpartsofthisguidanceasabenchmarkand

toexplainas

onuswouldremainonthejurisdictiontodemonstratecompliancetotheRCAPasssmentteam.

Framework

Identifyingandclassifyinggaps

ThestartingpointfortheRCAPteamistoidentifythegapsforeachofthekeycomponentsofthe

rick-badcapitalframework(Annex1).Oncethegapshavebeendetermined,theyshouldbe

classifiedasquantifiableornon-quantifiable.

Materialityofgaps

Naturalmeasurestoutoasssthematerialityofquantifiablegapsarerisk-badcapitalratios

andrisk-weightedasts(RWA).Annex2providesthresholdlevelsfordeterminingwhethera

mpactisabovethethreshold,thegapisconsidered

“material”.Ifthecurrentimpactisbelowthethreshold,butinareasonablerangeoffuture

scenariosmayexceedthethreshold,thegapisclassifiedas“potentiallymaterial”.Iftheimpact

ixpectedtoremainbelowthethresholdthegapisclassifiedas“unlikelytobecomematerial”

Insomecas,

directestimateoftheimpactisnotpossible,theRCAPteamshouldmakeeveryattempttoasss

materialitybadonproxiessuchasthelevelofexposuretotheaffectedastclass,thenumberof

bankngagedinspecificbusinessactivities,datafrompublicsources,orimpactstudies,orother

reencouragedto

utheircollectiveexpertitoformabesteffortestimateoftheimpactonthecapitalratiosand

uldallowtheRCAPtoputtogetheraviewonquantifiablegapsthatisas

consistentaspossible.

Box:Illustrativeexamplesofasssingpotentialmateriality

(a)Agapisfoundtobematerialforasinglesmallbank,butnotsoforotherbanks.

However,theaffectedbusinesscouldreasonablybeexpectedtobecomemoreimportantinthe

actforthesmallbankandobrvedtrendingrowthoftherelevantbusiness

couldbeudtoasssthepotentialimpactatotherbanks.

(b)Agapiscurrentlynotmaterial,butcouldchangeifbanksmovetoamoreadvanced

nexposuredataandtheexperienceoftheasssorswithsimilar

approachesinotherjurisdictions,anestimatecouldbemadetodeterminepotentialmateriality.

(c)Agapiscurrentlynotmaterial,butwouldbemorematerialataworstateofthe

mcouldestimatetheimpactoncapitalratiosinadownturn.

tance,gapsinPillar1

involvingareasrelatingtogovernancearoundtheuofinternalmodels,orgapsinPillar2or

erialityofsuchgapsshouldbeassdbadonthe

degreeofuncertaintythegapsarelikelytocau,atprentorinthefuture,regardingthe

accuracyofthecapitalmeasurementprocessand/orthequalityofriskmanagementwhenthatis

tance,inthecaofPillar2,thematerialityofrisksnotcapturedunderthe

ICAAPshouldbejudgedwithinthecontextoftheirimportanceforfinancialstabilityandthelevel

lowingboxtsoutaclassificationfornon-quantifiablegaps:

Box:Classificationofnon-quantifiablegaps

(a)“Notmaterial”or“unlikelytobecomematerial”:gapslikelytohaveanegligibleorminor

impactonfinancialstabilityortheinternationallevelplayingfieldnoworinthefuture.5

Examplesareasmalltechnicalgap;nopossibilityforabanktoexploitthegap;gapsthatare

unlikelytoaffecttheabilityofsupervisorstoenforceimplementationofBalstandards.

(b)“Material:or“potentiallymaterial”:gapslikelytohaveamaterialimpactonfinancial

mple,aBalprovisionthatis

implementedinawaythatissubstantiallydifferentfromthestandardsothatthequalityof

implementationortheabilityofsupervisorstoenforceimplementationcannotbeassured.

Grading

OncethematerialityoftheindividualgapsisdeterminedtheRCAPteamshouldproceedto

determinetheasssmentgradesforeachcomponentusingoneofthefourgradings.6The

followingthreestepapproachshouldguidethisprocess:

Step1:Foreachcomponentthecumulativeimpactofthequantifiablegapsiscalculatedand

comparedtothethresholdsprovidedinAnnex3,bothintermsofcapitalratiosandRWAs(where

applicable.)7(6)Thisproducesapreliminarycomponentlevelgrade.

Step2:Foreachcomponentthecumulativeimpactofnon-quantifiablegapsisalsoevaluated.

Asthefocusisonthecumulativematerialityofthegaps,theRCAPteamshouldnotaverageout

betweenthequantifiableandnon-quantifiablegapssoastoensurethatthegradederivedinstep1

iskeptthesameorlowered,butnotimproved.

Step3:Afinaljudgementalcheckisappliedtoensurethattheresultingcomponentgradeis

considerationaffectingthisjudgement

shouldbedocumentedandexplainedintheasssmentreport.

Asafinalstep,theRCAPteamshoulddeterminetheoverallgradefollowingthefourstepsbelow:

Step1:ultsarecompared

oducesapreliminarygrade.

5InthecontextofRCAP,the“internationallevelplayingfield”referstotherulesthatareapplied

ulesshouldagreewith,orexceed,theBalstandards.

6Thegradingsare“compliant”,“largelycompliant”,“materiallynon-compliant”and

“non-compliant”.

7Annex2providesinformationonthederivationofthethresholds.

Step2:,thegrade

derivedunderstep1canonlybekeptthesameorlowered,butnotimproved.

Step3:Theconstraintisappliedthattheoverallgradingcannotbehigherthanonenotch

comparedtotheworstcomponentgrade.8

Step4:Afinaljudgementalcheckisappliedtoassswhethertheresultingoverallgradingis

considerationthatplaysaroleforthe

assignmentofthefinalgradeshouldbeappropriatelydocumentedandexplainedintheasssment

report.

8Forexample,ajurisdictionthathasonecomponentassdas“materiallynon-compliant:

cannotgetanoverallgradinghigherthan“largelycompliant”.Thisconstraintwasagreedbythe

BalCommitteeaspartoftheRCAPasssmentprocessin2012

Annex1:KeycomponentsoftheBalframework

Thefollowingtablecontainsthe15keycomponentsoftheBalframeworkthatarecurrently

edjurisdictionsreceiveagradeforeachcomponent

atliquidity,leveragecomponentswillgetadded

progressively.

GeneralProvisionsandCapital

fapplication

tionalarrangements

tionofcapital

Pillar1:Minimumcapitalrequirements

Risk:StandardidApproach

risk:InternalRatings-Badapproach

risk:curitisationframework

rpartycreditriskrules

risk:standardidmeasurementmethod

risk:internalmodelsapproach

ionalrisk:BasicIndicatorApproachandStandardidApproach

ionalrisk:advancedmeasurementapproaches

lbuffers(conrvationandcountercyclical)

13.G-SIBandD-SIBadditionallossabsorbencyrequirements

Pillar2:SupervisoryReviewProcess

ndregulatoryframeworkfortheSupervisoryReviewProcessandfortaking

supervisoryactions

Pillar3:MarketDiscipline

surerequirements

Annex2:Calibrationofthresholdsforquantifiablegaps

ThefollowingquantitativethresholdsarepropodtohelpRCAPasssorsinasssingif

individualquantifiablegapsare“material”,“potentiallymaterial”or“unlikelytobecome

material”:

Table1:thresholdsfordeterminingwhetheragapismaterial

Thegapisconsideredmaterial(orpotentiallymaterial)whenitoverstates(orixpectedto

overstateinthefuture)either

...thecapitalratioofanindividualbankbymorethan10basispoints

...theweightedaveragecapitalratioofasampleofbanks9bymorethan5basispoints

Thethresholdswillhelpidentifygapsthathaveasubstantialimpactonthenumeratoror

r,somegapswillhaveasmallimpactonthecapitalratio,

butmaystillbeconsidered“material”fromtheperspectiveoftheindividualcomponentlevel(e

listinAnnex1).Forexample,gapsinthemarketriskcomponentmayhavealimitedoverall

impactonthecapitalratio,butcouldbeofmaterialnaturefromtheperspectiveofthe

tifymaterialgapsforthegradingofthe

individualPillar1components,thefollowingadditionalREA-thresholdsarepropod.10(9)

Table2:thresholdsfordeterminingwhetheragapismaterial

Thegapisconsideredmaterial(orpotentiallymaterial)whenitreduces(orixpectedtoreduce

inthefuture)either

...theRWA-componentofanindividualbankbymorethan5%

...theweightedaverageRWA-componentofsampleofbanksbymorethan2.5%

Calibration

Thepropodthresholdsarecalibratedbadonanumberofconsiderations,includingmateriality

tion,thethresholdsaretto

prervetheint,

9Regardingthesampleofbankstoassd,thisshouldbeagreeduponbetweenthejurisdiction

usoftheBalframeworkison

internationallyactivebanks,andtherefore,thematerialityasssmentshould,inprinciple,cover

r,theassdjurisdictiontogether

withtheRCAPteamcoulddecidetoincludeotherrelevantbanksaswell,forinstanceD-SIBs.

TheSecretariatwillfacilitatethechoiceofcoverageofbanksinamannerthatwillavoida

potentiallectionbiasonthepartoftheRCAPteamand/ortheBCBSmemberundergoingthe

asssment.

10EightPillar1componentsaredistinguished(ealsoAnnex1):creditriskSA,creditriskIRB,

creditriskcuritisation,counterpartycreditrisk,marketriskSA,marketriskIMA,operational

riskBIA/SA,andoperationalriskAMA.

wherepossible,thepropodthresholdlevelshavebeenbacktestedagainstpreviousRCAPs.

Generally,thethresholdlevelsforindividualbanksaretattwicetheleveloftheweighted

umptionisthattheimpactonindividual

bankscanbesomewhathigherbeforefinancialstabilityorthelevelplayingfieldisaffected

ingeneral.

Forquantifiablegaps,thethresholdfor“material”(or“potentialmaterial”)istat10

basispoin

thresholdsarebadonexperiencefrompreviousRCAPs.

Inaccountingandauditingexercisagapistypicallyconsideredmaterialwhenitsimpactis

morethan5%.The5%thresholdisudaslevelforRWA-keycomponentthresholdfor

Pillar1componentsforindividualbanks(Annex2).Fortheweightedaverageimpactofthe

sampleofbankstheRWA0-keycomponentthresholdistat2.5%.

Calibrationofthresholdsforderivingcomponentandoverallgrades(Annex3and4)

Forthederivationofthecomponentgradesandoverallgradeanothertofthresholdsisud(e

Annex3and4).Thethresholdsareconsistentwiththethresholdsforindividualgapsdescribed

sfurtherdetailastotheircalibration.

The5%accountingthresholdisudtodistinguishbetween“largelycompliant”and

“materiallynon-compliant”ngaTier1capitalratioof10%,a

5%impactwouldclassifyanimpactofmorethan50basispointsasthequantitative

ctlargerthan50basispointswouldbeconsidered“materially

non-compliant”.

Forthethresholdbetween“materiallynon-compliant”and“non-compliant”thelevelistaken

ndatafromMoody’s,

a100basispointdeviationcorrespondsapproximatelytoaonenotchdifferenceinthe

externalratingofbanks(assuminganaveragecapitalratioof10%).Hence,thethresholdis

tat100basispoints.

Further,thethresholdsforthecomponentlevelaretataboutonethirdofthethresholdlevels

llowsfromtheobrvationinpreviousRCAPsthattypically

hresholdsarederivedwiththeaim

ofprervinginternalconsistencywithintheframework.

Annex3:Determininggradesforindividualcomponents

“Compliant”“LargelyCompliant”“Materiallynon-compliant”“Non-compliant”

Step1Cumulativeimpactofquantifiablegapsforthecomponentunderconsideration(inordertobeassignedaspecificgradein

step1,everyofthefollowingconditionshastobemet)

ateofthecapitalratio

ofthemostaffectedbankat

thecomponentlevel

Notmorethan10basispointsNotmorethan20basispointsNotmorethan75basispoints

Atleastoneoftheconditions

for“Materially

non-complaint”isnotmet

atementofthecapital

ratiooftheweightedaverage

ofbanksatthecomponent

level

Notmorethan5basispointsNotmorethan10basispointsNotmorethan30basispoints

rPillar1

components:impactonRWA

ofmostaffectedbank

Notmorethan5%Notmorethan10%Notmorethan20%

rPillar1

components:impacton

weightedaverageRWAof

banksample

Notmorethan2.5%Notmorethan5%Notmorethan10%

Step2Cumulativeimpactofnon-quantifiablegapsforthecomponentunderconsideration(canmaintainorlowerthegrade

establishedinStep1)

Numberanddegreeof

non-quantifiablegapsforthe

componentunder

consideration

Nomaterialorpotential

materialgaps;cumulative

impactofothergapsissmall

Limitednumberofgapach

withlimitedmaterialityor

potentiallymateriality;

cumulativeimpactislimited

Largenumberofgapswithsignificantmaterialityorpotential

materialitylargecumulativeimpact

Step3Finalcheck

BadonthejudgementoftheNogapsordifferenceshaveOnlygapsordifferencesofGapsordifferenceswithaProvisionshavebeenomitted

team,andtakingintoaccount

anyotherinformation

available,doestheresulting

componentgradingfitthe

followingdescription?

beenidentifiedthatwouldor

wouldpotentiallygiverito

lowercapitalratiosfor

internationallyactivebanks

limitedmaterialityorlimited

potentialmaterialityinterms

ofimpactonfinancialstability

ortheinternationallevel

playingfieldhavebeen

identified

materialorpotentiallymaterial

impactonfinancialstabilityor

theinternationallevelplaying

fieldhavebeenidentified

fromtheregulationresulting

inundercapitalisationor

non-capitalisationofrelevant

exposures,orgapsor

differenceshavebeen

identifiedthatcouldverely

impactfinancialstabilityor

theinternationallevelplaying

field

Annex4:Determiningtheoverallgrade

“Compliant”“LargelyCompliant”“Materiallynon-compliant”“Non-compliant”

Step1Cumulativeimpactofallquantifiablegaps(inordertobeassignedaspecificgradeinstep1,everyofthefollowing

conditionshastobemet)

atementofthecapital

ratioofthemostaffectedbank

Notmorethan20basispointsNotmorethan50basispointsNotmorethan200basispoints

Atleastoneoftheconditions

for“Materially

non-compliant”isnotmet

atementofthecapital

ratiooftheweightedaverage

ofsampleofbanks

Notmorethan10basispointsNotmorethan25basispointsNotmorethan100basispoints

Step2Cumulativeimpactofallnon-quantifiablegaps(canmaintainorlowerthegradeestablishedinStep1)

Numberanddegreeof

non-quantifiablegaps

Thegradingwilldependonthenumberanddegreeofmaterialorpotentialmaterialgapsbadontheteam’sviewofthe

cumulativemateriality;manygaps(including“small”gaps)couldsumuptoamaterialimpact.

Step3Checkratingconstraint

WorstcomponentgradingNotlowerthan“largely

compliant”

Notlowerthan“materially

non-compliant”

Step4Finalcheck

Badonthejudgementofthe

team,andtakingintoaccount

anyotherinformation

availabletotheteam,doesthe

resultingcomponentgrading

fitthedescription?

Nomaterialorpotentially

materialgapsordifferences

havebeenidentifiedwhich

wouldorwouldpotentially

giveritolowercapital

requirementsfor

internationallyactivebanks

Onlygapsordifferencesthat

havealimitedimpacton

financialstabilityorthe

internationallevelplaying

fieldhavebeenidentified

Gapsordifferencesthatcould

materiallyimpactfinancial

stabilityortheinternational

levelplayingfieldhavebeen

identified

Provisionshavebeenomitted

fromtheregulationresulting

inundercapitalisationor

non-capitalisationofrelevant

exposuresorgapsor

differenceshavebeen

identifiedthatcouldverely

impactfinancialstabilityor

theinternationallevelplaying

field