Impact of a Capital Floor

Sanjay Sharma and John Beckwith

“One tequila, two tequila, three tequila, floor” – George Carlin

“Floor: … A level of capital charges (calculated as a percentage of the capital charges under the standardised approach) acting as a minimum to the pillar 1 capital charges under the internal models approach” – BCBS d352

 

This simple statement within FRTB belies considerable debate and analysis by global banks and regulators alike. FRTB stipulates there will be a top-of-the-house floor¹¹ Also Described as an “Output floor” under BCBS d424. to IMA capital based on a percentage of the SA capital from those RTDs. The Basel III reforms of December, 2017 (BCBS d424) clarify that the floor will constrain enterprise level RWA to no less than a fixed percentage of RWA calculated under the standardised approach across six Basel III capital frameworks: 1) credit risk; 2) counterparty credit risk; 3) credit valuation adjustment risk; 4) securitisation framework; 5) market risk; and 6) operational risk. The floor will be phased in over a six-year period as outlined in Table 9.1.

The debate around calibration of the floor was critical in defining how the IMA, and more broadly how Basel III, was deployed. As calibration