Consultation Paper - Output Floor for Banks

Summary

This consultation paper sets out the Bermuda Monetary Authority's proposal to adopt the Basel III output floor for banks. The output floor requires that a bank's risk weighted assets, however calculated, cannot fall below 72.5% of the risk weighted assets calculated using standardised approaches only. The Authority currently requires all banks to use standardised approaches and does not yet approve internal models, but is proposing this framework to prepare for that possibility.

• Scope of approaches: The floor applies across credit risk (standardised approach), counterparty credit risk (SA-CCR), credit valuation adjustment risk, the securitisation framework (SEC-ERBA or SEC-SA, or a 1250% risk weight where neither applies), market risk, and operational risk (all standardised approaches).
• Disclosure requirements: Banks would be required to publish in Pillar 3 disclosures both risk weighted capital ratios excluding the capital floor and ratios including it, plus more granular RWA calculation information once forthcoming disclosure templates are issued.
• Phase in calibration: Proposed implementation from 1 January 2023 with the floor calibration rising from 50% in 2023 to 72.5% by 1 January 2028, increasing by roughly 5 percentage points each year.
• Transitional cap: During the phase in period the Authority may exercise national discretion to cap the incremental increase in a bank's total RWAs resulting from the floor at 25% of pre-floor RWAs.

As a consultation paper, this document is a proposal open for industry comment rather than a binding rule; it does not itself impose current obligations but signals requirements the Authority intends to introduce for Bermuda banks.

Key obligations

• If adopted, banks would be required to calculate risk weighted assets as the maximum of their internally modelled approach and 72.5% of RWAs calculated under standardised approaches (subject to phase-in)
• If adopted, banks would be required to publish in Pillar 3 disclosures both floored and unfloored risk weighted capital ratios
• If adopted, banks would be required to disclose granular RWA calculation information under internally-modelled and standardised approaches once disclosure templates are finalised

Applies to

banks

Deadlines

• 1 January 2023: Proposed commencement of the output floor at a 50% calibration
• 1 January 2024: Proposed output floor calibration increases to 55%
• 1 January 2025: Proposed output floor calibration increases to 60%
• 1 January 2026: Proposed output floor calibration increases to 65%
• 1 January 2027: Proposed output floor calibration increases to 70%
• 1 January 2028: Proposed output floor calibration reaches full 72.5%