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Practice paper

Eliminating the negative impacts of the Basel IV output floor by adjusting a bank’s business model

Martin Neisen and Hermann Schulte-Mattler
Journal of Risk Management in Financial Institutions, 14 (3), 256-267 (2021)
https://doi.org/10.69554/FVNC4085

Abstract

The purpose of this paper is to show the interaction between the Basel IV output floor and business model management. Specifically, the paper analyses how banks can optimise the output floor by moderately adjusting the composition of their portfolio. The individual topics are explained based on simplified exemplary cases. The presented capital floor analysis may help a bank’s top management to allocate the available capital better, formulate a coherent internal risk appetite, including the cost of capital in their pricing models, and set explicit targets for key performance drivers directly linked to the desired shareholder returns. With a target business model in mind, our approach can therefore be used to determine target levels for the individual risk positions that contribute to the output floor. The paper presents a procedure for overall bank management, particularly for business model planning in the presence of the Basel IV floor. Managers, analysts and regulators can apply our approach to analyse the business model of an individual bank, as well as the output floor of the banking sector as a whole. To our knowledge, our paper is the first academic contribution on the impact of the new prudential floor approach on the banks’ business model.

Keywords: Basel III finalisation; Basel IV; business model planning; output floor; risk-weighted assets

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Author's Biography

Martin Neisen is the Head of the Risk and Regulation division at PricewaterhouseCoopers (PwC) in Frankfurt am Main and the Global Basel IV Leader, responsible for coordinating PwC’s global activities concerning Basel IV implementation. These activities cover all aspects regarding the impact and execution of Basel IV, including strategic implications, standardised approaches, internal models, business implications, information technology (IT), as well as knowledge management.

Hermann Schulte-Mattler is a Professor of Finance at the Dortmund University of Applied Sciences. Previously he worked for many years in the banking regulation division of the Federal Association of German Banks. Following studies in Economics at the University of Duisburg-Essen and Ohio State University and subsequent employment at a major bank, he studied in the PhD finance programme at the Wharton School at the University of Pennsylvania. He is the author of an extraordinary number of publications on the topic of international harmonisation of banking supervision rules and risk management. Furthermore, he is the co-publisher of a leading commentary on the German Banking Act and implementing regulations.

Citation

Neisen, Martin and Schulte-Mattler, Hermann (2021, June 1). Eliminating the negative impacts of the Basel IV output floor by adjusting a bank’s business model. In the Journal of Risk Management in Financial Institutions, Volume 14, Issue 3. https://doi.org/10.69554/FVNC4085.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 14 / Issue 3
© Henry Stewart
Publications LLP

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