PFE vs EEPE: Two Measures for Investment Banking

Interest rate risk has become a capital issue. APRA has released the final version of APS 117, which will take effect in October 2025. The framework raises expectations for how banks assess and manage interest rate risk across their lending portfolios. It creates a direct link between capital adequacy, funding structure and duration exposure, establishing a more integrated approach to risk management that connects asset sensitivity, balance sheet composition and capital discipline across the banking system. Under the new approach, banks will need to demonstrate that they can absorb rate shocks without compromising profitability or liquidity. That discipline will influence how they fund, how they price credit, and where they deploy balance sheet capacity. In practical terms, we expect longer-dated lending to attract greater scrutiny, and borrowers with predictable, hedged cash flows to be rewarded with more competitive terms. This evolution will not change the volume of capital in the system, but it will change how that capital moves. As lenders adjust their models, the differentiation between well-structured and loosely-structured transactions will widen. At Pomeroy Capital, we are already working with clients to translate these prudential settings into design strategy, ensuring that funding structures remain both compliant and commercially efficient. The outcome is not just resilience to regulation but an ability to price ahead of it.

Introducing the Credit Risk Index (CRI): A New Lens on Private Market Risk. Credit Benchmark launches the flagship Credit Risk Index (CRI) - the first monthly measure tracking credit deterioration and improvement among U.S. private corporates. Built on strength: 💠 Based on the collective credit views of 20,000 analysts across 40+ global banks, covering over $9 trillion in wholesale loans. 💠 The flagship CRI illuminates a key segment of that universe: 3,000 U.S. private corporates. 💠 Grounded in actual rating actions from banks on their own exposures, not market prices or agency ratings. 💠 Provides a uniquely independent, timely measure of credit risk trends across industries. 💠 Latest data shows risk rising again in 2025, with notable stress in autos and healthcare. The CRI delivers real transparency into private market credit -  a trusted, data-driven signal before stress hits balance sheets. 👉 Explore the CRI and download the latest insights: https://lnkd.in/eVYrKYmf

Celebrating 10 Years with a New Lens on Credit Risk This year, Credit Benchmark marks a decade of bringing transparency to credit risk and we’re celebrating with the launch of our flagship Credit Risk Index (CRI). The CRI is the first monthly measure of credit quality among U.S. private corporates, built from the collective views of 20,000 analysts across 40+ global banks. It delivers a clear, data-driven signal where visibility has long been limited. From the start, Credit Benchmark has been a tech-first company tackling one core challenge: the lack of an independent view of risk from those who actually hold it. That mission is even more relevant today as markets grow more opaque and volatile. This month also marks my first year with the company — it’s been energizing to join a team still innovating a decade in. Proud of what we’ve built, and excited for what’s next. 👉 www.creditbenchmark.com #CreditBenchmark #CreditRiskIndex #PrivateMarkets #CreditData #10YearsStrong

#Day 4 of the 100-dayThe Valuation School challenge: Understanding the Basel Framework—How Banks Stay Secure Banks play an important role in the economy by managing money for individuals and businesses. But to stay safe and protect people’s money, banks follow an international set of rules called the Basel Framework. What is the Basel Framework? The Basel Framework is a global set of banking regulations designed by the Basel Committee on Banking Supervision, based in Switzerland. These rules ensure banks have enough capital (backup money) to absorb losses and continue operating safely during financial difficulties. Why Are These Rules Important? Banks lend money to customers and businesses, but some loans may not be repaid. Without enough capital, banks risk failure, which can cause wider economic problems. Basel rules specify how much capital banks must hold based on the riskiness of their loans and investments. Evolution of Basel Norms Basel I (1988): Established minimum capital requirements. Banks must keep capital equal to at least 8% of risk-weighted loans. It focused on credit risk. Basel II (2004): Added rules for operational and market risks, improved supervision, and transparency requirements. Basel III (2010): Introduced after the 2008 financial crisis, it raised capital quality and quantity requirements, added liquidity and leverage standards to strengthen bank resilience. Basel IV (2023–2028): An update to Basel III that limits banks’ reliance on their own risk models, sets capital floors, and improves consistency and safety across countries. Three Pillars of Basel Minimum Capital Requirements: Banks must hold enough capital to cover all risks they face. Supervisory Review Process: Regulators check banks’ risk management and capital adequacy. Market Discipline: Banks disclose key information to promote transparency and trust. Key Concepts to Remember Capital Adequacy Ratio (CAR): The ratio of a bank’s capital to its risky assets, showing financial strength. Risk Weighted Assets (RWA): Assets classified according to their risk to calculate capital needs. Leverage & Liquidity: Limits on how much debt banks can take and requirements for cash reserves to meet short-term obligations. Basel Framework in India The Reserve Bank of India (RBI) oversees Basel implementation in Indian banks. Many banks follow Basel III norms and are preparing for Basel IV upgrades soon. Summary The Basel Framework is the safety net of international banking. It keeps banks strong, protects depositors, and supports financial stability during uncertain times. #ValuationSchool #100DaysChallenge #BaselFramework #BankingRegulations #FinancialStability #RiskManagement #FinanceEducation

💡 Day 25: The Simple Ratio That Saved Banks from Themselves — The Basel III Leverage Ratio Back in 2008, when the world’s biggest banks were toppling one after another, one question echoed across boardrooms and regulators alike: > “How did banks with such high capital ratios still collapse?” The answer was hidden in plain sight — leverage. Banks had borrowed and re-borrowed so much that even a small shock could wipe out their thin layer of true capital. To fix this, Basel III introduced a reality check — a non-risk-based backstop known as the Leverage Ratio Framework. 🧭 So, what exactly is the Leverage Ratio? Think of it as a seatbelt for banks. No matter how complex the models or how “safe” the risk weights appear, this ratio ensures every bank maintains a minimum layer of real capital for every rupee it lends or exposes itself to. Leverage Ratio = Tier 1 Capital\Total Exposure Measure Minimum Basel III Requirement: 3% Higher for G-SIBs (Global Systemically Important Banks) It’s simple, yet powerful — because simplicity doesn’t lie. 🧮 Breaking it Down 🔹 Tier 1 Capital: The core capital that truly absorbs losses — CET1 + AT1 🔹 Total Exposure Measure: Includes everything — loans, derivatives, securities financing transactions, and even off-balance sheet commitments. 📊 Example in Numbers Component Amount (₹ crore) Tier 1 Capital 5,000 Total Exposure 150,000 Leverage Ratio 3.33% ✅ This bank meets the Basel III minimum requirement comfortably. 🏦 Regulatory Reporting in India Under RBI’s Basel III framework: Return Name: Basel III Leverage Ratio (BLR) Frequency: Quarterly Mode: XBRL via CRILC This helps regulators monitor if banks are maintaining adequate capital across total exposures — not just risk-weighted ones. 🔍 Why It Matters While risk-weighted ratios (like IRB or Standardized) capture how risky assets are, the Leverage Ratio ensures banks can’t game the system by underestimating risk weights. It’s a simple safeguard that prevents complex problems. Measure Risk-Based (IRB/SA) Leverage Ratio Basis RWA Total Exposure Focus Credit Risk Quality Balance Sheet Simplicity Strength Sensitive to risk Prevents over-leverage Weakness Model dependent Not risk-sensitive. 💭 Final Thought As financial models evolve and risk analytics grow smarter, the Basel III Leverage Ratio quietly reminds us of something timeless: > “It’s not the complexity that protects you — it’s discipline.” The Leverage Ratio isn’t glamorous, but it’s one of the silent heroes keeping our financial system stable. #Finance #RegulatoryReporting #BaselIII #LeverageRatio #RiskManagement #Banking #CapitalAdequacy #IFRS9 #BaselFramework #Day25

📑 𝗙𝘂𝗻𝗱𝗮𝗺𝗲𝗻𝘁𝗮𝗹 𝗥𝗲𝘃𝗶𝗲𝘄 𝗼𝗳 𝗧𝗿𝗮𝗱𝗶𝗻𝗴 𝗕𝗼𝗼𝗸 (𝗙𝗥𝗧𝗕) . An insight on how GFC led to the development of Fundamental Review of Trading Book (FRTB) rules: Financial instruments subject to similar interest rate risk and credit spread risk could result in materially different minimum capital requirements, depending on whether the positions are held in trading book or banking book. This reflects the different notions of risk between positions in these two books. 📜 𝗕𝗮𝗻𝗸𝗶𝗻𝗴 𝗕𝗼𝗼𝗸 𝗜𝗻𝘀𝘁𝗿𝘂𝗺𝗲𝗻𝘁𝘀: Banking book instruments are generally intended to be held to maturity, with changes in market value not necessarily reflected in financial accounts or capital requirements. Credit default risk is the primary focus of such exposures. 📜 𝗧𝗿𝗮𝗱𝗶𝗻𝗴 𝗕𝗼𝗼𝗸 𝗜𝗻𝘀𝘁𝗿𝘂𝗺𝗲𝗻𝘁𝘀: By contrast, banks holding a similar portfolio of financial contracts in the trading book are exposed to fair value losses through income associated with both general movements in market interest rates and idiosyncratic changes in credit spreads, along with default risk. As a result, each of these market risk elements is treated under the trading book’s Pillar 1 framework, while IRRBB has remained within the Pillar 2 framework. 📜 𝗥𝗲𝗴𝘂𝗹𝗮𝘁𝗼𝗿𝘆 𝗔𝗿𝗯𝗶𝘁𝗿𝗮𝗴𝗲: In the lead-up to the crisis, banks could designate instruments with observable market prices to the trading book by claiming trading intent – a subjective concept which was difficult for supervisors to invalidate. 📜 𝗖𝗿𝗶𝘀𝗶𝘀 𝗦𝗶𝘁𝘂𝗮𝘁𝗶𝗼𝗻: During Great Financial Crisis, many positions became illiquid and some banks avoided the impact on income by re-designating such positions to the banking book and subjecting them only to the minimum capital requirements for credit default risk. 📜 𝗙𝗥𝗧𝗕: Post-crisis, the Committee initiated a fundamental review of the capital framework for market risk, which, among other things, identified the different capital treatment of similar types of risks across a bank’s balance sheets. In the FRTB, the Committee decided to pursue the revised boundary supplemented with a list of instruments presumed to be designated to the trading book. In taking this path, the Committee focused on addressing potential regulatory arbitrage across the banking book/trading book boundary. This includes investigating the possible development of a Pillar 1 capital requirement for IRRBB, addressing CSRBB, placing restrictions on shifting positions across boundaries, and limitations on internal risk transfers (IRT). 🔄 Kindly repost it in your network if you found it helpful. 🔔 Subscribe our YouTube Channel: https://lnkd.in/g59T2r_j #frtb #marketrisk #creditrisk #liquidityrisk #riskmanagement #tradingbook #bankingbook #irrbb #csrbb #regulatoryarbitrage #bcbs #risk #finance #frm #cfa #cqf Sudhanshu Gaby KSHITIJ Mihir Dimitri Jon Johannes Ernest Andrew Marcos Aswath

Banking Instability Alert: Stress Testing Under Legal Challenge The banking sector faces unprecedented regulatory uncertainty as major institutions challenge the Federal Reserve's stress testing framework through litigation. Fed Governor Barr's September 25 speech reveals deep concerns about proposed changes that could "substantially impair stress testing" and make banks less resilient. Key developments creating instability: • Bank trade associations are suing the Fed over stress test opacity and capital requirements • Proposed "full transparency" changes could allow banks to game the system, reducing actual capital protection • Regulatory burden from Basel III implementation continues to strain smaller institutions • Two-year averaging of stress test results may mask emerging risks • Gaming attempts already documented, including "macro hedges" that provided false protection The risks are severe: → Weakened stress tests that fail to identify vulnerabilities before the next crisis → Reduced capital buffers as banks optimize around known test parameters → Increased systemic risk from concentrated exposures in lightly-tested assets → Loss of supervisory flexibility to address unique bank risk profiles → Potential repeat of pre-2008 regulatory capture and complacency As Governor Barr warned: "A loss in credibility is bad for the banks, the banking system, financial stability and, ultimately, American families and businesses." While regulators debate framework changes, smart wealth managers are diversifying beyond traditional banking systems. Varidiem's international jurisdiction diversification, offshore entity formation, and crypto/stablecoin strategies provide essential protection from domestic banking instability. Secure your financial independence: www.varidiem.com #WealthProtection #FinancialFreedom #OffshoreStrategy #CryptoStability #AssetProtection #BankingInstability #Varidiem

Let's talk about Counterparty Risk When a bank enters into a derivative trade (like a swap or a forward contract), they face two separate risks. The first is the market risk. The trade itself moving against them. The second is usually subtle which is the Counterparty Credit Risk (CCR). This is the risk that your trading partner goes bankrupt before the contract is settled.  If they default when the trade is favorable to you, you lose the profit you were owed. Basel ensures banks manage this risk using two main tools: 1. Netting Agreements: This is like offsetting bills. If you owe your partner $5 million on one trade and they owe you $3 million on another, a netting agreement means your exposure is just $2 million. Basel encourages this because it dramatically reduces the actual risk in the system. 2. Collateral (Margining): This is the security deposit. Banks routinely exchange collateral (often cash) with their trading partners daily. If the value of the trade moves in your favour, your partner must send you collateral to cover the gain. This means the risk of losing a large amount is minimized daily. Here is the bigger picture: Basel's rules around CCR are about creating a framework of trust and protection. They ensure that banks are not just calculating the price of the derivative, but actively managing the financial health of the person on the other side of the trade. In your view, which poses the greater challenge for banks today: market risk from volatile prices, or counterparty risk from defaulting partners?

Significant Risk Transfers (SRTs) have quietly become one of the fastest-growing areas of the credit market. Over the past few years, SRTs have moved from being a niche tool for regulatory capital relief to a mainstream structured credit product attracting banks, insurers, and private credit investors alike. They now appear in more and more research pieces — and were even the subject of a recent IMF study on potential systemic implications. In my latest article, I take a closer look at: - How SRTs work and why they’ve become popular among banks and investors - The typical structures, reference portfolios, and covenant protections - The return and risk dynamics compared to similar securitized instruments Understanding this market is becoming increasingly important for anyone investing in credit or following bank balance sheets. https://lnkd.in/dPzXD6uc

Reserve Bank of India has set the ball rolling with release of its draft guidelines for implementing the Standardised Approach (SA) for credit risk under Basel III norms, effective April 1, 2027. This marks a significant shift towards a more risk-sensitive and globally aligned capital framework for Banks, moving away from the earlier regulations that relied on relatively broad-brush risk weights and static regulatory prescriptions. These regulations encourage better credit underwriting practices, portfolio diversification and prepare the Indian Banks for global comparability.   💱 Some of the key changes from the previous regulation include: * Granularity & Risk Sensitivity: The new regulations now require a more granular assessment of the exposures of banks across corporates, MSMEs, real estate which are further broken down into various nuanced categories such general exposures, specific exposures, project finance, transactors for credit cards, etc. * Risk Based Adjustments: Banks are now required to perform an annual due diligence on their portfolio (including considerations around climate related risks) and make necessary adjustments to the risk weights if the Bank perceives higher risk. Banks also need to adjust risk weights based on Probability of Defaults (PDs). * Credit Risk Mitigation (CRM): Banks are now mandated to use the comprehensive approach for CRM purposes ie consider the collateral values with supervisory haircuts. RBI expanded the list of eligible collateral but also placing stronger emphasis on enforceability and on margining/liquidation of collaterals.   💰 Impact on Banks: * Additional Capital Charge: Banks with significant unrated corporate exposures, real estate exposures, unsecured personal loans exposures and exposure to borrowers with large unhedged foreign currency exposure would see a higher capital requirements. * Capital Relief: Banks with exposures to low LTV home loans, MSMEs and rated corporates could see a capital relief with reduced risk weighting on these categories.   ⭐ Broader Market Implications: Push for Ratings and Governance The revised framework creates a strong incentive for corporates to obtain external credit ratings, as unrated exposures attract high risk weights. This shift is expected to: * Increase demand for credit ratings, bringing more corporates under the scrutiny of rating agencies thereby drive greater transparency and disclosure of financials. * Encourage better corporate governance practices, since strong governance and risk management positively influence ratings and creditworthiness.   📈 Preparing for 2027 As these new regulations kick in, Banks would need to assess their preparedness in terms of data quality, robust risk governance frameworks and internal SOPs for due diligence and PD based adjustments. Strategic portfolio planning will be critical to optimize capital levels under these proposed norms. Amit KabraSarvesh WartyDipti Sharma