Japan’s largest lenders, which became subject to the final Basel III rules at the end of March, diverged by as many as 13 percentage points in how much they compressed credit and counterparty credit risk (CCR) capital charges through internal models – an early indication of how some dealers may be adapting better to the new framework’s restrictions.

Mitsubishi UFJ Financial Group (MUFG) reported internally modelled credit and CCR risk-weighted assets (RWAs) of ¥45.2 trillion ($287.3 billion) – 57% lower than they would have been using standardised approaches (SAs) alone.

In contrast, Sumitomo Mitsui Trust Holdings (SMTH) achieved only a 44.3% reduction on the same class of exposures, with RWAs totalling ¥14.6 trillion.

Mizuho Financial Group, Sumitomo Mitsui Financial Group (SMFG) and the Norinchukin Bank ranked in between, with compressions of 53.8%, 49.4% and 46.8% respectively.

For Norinchukin, the figure marked an improvement from 43.6% reported a year prior, when the bank adopted Basel III-compliant models ahead of schedule.

Despite SMTH’s comparatively lower model efficiency, the bank retained the largest proportion of credit and CCR RWAs under internal models at 96.1%, followed by SMFG at 90.5% and Mizuho at 84.6%.

On the other hand, MUFG was the most encumbered by regulator-set formulas, with its models underpinning only 61.7% of RWAs, just behind Norinchukin with 61.9%.

What is it?

The final batch of Basel III reforms – sometimes referred to as Basel IV by the industry – revises parameters for the regulator-set standardised approach, restricts the use of internal models for credit risk and removes banks’ use of internal models for credit valuation adjustments and operational risk.

It also introduces an output floor, limiting RWAs calculated using internal models to 72.5% of RWAs calculated under the standardised methodology, and establishes a leverage buffer for global systemically important banks.

Basel Committee on Banking Supervision member countries were required to implement the final batch of reforms by January 1, 2023, with full adoption by 2028. However, several major jurisdictions – including the European Union, Japan, the UK and the US – delayed the implementation because of the Covid-19 pandemic.

In Japan, most banks were required to comply by March 2024, with others following by March 2025. Among the Japanese banks tracked by Risk Quantum, Japan Post Bank and Nomura fall into the latter category. Some banks, including Norinchukin and Shoko Chukin Bank, opted for early adoption in March 2023.

The data used in this article relies on banks’ classification of standardised and modelled RWAs, as presented in the CMS1 template of their Pillar 3 disclosures.

Why it matters

Unlike in the market risk department – where operational and regulatory complexities have led banks to abandon internal models – early evidence suggests that credit risk modelling can still provide a competitive advantage despite Basel III’s constraints.

In a highly concentrated banking market such as Japan’s, each lender has its own idiosyncrasies, meaning MUFG’s models, if hypothetically applied to SMTH’s portfolio, may not reap the same extent of RWA savings.

Conversely, SMTH’s extensive use of internal models for virtually all its credit and CCR exposures means incremental improvements may benefit a bigger swath of its book compared with MUFG, where two-fifths of charges still rely on standardised formulas.

The disparity in the levels of compression achieved by different banks through the reforms indicates that continued investment in model efficiencies could be worthwhile, despite the challenges posed by Basel III – at least until capital floors add further complexity to the lenders’ balancing act.

Correction, June 6, 2024: The original version of this article stated incorrectly that Nomura was required to implement Basel III rules by March 2024. The article has been amended. 

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