Capital Considerations Based on Basel III Risk Weightings

The U.S. Basel III final rules on standardized risk weightings went into effect in January of 2015.  While the final rules minimize the impact on the community banking sector, it is still important to understand how Basel III impacts capital requirements.  LoanPricingPRO is designed to accurately calculate the correct equity allocations required under Basel III.  You should consider, at a minimum, the following configuration in your loan pricing model setup.

Unfunded Commitments

The table below shows the risk weightings of various off balance sheet items under Basel I and Basel III rules. One of the major differences between Basel I and Basel III is the new 20% risk weighting assigned to the unused portion of a commitment with an original maturity less than a year.  These previously held a 0% risk weighting.  Your pricing model should have the ability to allocate capital to the unused portion of a commitment based on various risk weightings.
Unfunded Commitments

Highly Volatile Commercial Real Estate

The table below shows the risk weighting assigned to a new category of commercial real estate loans, namely highly volatile commercial real estate (HVCRE).  This new category of loans under Basel III rules carries a 150% risk weighting.  Again, your pricing model should allow for additional allocated capital to commercial real estate loans that fall in the HVCRE category.

Residential Mortgages

Initially, there were proposed Basel III rules on 1-4 family residential mortgages.  The risk weighting of 50% was going to change based on loan to value (LTV) tranches.  Ultimately, this rule wasn’t adopted and retail mortgages will continue to carry a 50% risk weighting.