Analysis of the impact of a constantly evolving regulatory framework on credit risk capital requirements within the EU banking environment: Sensitivity Analysis on a specific Credit Portfolio within BNP Paribas Corporate and Institutional Banking

This project master’s thesis is mainly divided into two parts. The first one (the theoretical part) focuses on analysing the impact of the Basel Regulations on credit risk capital requirements within the European Union banking environment. The most relevant aspects of each regulatory framework (from Basel I until the current setting and beyond) will be highlighted, contextualised and compared to one another. A critical mindset will be adopted to identify the improvements and shortcomings of each regulatory setting. The European Union implementation will be detailed only for the latest framework (Basel III). Even if the focus will mainly be on credit risk, other financial risk dimensions (when deemed relevant) will be introduced (e.g. market risk). The second part of this thesis (the practical part) will consist of a real-life case study within the BNP Paribas CCM department. We will perform a sensitivity analysis on a portfolio of corporate and institutional credit exposures. Our goal will be to assess the change in the RWA if we bring the portfolio from a standardised approach (based on external ratings) to a more advanced approach (using internal models). We will also include some considerations regarding the latest Basel regulatory developments (what we will call Basel IV). All together these two parts will allow us to answer the following research questions: “What is the underlying rationale that is pushing the Basel Committee to promote a credit risk regulatory framework based on greater simplicity, comparability and risk sensitivity?”; “Will the latest regulatory developments induce an increase or a decrease in risk-weighted assets figures for this specific credit portfolio, within the scope of the Migration Single Branches project?”;“ Will the latest regulatory developments eliminate the previously existing incentive to migrate this specific credit portfolio from a standardised to a more advanced approach?”.