Even though investment firms have different primary business models versus lending institutions, to date, for regulatory purposes many have been considered credit institutions and accordingly report under the Basel-driven capital requirements regulation (CRR). The CRR approach is too broad to effectively account for the risks faced by both investment firms and credit institutions. The Investment Firms Regulation (IFR) seeks to create requirements proportionate to the size of the firms expected to comply, based on designated categories determined by thresholds that use K-factors (quantitative indicators). However, just as it may be surprising that kryptonite makes Superman weak, the IFR regime unexpectedly makes things more complicated.
The K-factor methodology is the most significant change to the IFR regime and may cause the most distress for organizations. Firms must continuously monitor eligibility thresholds and provide evidence of such to regulators, all while accounting for the risks covered by K-factors — market, credit and large exposure.