Basel IV

Basel IV is a contested term[1] for the changes agreed in 2016 and 2017 to the international banking standards known as the Basel Accords; regulators argue that these changes are simply completing the Basel III reforms, agreed in principle in 2010-11, although most of the Basel III reforms were agreed in detail at that time.[2] Critics of the reform, in particular those from the banking industry, argue that Basel IV require a significant increase in capital and should be treated as a distinct round of reforms.[1]

Requirements

Basel IV introduces changes that limit the reduction in capital that can result from Banks' use of internal models under the Internal Ratings-Based approach. This includes:[3][4]

  • A standardised floor, so that the capital requirement will always be at least 72.5% of the requirement under the Standardized approach;[5]
  • A simultaneous reduction in Standardised risk weights for low risk mortgage loans;[5]
  • Requiring banks to meet higher maximum leverage ratios (an initial leverage ratio maximum is likely to be set as part of the completion of the Basel III package);
  • A higher leverage ratio for Global Systemically Important Banks (G-SIBs), with the increase equal to 50% of the risk adjusted capital ratio[5]
  • More detailed disclosure of reserves and other financial statistics.

British banks alone may have to raise another £50Bn in capital in order to meet Basel 4 requirements.[6] The average Common Equity Tier 1 (CET1) capital ratio for major European banks is estimated to fall by 0.9%, with the biggest impact on banks in Sweden and Denmark of 2.5% - 3%.[7]

History

Basel III's rules increased the amount of capital that banks must hold, and set a core tier 1 capital ratio of 6%. The technical implementation deadline for Basel III is 2019, but recent developments in the banking market have suggested that even stricter rules may be applied by a later framework, which has been dubbed "Basel 4".[8] The Basel Committee on Banking Supervision released a consultative paper, seeking out views on the Committee's plan to change how capital requirements and market risks are calculated.[9]

References

  1. 1 2 Davies, Howard (2017-12-21). "The Last Basel Round? by Howard Davies". Project Syndicate. Retrieved 2017-12-27.
  2. ↑ "Regulators look ahead to 'Basel 4'". ICAEW. Retrieved 18 May 2014.
  3. ↑ "Basel 4 – Emerging from the mist". KPMG. Retrieved 18 May 2014.
  4. ↑ "South Africa: Basel 4 – Emerging From The Mist?". Mondaq. Retrieved 18 May 2014.
  5. 1 2 3 "Five things to remember about Basel III - Banking blog". blogs.deloitte.ch. Retrieved 2018-01-09.
  6. ↑ "KPMG: UK Banks Facing New £50bn Capital Hole as 'Basel IV' Emerges". International Business Times. September 12, 2013. Retrieved 18 May 2014.
  7. ↑ Nicolaus, David (2017-12-19). "Basel IV – capital and strategic planning". KPMG. Retrieved 2018-01-10.
  8. ↑ "KPMG Warns Over £50 Billion 'Basel 4′ Capital Hole". Moneybeat. Retrieved 18 May 2014.
  9. ↑ "Introducing "Basel 4"?… Basel Proposes Changes to Trading Book Market Risk Capital Requirements". Advantage Reply. Missing or empty |url= (help)
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