Basel IV

Basel IV concerns[1] 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] The Basel Committee (BCBS) itself calls them simply "finalised reforms"[3] and the UK Government has called them "Basel 3.1".[4] 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]

Bank regulation and standards
Background
Pillar 1: Regulatory capital
Pillar 2: Supervisory review
Pillar 3: Market disclosure
Business and Economics Portal

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:[5][6]

  • A standardised floor, so that the capital requirement will always be at least 72.5% of the requirement under the Standardized approach;[7]
  • A simultaneous reduction in standardised risk weights for low risk mortgage loans;[7]
  • 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[7]
  • More detailed disclosure of reserves and other financial statistics.

These reforms will take effect from January 2022 (with exception of the output floor, which is phased in, taking full effect only on 1 January 2027).[8]

British banks alone may have to raise another £50Bn in capital in order to meet Basel IV requirements.[9] 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%.[10]

History

Basel III is an international regulatory framework for banks, developed by the Basel Committee on Banking Supervision (BCBS) in response to the financial crisis of 2007-08. It contains various rules on capital and liquidity requirements. The 2017 reforms (Basel IV) complement the initial Basel III. This set of rules has been adopted on 7 December 2017 (14 January 2019 for the adjustment to the market risk framework) and has to be implemented by 2022 (2027 for the output floor).[11][12] As the BCBS does not have the power to issue legally binding regulation,[13] the Basel IV standards have to be implemented by national authorities.

References
  1. 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. "Sixteenth progress report on adoption of the Basel regulatory framework". BCBS. Retrieved 31 May 2019.
  4. "Prudential standards in the Financial Services Bill Policy statement" (PDF). UK Government. 2020-03-11. Retrieved 2020-03-12.
  5. "Basel 4 – Emerging from the mist". KPMG. Retrieved 18 May 2014.
  6. "South Africa: Basel 4 – Emerging From The Mist?". Mondaq. Retrieved 18 May 2014.
  7. "Five things to remember about Basel III - Banking blog". blogs.deloitte.ch. Retrieved 2018-01-09.
  8. "Sixteenth progress report on adoption of the Basel regulatory framework". BCBS. Retrieved 31 May 2019.
  9. "KPMG: UK Banks Facing New £50bn Capital Hole as 'Basel IV' Emerges". International Business Times. September 12, 2013. Retrieved 18 May 2014.
  10. Nicolaus, David (2017-12-19). "Basel IV – capital and strategic planning". KPMG. Retrieved 2018-01-10.
  11. "Finalising Basel III - in brief" (PDF). BCBS. Retrieved 16 July 2019.
  12. "Basel III Website". BCBS. Retrieved 16 July 2019.
  13. "Policy development and implementation review". www.bis.org. 30 October 2015. Retrieved 8 April 2019.

Bibliography
  • Ioannis Akkizidis, Lampros Kalyvas (2018). Basel IV Modelling: Implementation, Impact and Implications, Palgrave Macmillan. ISBN 978-3319704241
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