The implementation of Basel IV leads to even more extensive data requirements for Basel monitoring and quantitative impact studies The Basel proposals foresee various changes that make standardized approaches more risk-sensitive. In general, changes tend to add more layers, categories, and requirements, making standardized approaches more complex. CRR III and CRD VI contain important new ESG requirements for banks and require the EBA to accelerate the publication of recommendations on capital requirements by June 2023. In addition, the relevance of the macroprudential framework to address these risks will be reviewed by 2022. The third tranche of global banking regulation, adopted by the Basel Committee in 2009 in response to the global financial crisis. The reforms raised banks` capital ratios to 2.5% and introduced a countercyclical capital buffer, leverage ratio and liquidity requirements. Banks were quick to refer to the BCBS principle, according to which capital requirements should not be higher as a result of the reforms. However, Basel 4 will increase capital requirements for banks that may be undercapitalized, just as the framework should work. At the system level, the relative cost of capital for banks will change depending on the business model. Banks should consider how to deal with possible increases in their capital requirements, for example by combining Pillar 1 and Pillar 2 measures and ensuring thorough capital planning. Basel I: Formerly known as the Basel Capital Accord, Basel I was published in 1988. Its aim was to respond to what central bankers saw as the need for a “multinational agreement to strengthen the stability of the international banking system and eliminate a source of competitive inequality resulting from differences in national capital requirements”.
Capital requirements refer to the amount of liquid funds a bank must hold to meet its potential obligations. Basel I called on banks to maintain a minimum active capital-to-risk ratio (RWA) of 8% until the end of 1992. This Standard establishes minimum margin requirements for non-centrally cleared derivatives. These requirements reduce the systemic risk associated with unstandardized derivatives by reducing the risk of contagion and overflow and promoting central clearing. And here, opinions are divided: regulators insist that implementation must be pursued in accordance with the BCBS schedule and without major deviations from the globally agreed standard. Banks recommend taking into account the additional stresses to which they would be exposed, in particular as regards additional capital requirements, the production floor and considerations of proportionality and regional specificity. PwC has already developed numerous thematic solutions and project approach templates that will make it easier for your bank to implement Basel IV requirements. The European Commission has introduced a new framework that includes a classification system and related requirements for the authorisation, regulation, reporting and supervision of BDCs in the EU.
The European Commission had originally planned to include mandatory FRTB standards under CRR II. However, following the revision of the standards published by the BCBS in 2019 in combination with updated schedules, the FRTB was included in crR II for reporting purposes only. The CRR is now amended to reflect the revised 2019 FRTB standards, with the proposal to move to mandatory capital requirements for market risk and CVA, which would come into force on 1 January 2025. This timeline differs from the BCBS proposal of January 1, 2024. This standard describes the framework for risk-based capital requirements. The first Basel framework was introduced in 1988, followed by Basel II in 2004, which expanded the standard rules, including the ability for banks to use their own internal risk models to calculate their capital requirements. In September 2021, Carolyn Rogers, General Secretary of the BCBS5, expressed concern that some stakeholders continue to push against the consistent and timely implementation of Basel 4, reflecting that some “fault lines” in the banking system “remain as important as they were before the pandemic”. In particular, it highlighted banks` measurement of capital requirements using internal models and the need for a production floor to address consistency and comparability issues. It also rejected arguments for a disproportionate impact on some banks and jurisdictions, saying that “any stakeholder arguing that a global standard needs to be adjusted at the national level to reduce the impact on outlier banks has lost sight of the purpose and value of global standards.” PwC has developed a range of quantitative tools to help your bank meet QIS regulatory requirements efficiently, effectively and sustainably. Learn about the features of these tools on the following pages. It is also possible that legislative and regulatory proposals lead to different approaches in different regions. While it`s too early to say how significant these differences could be, banks with international operations need to consider the potential for different requirements in each major location and adapt accordingly.
In December last year, the Basel Committee on Banking Supervision (“BCBS”) formally presented the new recommendations on setting capital requirements for the banking sector, commonly known as “Basel IV”. The new regulation will include reforms to the standardised approach to credit risk, the IRB approach, the quantification of CVA risk and operational risk approaches, improvements to the leverage ratio framework and the finalisation of the production workshop. Deloitte has developed a placemat that highlights and develops the most important changes from Basel III to “Basel IV”. Basel III is an international regulatory framework for banks developed by the Basel Committee on Banking Supervision (BCBS) in response to the 2007-2008 financial crisis. It contains various rules on capital and liquidity requirements for banks. The 2017 reforms complement the original Basel III. The implementation of the Basel IV framework is already a remarkable challenge for the European banking landscape, as the methods for determining capital requirements need to be revised. Capital calculations are basically adjusted for all types of risks. This standard describes the simple, transparent and non-risk-based leverage ratio. The objective of this measure is to limit the accumulation of debt capital in the banking sector and to strengthen risk-based requirements through a simple measure that is not based on the risk of a “backstop”.
Critics of the reforms, particularly in the banking sector, argue that the standards have led to a significant increase in capital requirements, although the Basel Committee`s stated intention was that changes to the standards would be capital neutral in terms of overall impact, but not necessarily neutral for individual banks. [6] And the EU seized the opportunity to include in this package additional regulatory changes, including (i) environmental, social and governance (ESG) requirements, (ii) the introduction of a new framework and classification system requiring a new authorisation of all existing branches in third countries, (iii) amendments to the crisis management framework for banks and (iv) new measures to harmonise powers and monitoring instruments. The Basel III Reform Standards: Post-Crisis Finalization, sometimes referred to as Basel 3.1 or Basel IV, are changes to the international standards on capital requirements for banks agreed by the Basel Committee on Banking Supervision (BCBS) in 2017 and to be implemented in January 2023. They are changing international banking standards known as the Basel Accord. [1] According to initial indications, if the European Commission sticks to the “single pile”, it will look for other ways to keep capital increases below 10%, for example by applying the requirements at the highest level of consolidation. The EU could choose to use the flexibility of the framework to, for example, reduce the impact of historical capital losses, introduce transitional provisions for credit to unrated companies and low-risk mortgages, and maintain regional spin-offs for small businesses, infrastructure and derivatives.