For a regulator's perspective on Basel IV, Johan Trocmé, Director at Nordea Thematics, turned to Anders Kvist and Maria Blomberg at the Swedish Financial Supervisory Authority (FSA). They describe the aim of simplifying and clarifying the regulations as well as restoring faith in banks' reported risk-weighted capital ratios by improving global comparability.
While the Basel Committee is keen to prevent any signiﬁcant increase in overall capital requirements, it may be unavoidable that outlier banks see changes to their levels, they say. It is, however, too early to predict any changes to the corporate lending arena.
JT: Basel III is a very comprehensive framework for bank regulation, and its ﬁnalisation is now turning into a quite ambitious Basel IV. How would you describe what has driven the need for such a major review?
Although comprehensive, we would not call the current regulatory changes a major review. In fact, it is more a case of completing the intentions behind Basel III, which was an important part of the Basel Committee´s response to the Global Financial Crisis in 2007-08.
Basel III aims to address a number of the shortcomings in the banking system and to provide for more resilient banks. It is the Committee’s answer to the question of how the capital requirements for large, internationally active banks could be made more robust and comparable.
The ﬁrst part of the Basel III standard was agreed upon in 2010, and it was implemented in the EU in 2014. What you call Basel IV is really the ﬁnalisation of Basel III. The standard was ﬁnalised in 2017, but due to the coronavirus pandemic, the Basel Committee has postponed the implementation of ﬁnalisation of Basel III to 2023. Some parts of the standards are to be phased in over several years, and those transitional arrangements have also been postponed.
It is easy to forget that the agreed Basel standard needs to be transposed into legislation before it takes legal effect. We are still waiting for the EU Commission´s proposal for how the standard should be implemented into EU regulation. There is normally a negotiation process comprising the European Parliament and the EU member states after that. It is also quite usual that proposals include additional suggestions that are not included in the standard. That said, we are still facing uncertainty on what the actual regulation will look like in the end. It will probably take quite a long time before we see the full effect of the requirements of the new regulation.
JT: How would you, in simple terms, describe the key changes in Basel IV compared to Basel III?
The ﬁrst part of Basel III focused, among other things, on increasing the quality of the capital that banks must hold in order to better be able to absorb losses. Other focus areas were the level of capital and buffers, the introduction of the leverage ratio, as well as liquidity requirements.
The main objective of the ﬁnalisation of Basel III now at hand is to improve comparability and reduce the risk of unjustiﬁed differences in capital requirements between banks and across jurisdictions by focusing on the calculation of the risk-weighted assets. In addition, a need to simplify and clarify the regulations has been identiﬁed. To give some example of what this means in practice, the approaches for determining the risk-weighted assets for credit risk, operational risk and market risk are being revised. Some limitations are introduced in banks´ use of internal models when determining the risk-weighted assets, for example, the standard does not permit the modelling of all credit risk parameters for corporate customers belonging to a group with a total consolidated revenue greater than EUR 500m, since there is not sufficient credit-loss data. The biggest change is, however, the introduction of a so-called output floor that limits how low the banks’ risk-weighted assets may be.