17-05-2022 13:07

Basel IV: Back to basics

The European Commission has made some changes to the implementation of Basel IV. However, the regulation will still be a gamechanger for both banks and corporate borrowers, according to Nordea On Your Mind.
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Really, another Nordea On Your Mind about banking regulation?

Yes. We sense there is a need for it. Since we released our first Basel-themed Nordea On Your Mind (NOYM) report a year ago, there have been some new developments, and Basel IV (defined by the regulator as finalisation of Basel III) is starting to rear its head in
corporate re-financing discussions as implementation draws nearer. It is complex and good information in a pedagogical
format is hard to come by, so we revisit the topic to help readers understand its implications for corporates.

A slightly different journey to the same endgame

In October 2021, the European Commission proposed a deferral of Basel IV implementation in the European Union by two years to 1 January 2025. In addition, one of its key elements – the output floor, which limits banks' benefits from internal risk models – will be implemented gradually in 2025-30. There will also be a transition period until 2032, during which banks can use lower risk weights when calculating risk-adjusted lending to non-rated large corporates that are internally rated as Investment Grade. In aggregate, this should make the immediate impact of Basel IV on lending to corporates less drastic, but the long-term impact is virtually the same as before.

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

A closer look at why and how corporate borrowers will be affected by Basel IV

Our previous report described the origins of bank regulation, the evolution of the Basel global regulatory framework and the likely impact of Basel IV's implementation on banks' capital requirements and loan pricing. In this report, we explore further how Basel IV will change how banks measure risk in lending to corporates, and how the impact on capital reserve requirements, and thus pricing, will likely change for key parameters such as internal credit ratings and loan maturity. Large corporates (with revenue in excess of EUR 500m) without a credit rating will be among the most negatively affected borrowers.

A 'dumbing down' of risk measurement for the greater good

Putting it very simply, Basel IV will limit the extent to which banks can use internal models to calculate risk-weighted assets (RWA), tie the outcome of the internal models to outcomes from a simpler standardised approach defined by the regulator and cap the benefit in the form of how much RWA can be reduced by using more advanced and accurate internal risk models. EBA, the European regulator, estimates that full Basel IV implementation would increase the Tier 1 capital requirement for EU banks by some 14%, based on their lending books as of the end of 2020. Other studies show that banks will need to pass on the cost of the additional capital to their customers, meaning Basel IV will have a very uneven impact across the globe, with Nordic and northern European banks among the hardest hit. The regulator (BIS) aims to achieve a global harmonisation of risk modelling, with more crude tools but greater faith in the robustness of banks' reported risk-weighted assets. Capital ratios may be lower, but should be more reliable.

Expert voices

We interview Johan Hansing, Chief Economist at industry body The Swedish Bankers' Association, and Antti Lemberg and Jonas Bjarke Jensen, Managing Economists at economics firm Copenhagen Economics, who share their views on the implementation of Basel IV and its likely impact on banks, their customers and other stakeholders.

Explore more publications about Basel IV

Basel IV, or actually finalisation of Basel III, is a major overhaul of global banking regulation. It will change the playing field in banking, particularly for Nordic and European banks. Some of the biggest changes should be in lending to corporates. How can borrowers prepare and mitigate the impact?

Corporate lending under Basel IV

Podcast: Basel IV – A game changer for bank lending to corporates

Basel IV: Unintended consequences of levelling the playing field

Basel IV: A delicate act of balancing simplicity, comparability and risk sensitivity

Basel IV is coming: What you need to know

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Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact viktor.soneback [at] nordea.com (Viktor Sonebäck)

Nordea On Your Mind