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Basel 4: The way ahead

Basel 4: The way ahead

In December 2017, the Basel 4 standards were finalised.


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In December 2017, the Basel Committee on Banking Supervision (BCBS) finalised the Basel 4 standards, leading to intense debate about how these would affect risk weighted assets and the resulting amount of regulatory capital banks will be required to hold under the new rules. To assess the full impact of these final rules, we are leveraging the insights of our global network to publish a series of articles that focus on specific areas affected by the standards.

Operational Risk: The new Standardised Approach

With the final Basel 4 standards, the BCBS introduced a new single non-model based method for the calculation of operational risk (OpRisk) capital called the Standardised Approach (SA). This replaces three existing approaches under Pillar 1 and is due to apply from 1 January 2022. But does it also pose the risk of reducing incentives for robust risk management within the business due to the lack of risk sensitivity?

Market Risk: Is the output floor a game changer?

The new capital requirement standards issued by the Basel Committee have several implications for market risk when implemented on 1 January 2022. The confirmation of an output floor will potentially constrain the benefits from the use of internal models when determining a bank's risk weighted assets (RWAs). Leaving aside supervisory expectation and guidance on the use of Internal Model Approach (IMA) and the 'non-capital' benefit, is the output floor the final nail in the coffin for the IMA or are there still benefits for banks moving to an IMA for market risk?

CVA Risk: A model-based standard approach

The set of final standards agreed by the Basel Committee in December 2017 for credit risk, operational risk and the output floor also included revised minimum standards for the capital treatment of credit valuation adjustment (CVA) risk. In this article, we discuss the two new approaches replacing the current standard; the Basic Approach (BA-CVA) and the Standardised Approach (SA-CVA). What impact will these have on banks' capital, data and systems and how will they be implemented across the European Union?

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