As a response to the global financial crisis the Basel Committee on Banking Supervision published in December 2017 the new capital Framework, referred to as the Basel IV agreement. Providing a regulatory foundation for a resilient banking system that supports the real economy. This new capital agreement will have a significant impact on the European Banks, hitting the Northern European Banks even harder. Basel IV is bridging the gap between the current standardized approach and internal models by the introduction of the Standardized Output Floor. Both the input floor and output floor result in less risk sensitive regulatory capital. Given the magnitude of the impact of Basel IV, it is not only about regulatory compliance, but it also affects the business in client pricing. Questions as how to pick the right clients and avoid mis-pricing under Basel IV need to be answered. This requires timely action by banks to fully understand the impact and steer the bank in the right direction: no time to waste!
Which actions should you take as bank?
The following topics require close attention:
Impact assessment: Banks need to fully understand the impact of Basel IV on their portfolio and/or asset classes in terms of risk-weighted assets, income and CET 1.
Mitigation actions: Given the significant increase of regulatory capital banks should take into account all available mitigation measures to reduce the overall impact of Basel IV.
Bank Steering: The risk and return profiles of the different portfolio's will change under Basel IV and capital, including the impact of the output floor need to be allocated and reflected in client pricing.
Implementation: Regulatory compliance means that IT systems, policy and procedures need to be adjusted to be able to report Basel IV risk-weighted assets.
By 1 January 2023 banks need to be ready to report Basel IV capital to their regulator. This is already a one year deferral compared to the initial implementation date. It now seems, but it is by no means certain that, the draft legislation (CRR3) is expected to be published by the European Commission in the second quarter of 2021.
How can we help?
With the effective application timeline of 1 January 2023 getting closer, banks should have a dedicated project team up and running to achieve Basel IV compliancy and involve the business in order to timely steer the bank. KPMG can help with the whole implementation process, from impact analysis, mitigation and bank steering to planning and execution of the implementation. Our highly experienced team with deep knowledge of Basel IV gives us the unique capability to help you navigate through the complex regulatory requirements and achieve both regulatory compliancy and desired business benefits. KPMG has developed tooling for calculating, analyzing and reporting of Basel IV capital requirements.
For any further information, please contact Mark van Vugt.