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Basel 4 – Emerging from the mist

Basel 4 – Emerging from the mist

Since 2013, there have been signs we were moving beyond Basel 3.


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Emerging from the mist

Regulators around the world – and the banks themselves – have fast-tracked the implementation of Basel 3 as a safeguard against another financial crisis, raising the capital levels that banks must hold. But there are strong signals that we are already moving beyond this to the emergence of the next iteration of the capital standards framework, or ‘Basel 4’.

The path to Basel 4

Recent developments are likely to result in three changes that might form the basis of Basel 4:

  • Requiring banks to meet a higher minimum leverage ratio;
  • Restricting the advantages to banks of using internal models to calculate their capital requirements; and
  • Greater disclosure by banks.

Possible implications for banks

These moves towards Basel 4 have three major implications.

Banks are likely to face significantly higher capital requirements and will likely need to improve their capital management. A less risk-sensitive approach to both capital ratios and internal modelling is likely to force banks to re-evaluate the balance between lower and higher risk businesses.

‘More and more of everything’

Basel 3 is but one element of the multiplicity of regulatory reforms under way – the ‘more and more of everything’ approach to regulation. Banks need to consider the combined impact of all these initiatives, in addition to the impact of Basel 3 and of moves towards Basel 4, on their strategies and business models.

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