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Basel 4

An overview

An overview of Basel 4 highlighting its main components, its potential impact and the actions that banks should be taking to implement these changes.

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Basel 4 was (almost completely) finalised by the Basel Committee in December 2017, and is due to be implemented from January 2022.

The December 2017 agreement included substantial amendments to the capital treatment of credit risk, operational risk and the credit valuation adjustment, the imposition of an output floor, revisions to the definition of the leverage ratio and the application of the leverage ratio to global systemically important banks. A revised market risk framework had already been largely finalised in January 2016.

In the EU the full implementation of Basel 4 will require not only finalisation of the CRR2/CRD5 package (covering mostly the revised market risk framework) but also the introduction of a CRR3/CRD6 package for the other elements of Basel 4.

The EU has already implemented Basel 3 through the Capital Requirements Regulation (CRR) and the revised Capital Requirements Directive (CRD4). These covered the quantity and quality of capital that banks should hold, the introduction of a minimum leverage ratio, two new minimum liquidity ratios (the LCR and the NSFR), a tougher capital treatment of securitisations, and the use of the counter cyclical capital buffer as a macro_prudential tool.

We present here a primer for Basel 4, highlighting its main components, their potential impact on major EU banks and the actions that banks should be taking to implement these changes and to mitigate (where possible) their impact.

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