In the world after the global financial crisis, banks and financial institutions have faced a slew of new regulations since 2008, focused on ensuring capital adequacy. In December 2017 the Basel Committee agreed on the finalisation of Basel III, popularly referred to as Basel IV. The changes, which are expected to enter into force from January 2022 onwards, are summarized in the document d424 “Basel III: Finalising post-crisis reforms

Although not stated explicitly, the changes reflect how regulators are skeptical of the internal models developed by banks, as well as the ratings from the rating agencies. So, it’s not surprising that the salient features of Basel IV include:

• Risk weights based on risk drivers such as interest coverage, which will help reduce variability in a bank’s risk-weighted assets.
• A standardized approach to calculating credit risk, which will serve as a floor for banks that use the advanced approaches.
• Finalizing the design and calibration of the leverage ratio and capital floors

Basel IV tries to address the limitations seen in many of the earlier approaches to measuring capital adequacy, such as use of internal ratings, ratings assigned by rating agencies and value at risk. The new, standardized approach will rely less on rating agencies and internal ratings, and ultimately result in more consistency across banks in terms of how they measure capital adequacy.

Agenda