Basel IV to bring changes to bank structures

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The Basel Committee on Banking Supervision (BCBS) has released its Basel IV recommendations, under which simpler or standardized models will be emphasized over the use of banks’ own internal models to calculate risk-weighted assets (RWA). Some European banks will have to consider increasing capital reserves to equal 10-15% of RWA.

The recommendations released on December 7 by the BCBS are an update of the Basel III framework, which was aimed at patching the regulatory shortcomings revealed by the 2007/2008 financial crisis, according to a press release sent to the Budapest Business Journal by PwC Hungary.

Under the new rules, banks will be limited in their use of their own internal models to calculate RWA, i.e. their loans and other exposures weighted by risk. At the same time, the standardized approaches used by most banks worldwide will become more risk-sensitive and will reflect developments in global financial markets over the last few years.

A relatively high capital floor of 72.5% will be introduced, meaning that a risk weighting of an asset calculated using a bankʼs internal models can be no less than 72.5% of the calculation generated by regulatorsʼ standardized models.

According to PwC, the Basel IV rules mark the conclusion of work carried out by the BCBS to deal with the aftermath of the global financial crisis of 2007-08.

The new package of rules will be introduced globally with a "big bang" in 2022. In the interim, national lawmakers will need to draft new legislation to reflect the rules and many businesses will need to adjust their strategies. If a bankʼs capital costs increase, this will affect the interest rates and fees it charges its clients. If some business areas no longer prove attractive to banks, other players – such as insurance companies, asset managers, hedge funds or FinTech businesses – may step in, notes the press release.

"The reforms will impact all banks, regardless of their size or business model and regardless of if they use standard or advanced methodology for calculations," said Árpád Balázs, head of the controlling business unit of PwC Hungary. "According to the Basel IV recommendation, the standard model becomes more risk-sensitive, the internal models become more limited," he added.

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