This guide explores Basel IV and the evolution of the Basel regulatory framework. Basel IV marks a major step in promoting global banking stability and resilience. As the latest version, it addresses gaps in earlier frameworks and strengthens financial institutions.
The Conception of Basel IV
After the financial crises of the early 21st century, the Basel Committee on Banking Supervision (BCBS) launched Basel IV. This initiative seeks to correct flaws in the existing framework and strengthen banking sector stability.
The aims of Basel IV
Reduce RWA volatility: Basel IV aims to decrease the variability of risk-weighted assets (RWA), thereby enhancing resilience within the banking sector.
Enhance risk sensitivity: By introducing a more granular approach to risk-weight calculations, Basel IV promotes a sensitivities-based framework to account for complex risk profiles.
Limit discretion in internal models: To reduce RWA variability, Basel IV restricts the use of internal models for certain exposures, ensuring more consistent RWA assessments.
Implement output floors: Basel IV sets a minimum threshold for RWAs calculated by internal models, establishing a stronger base for institutional risk evaluation.
A brief history of Basel IV
Basel IV marks a major evolution in regulatory capital standards for banks. It brings the most substantial changes seen in a decade. Originally developed by the Basel Committee on Banking Supervision (BCBS) in 2017, this framework is now in its final stages of global implementation.
However, if there is a Basel IV there must surely have been three previous iterations – and indeed there have been.
Before Basel IV – Basel I, II, III and IV are a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) to promote financial stability.
| Introduced in | Framework name | Purpose |
|---|---|---|
| 1988 | Basel I | Focused on setting minimum capital requirements for banks based on the riskiness of their assets. It required banks to maintain a minimum capital ratio of 8% of their risk-weighted assets. |
| 2004 | Basel II | Built upon Basel by incorporating more detailed risk assessment methods. It introduced three main pillars: minimum capital requirements, supervisory review, and market discipline. This allowed for a more risk sensitive approach to capital requirements. |
| 2008 | Basel III | Introduced after the 2008 financial crisis, further strengthened the regulatory framework |
| 2023 | Basel IV | To address shortcomings in the existing regulatory framework |
Above all the primary aim of the Basel standards has been to create a more resilient banking system capable of withstanding financial shocks.
The global adoption and implementation landscape
The global adoption of Basel IV brings significant complexities. Financial centres implement the framework differently, creating an uneven regulatory landscape. While Basel IV aims to stabilise the banking sector, it also introduces several challenges.
Fragmented adoption
Different regulatory approaches across regions create disparities. As a result, firms face uneven competitive positioning, which complicates their operations.
Operational challenges
Additionally, varying Basel IV requirements force firms to adapt their processes. This often leads to inefficiencies and increased operational burdens..
Potential new risks
Moreover, fragmented implementation can introduce unexpected risks. These risks not only affect individual firms but may also disrupt the broader financial system.
Clearly, Basel IV marks a major step forward in strengthening global banking resilience. However, institutions and regulators must stay alert. The complexities and challenges of adoption require careful management to achieve the framework’s full potential.
Adoption of Basel by country
To see the latest developments on the adoption of Basel by country, read the latest progress report here – Progress report on adoption of the Basel regulatory framework (bis.org)
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