Basel IV, Basel III and the revision's potential and scope

 

“All Basel Accords have their positives and negatives. Consequentially, today banking industry is better prepared to face the future crisis but overwhelmed with complex regulatory reports and ratios. Hence, Basel IV should focus on developing sound data management, risk transparency, and accurate, comprehensive and timely risk reporting. In addition, the new Basel accord need to simplify risk ratios while keeping risk sensitivities.”

 Vera Economou

Raiffeisen Bank International AG, Austria

Senior Liquidity Risk Manager

 

I it is worth noting that the principal idea of the Basel III is to set up a legislative measures by which banks will stay functioning not only in normal liquidity times but also in a stress liquidity times.

 

To achieve that goal many topics were covered on liquidity filed (LCR implementation), capital (capital buffers for various requests) and leverage limitation (leverage ratio).

 

Basel III framework as international regulatory provisions for the banks set by the BCBS (Basel Committee on Banking Supervision) was adopted in 2010, implementation in the EU started in 2013 by phase in implementation up to 2019.

 

Implementation into European banking law has been done by following sets of directions:

  • DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC >>> known as CRD IV
  • REGULATION (EU) No 575/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 >>> known as CRR 575

 

Nevertheless, to adequately capture post – crisis reform initiatives, upgrade of the BCBS standard has been done in 2012, to again embrace capital requirements for market risk (interest rate risk), credit risk (standardized approach) and capital buffers (TLAC, leverage ratio).

 

To transpond this rules into EU Directive and Regulation (from global BCBS standard) by full implementation of the Basel III (as of phase in) together with the new requirements (as banking industry is calling Basel IV), EU Commission in November 2016, presented review of prudential requirements (Capital Requirements Directive and Regulation – known as CRD-V package / CRR II.

 

Generally CRD V / CRR II captures following parts (in short):

  • A binding net stable funding ratio (NSFR)
  • A binding leverage ratio
  • A fundamental review of the trading book (FRTB)
  • A new standardized approach for counterparty credit risk (SA-CCR)
  • Standards on the total loss-absorbing capacity (TLAC)
  • Intention to increase proportionality of the EU rules
  • Intention to promote investment in the economy through encouraging SME lending and infrastructure financing

To wrap it up, the goal of the revision is to effectively manage long term funding (by NSFR), reduce leverage (leverage ratio), improve market risk, distinguish management tools for big/ mid/ small banks (proportionality).

 

To conclude, Basel IV is the upgrade of Basel III, because by having legislative sets (EU banking law) governing body tends to minimize the impact of the capital requirements on the real economy.

 Tihomir Bublic

Hrvatska poštanska banka, d.d.. Croatia

Executive Director of Asset Liability Management

Collaborators

  • Tihomir Bublić
  • Executive Director of Asset Liability Management
  • Hrvatska Poštanska Banka, Croatia
  • Vera Economou
  • Senior Liquidity Risk Manager
  • Raiffeisen Bank International AG , Austria