Welcome to the Blog OnMyBubble.com - Latest news from Basel IV: Part Two Blog Last modified 2017-05-08
In part one we discussed the meaning of Basel IV and what it might mean for banks implementing it. Here we will go into a little more detail on the various aspects of the umbrella term Basel IV and offer some opinions on the wider implications of the new changes being brought in on top of the Basel III Accord.
When we talk about Credit Risk and the proposals for the IRB approach, Internal Rating Based approach, it is unlikely that banks will be able to use the Advanced Approach which allows banks to calculate all risk parameters on their own to use that approach for specialised lending.
Specialist lending banks may therefore have to move to the standardised approach from the Internal Ratings Based or IRB approach for their portfolios. As a general rule the risk weights in the standardised approach are much higher than in the advanced IRB approaches. Banks can and should expect this as many banks have been creative with their internal risk evaluations in order to circumvent the rules, but in doing so almost brought down the global economy during the period leading to the global financial crisis.
Whereas Basel III may have been a knee jerk reaction to the issues then raised, Basel IV will be more considered, or at least we could expect this. One of the most important tasks that banks can undertake right now it to perform test calculations. This is important because the proposals coming from the Basel Committee are much more Risk Sensitive.
Research by PWC for example has shown a diverse range of outputs, averaging an increase of 40% in Risk Weighted Assets. This could generate a capital requirement of up to three and a half percent. Certain payday lenders for example can therefore expect a tighter squeeze on their capital and many are likely to see themselves on the wrong side of rising interest rates, that will lead to massive portfolio write offs.
Many of these banks , banks that could be regarded as outlier banks, faced increased risk weighted assets of more than 190%. Of course for other banks there will be a decrease in risk weighted assets resulting in them profiting from the new regulations seeing up to a 10% decrease in Risk Weighted Assets - RWAs.
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The Bank for International Settlements (BIS) (in French, Banque des règlements internationaux (BRI)) is an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for
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