The implementation of the Basel 3.1 finalization (a.k.a. Basel 4) is one of the biggest priorities for banks in 2024. They have a last window of opportunity to recalibrate their compliance approaches and strategies, refine their systems and ensure that they are fully equipped to navigate the complexities of the Basel 4 landscape.
Even for small financial institutions that calculated their capital requirements based on standardized approaches up until now, there are plenty of important amendments to implement and comply with as from January 2025.
The changes to the Basel rules create significant work for banks. However, this should be considered as an opportunity, not only to ensure regulatory compliance but also to consider the capital impacts and how their business should evolve to deliver future profitability.
KPMG in Belgium has the skills and expertise to support you through all the stages of this transformative journey. Read on for a summary of our views on the challenges banks will likely face as they look towards implementation and to learn more about potential strategies for successfully navigating the complex Basel 4 requirements.
Timeline
After a preliminary agreement was reached in the trialogue procedure between the EU Commission, Parliament, and Council on 27 June 2023, and the preparatory bodies of the Council and Parliament endorsed the banking package in December 2023, nothing stands in the way of implementing Basel 4 in the EU.
The comprehensive new regulations for determining risk-weighted assets are to be applied as of January 2025, gradually phasing out various transitional measures until the end of 2032. Banks now have fewer than 12 months to prepare.
An extra challenge for Belgian banks compared to their European peers is the ineligibility of the mortgage mandates as collateral under the Standardized Approach for credit risk. This highlights the need to strategically refine existing policies and practices, adjust operating models, and make good use of the balance sheet optimization opportunities - not just meeting regulations.
Implementation concerns
Banks have significant work to do to ensure timely compliance with the Basel 4 requirements.
This includes, but is not limited to:
- Standing up and executing a strategic implementation program;
- Performing gap analysis assessments against the new rules;
- Data sourcing for new attributes required for real estate, unrated corporates, and institutions;
- Reviewing and updating existing policy interpretations;
- Identifying and making necessary changes to operating models;
- Building and implementing RWA calculators for the new standardized approaches for credit, market, and operational risk;
- Building the standardized floor calculation for Internal Ratings Based (IRB) banks;
- Submitting model applications or re-applications to continue using IMA and IRB approaches; and
- Re-visiting impacts with front office and educating board and executive management.
Implications
Basel 4 will fundamentally change the way in which banks need to manage their balance sheets, presenting opportunities to:
- Drive efficiencies through improved capital deployment;
- Increase balance sheet velocity;
- Enhance earnings/deployment of capital and return on capital;
- More dynamically manage risk appetite;
- Reduce balance sheet volatility and stress impact; and
- Create optionality / recovery actions in stress.
Asset origination and distribution economics will change as a result of the output floor. Effective balance sheet management requires banks to look for divergence between the regulatory capital assumed risk and the market assumed risk.
The output floor and adjustments to the standardized and IRB approaches will create a dislocation between these assumed risk metrics, that may benefit from an increase in structural distribution mechanisms; for example, using Significant Risk Transfers (SRTs).
In summary
Given the volume of change required, banks need to act now to ensure sufficient time to implement everything and be compliant.
Several of the proposed changes will have significant impacts, affecting not only the amount of capital banks are required to hold, but also the type of business that they are able and wish to engage in going forward.
Basel 4 is not only about interpreting and applying regulations – it is about getting ahead of the ways in which the new requirements could impact your business and ensuring future profitability.
KPMG member firms are already supporting many clients on their Basel 4 journey and can share knowledge and insights from this work.
Source: Basel 3.1
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