Moving the dial article series

November 2022

The implementation of the Basel 4 capital rules and requirements will be a significant undertaking for banks across the world. It will be much more than a narrow technical exercise — its implications are expected to spread right across the bank, with an impact at the most strategic level. We believe it will lead to fundamental decisions around investments and portfolio management. It’s no exaggeration to say that Basel 4 could be a game changer.

As a result, with little time left before the likely go-live date of 1 January 2025 in regions like the European Union (EU), Basel 4 preparation and project management should be a live topic right now as firms progressively intensify their activity.  

A technical challenge

We won’t go into exhaustive detail on all the technical issues and questions created by the final Basel 4 rules, but suffice to say they are far-reaching, including:

  • Changes to capital calculations across all risk types, whether using standardised approaches or internal models.
  • A general increase in risk-weighted assets (RWAs) for all risk types — banks authorised to use internal models will be obliged to calculate RWAs in parallel with standardised approaches.
  • Extensive additional data requirements, e.g. market data granularity and historical data for the use of internal market risk models.
  • Expected expansion of reporting requirements to the supervisory authorities, e.g. monthly rather than quarterly reporting of market risk.
  • Impact of a completely new generation of data and reporting software on future IT infrastructure. One bank KPMG professionals are working with, for example, has realised that the changes will touch on no fewer than 50 separate IT systems/applications.  

Programme management office approach

Clearly, a comprehensive programme management approach will be integral to delivering such large-scale transformational change. This in itself could necessitate new thinking as, in the quest for leanness and operational efficiency, many financial institutions don’t have a ‘change function’ anymore, with change programmes instead being delivered on a ‘side-of-desk’ basis by staff alongside their business-as-usual (BAU) activities. However, such an approach simply won’t be sufficient to deal with the size and complexity of the task involved in Basel 4 implementation.

Agile approaches and lean methodologies have become the watchwords for many aspects of today’s working, but for large scale regulatory projects of this kind, it is our strong belief that a return to classical, waterfall style project management is needed, with a well-resourced Programme Management Office (PMO) function as the ‘control room’.

In our view, a high-performing PMO can provide the requisite good governance and due diligence to manage the substantial changes of Basel 4 across the entire organisation in functions from capital planning to investor relations. From experience, the

PMO function works best if it has a broad knowledge of the functions and people across the organisation. We anticipate this will demand more resources than traditional regulatory change programmes seen in recent years. Many organisations will likely require an uplift in resources to manage the journey.

Programme planning

This journey starts with the programme plan, which sets out the organisation’s Basel 4 goals and strategies to achieve them. A well-constructed plan can help save time and money, enabling early identification of risk and methods to resolve it. The plan can also enable a complex set of activities to be broken down into simple, workable actions. We believe a comprehensive breakdown structure is crucial to enable programme managers to undertake this activity at the earliest stage.

A robust programme management approach sits at the heart of any large-scale transformation. It enables a variety of related projects to be managed in a coordinated manner, allowing for simultaneous execution, shared resources, synchronised activities and engagement across a wide group of stakeholders. Managing related projects or workstreams simultaneously can create opportunities for synergies and optimisation as dependencies and linkages are mapped, helping to promote effective and efficient delivery. This can naturally generate more complexity across the programme and require an agile and resourceful management team. Regular, cross-sectional updates are also an important feature of programme effectiveness.

Basel 4 programme plan

Without doubt, Basel 4 is a more complex undertaking than most other projects, with implementation in a matter of years rather than months. Its implications spread to all parts of the organisation, including areas such as IT. This makes detailed and ordered planning essential. In our view, a thorough impact assessment will be necessary across the enterprise, which will itself result in numerous side projects to help mitigate or optimise those impacts in specific areas and functions. Internal awareness-raising, education and communication become key, with dedicated resources required to keep all stakeholders informed and engaged. Banks should also consider what communication and engagement are necessary with external stakeholders — and when.

Basel 4 is expected to be more demanding for a PMO than other changes. It may be that outside support is needed at the beginning to set-up the programme governance and programme plan.

Outside support from subject matter experts can help add value in the later stages of the multi-year journey, particularly in very specialised areas, such as models, bank steering, and tax and regulatory implications.

Time for action

The clock is ticking. Many banks have already gone a significant way along the journey, but others are further behind. We believe the time for action is now — ensuring banks are optimally set-up in their project management approach is a foundational step for success.

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Mark van Vugt

KPMG in the Netherlands


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