Basel IV - a collective term for regulatory innovations of the Basel Committee on Banking Supervision that have not yet been (fully) incorporated into the CRR and CRD. In contrast to Basel III, whose changes were predominantly aimed at increasing the quality and quantity of capital and liquidity and thus the numerator of the regulatory capital ratio, Basel IV focuses on the denominator of the capital ratio - the measurement of a bank's risk positions, especially in credit, market, counterparty and operational risk under Pillar 1.

Standard approaches are the focus here, internal models experience noticeable restrictions. In addition, these contents are linked to Pillar 2 or SREP (incl. concrete specifications for the treatment of interest rate risks in the banking book) as well as to regulatory disclosure and thus Pillar 3. Regulations on securitisations and large exposures round off the Basel IV package. The implementation in Europe is already taking place in parts in CRR II and CRD V, which are currently in the EU trilogue process. However, the changes in the area of credit risk and operational risk in particular will only be included in CRR III.

Standardisation should limit the influence of internal risk models

Clearly, the new rules aim to limit the influence or use of internal models and to ensure more uniform and thus more comparable procedures through more standardisation, which nevertheless have a certain degree of risk sensitivity. After the financial crisis, the realisation was too clear that the same risk positions were valued too differently by institutions' own internal models, more than could have been justified by using comparable standards. For internal models, the application of a capital floor is being discussed - even though it is still under discussion - which should continue to limit capital savings from internal models.

European banks particularly affected

European banks in particular are strongly affected by these changes, as many make extensive use of internal models and their exposure is often heavily concentrated in areas with lower risk weightings and these positions are held on the banks' balance sheets. Accordingly, institutions may often face higher capital requirements as a result of the revised standards as well as high implementation costs. These include developing new methodologies to comply with the new standards, complying with the imposed supervisory reporting requirements, and adapting systems and processes. Against the backdrop of the current low interest rate policy, strong intra-industry competition and constant regulatory changes, institutions as a whole are facing major challenges.

KPMG offers institutions comprehensive support in all challenges through many years of project and auditing experience as well as extensive expertise in all affected areas. Please do not hesitate to contact us.