Basel IV / CRR III

The finalisation of the Basel III framework - known as Basel IV - is imminent: on 27 October 2021, the European Commission presented the draft of an EU banking package that is to implement Basel IV into European law, including CRR III (Capital Requirements Regulation). The European Council (October 2022) and the European Parliament (January 2023) have now also published their positions, meaning that the final negotiations can begin.

Basel IV is the collective term for regulatory changes to further develop the capital adequacy framework for banks in accordance with the requirements of the Basel Committee on Banking Supervision (BCBS). In addition to the general objective of ensuring financial stability, the finalisation of Basel III in the EU is also intended to strengthen the risk-based capital framework, focus on ESG risks and harmonise supervisory powers and instruments.

While CRR II still had a moderate impact on the calculation of RWA (risk-weighted assets), CRR III will result in significant changes to RWA and capital requirements. For European banks in particular, it means potential changes in profitability, in the design of individual products and their pricing as well as in the implementation of significant requirements for IT and reporting solutions.

The most important changes for institutions relate in particular to the requirements for calculating RWA for credit risk, operational risk, CVA risk (credit valuation adjustment) and, in some cases, market risk. The gradual introduction of the so-called output floor, which limits the possible relief effects of users of internal models on RWA, is also moving into focus. In future, they will have to apply all standardised approaches in parallel alongside the internal models.

German banks in particular will be heavily affected by these changes, as many rely to a large extent on internal models and their activities are often focussed on areas with previously lower risk weightings. Accordingly, the revised standards can often result in higher capital requirements and high implementation costs for the institutions.

These include the development of new methods to comply with the new standards, compliance with the imposed disclosure requirements and the adaptation of systems and processes. Against the backdrop of strong competition within the sector and constant regulatory changes, institutions are facing major challenges overall - including when it comes to integrating the effects into pricing.

Familiarisation with the new regulations at an early stage helps to assess the impact on risk-weighted assets and the resulting amount of regulatory capital that banks must hold under Basel IV. In particular, the internal processes in the banks and the interactions between the reporting units (including the reporting system) and the back office and credit departments must be strengthened and expanded.

KPMG is a market leader in supporting the implementation of Basel IV and CRR III requirements. We support our clients with detailed knowledge of Pillar 1 and Pillar 2 capital requirements and their interactions. Extensive experience in covering the broad range of topics and in-depth regulatory expertise (KPMG ECB Office) ensure customised solutions for your company on the way to implementing the banking package.

We offer you established calculation and benchmarking tools from ongoing implementation projects to analyse the potential impact of RWA changes and potential design decisions. In addition, we bring proven tools, methods and EU-wide implementation experience for the best possible success to ensure the reporting capability of your bank under CRR III in high quality - including technical adjustments to the delivery routes - in the reporting system.