Basel IV Credit risk

The Basel Committee on Banking Supervision is revising both the Standardised Approach (SA) and the Internal Ratings-Based (IRB) approach for credit risk. The key objectives are to: (1) reduce the complexity of the credit risk framework, (2) improve comparability among banks and (3) reduce the variation in risk weights across banks. The BCBS does not aim to increase the total required capital. The key proposed changes concern: (1) recalibration of risk weights for standardised approach, (2) higher due diligence requirements to use external ratings and the quality of collateral in using the standardised approach, (3) removal of the option to use internal rating-based models for certain exposure classes e.g. banks and (4) IRB models to be subject to capital floors and parameter restrictions.

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Implementation / enforcement 12/2014 - 12/2018

STATUS
Basel issues final standards by the end 2016. Implementation arrangements are under consideration.

The impact on capital requirements for most large and diversified banks is limited, though per country or portfolio, large differences may occur. Significant shifts in the business models of some banks are already under way owing to the current and prospective pressures on capital, costs and risk sensitivity. Some banks have already withdrawn from, or scaled back their activity in, lending and trading markets and a few geographic regions. Specifically, standardised approaches are becoming more complex and therefore raising challenges for smaller banks to control their system- and reporting-related costs.

Further information:
Basel second consultation on revisions to the standardised approach for credit risk
Basel consultation on reducing variation in credit risk-weighted asset 

author
Gert-Jan Thomassen Partner
Categories: Liquidity Capital and Risk