Under the timetable set by the Basel Committee on Banking Supervision (BCBS), a five-year implementation period for Basel IV is due to begin on 1 January 2023. How banks and supervisory authorities are using the two-plus years until then varies from one jurisdiction to another.
The establishment of regulatory frameworks across the European Union is relatively advanced, while regulators in Asia-Pacific and the Americas have only finalized a handful of elements.
CRD V and the latest Capital Requirements Regulation (CRR II) in Europe came into force on 27 June 2019 and provide a solid text on which implementation can be based. Succeeding drafts, CRR III and CRD VI, were anticipated in the second half of 2020 but have been delayed by the COVID-19 pandemic.
Moving on to North America, Canadian regulators have finalized most of the Basel IV building blocks, with still a number awaiting public proposal. Bart Everaert, Product Management Director, Americas at Wolters Kluwer, says, “The United States has experienced a regulatory slowdown during the Trump administration and only seen the Federal Reserve issue a handful of updates that comply with the 19 BCBS Basel IV components.”
This presents an opportunity for banks to determine how implementation challenges can be resolved to give them their best chance of meeting the deadline, as well as to research the issues they are likely to face after implementation. It is a chance to review everything within each bank’s “Basel chain,” to investigate whether these components are ready for the future. This means reviewing credit risk, market risk, operational risk, liquidity, leverage ratios and all the reporting systems and system data that align with those elements.
In terms of risk infrastructure, much has changed. But that does not necessarily mean that organizations must replace their entire systems architecture. Banks are advised to review their systems step by step and then make a call.
Firms need to identify whether they would prefer a patchwork replacement for elements of their current solutions or whether it makes more sense to embark on a full-scale overhaul. They should evaluate this by considering levels of satisfaction with existing elements, but also whether any upgrades will be fit for purpose beyond the next several years.
Xavier Dubois, Product Management Director, EMEA at Wolters Kluwer, says: “We believe it is far more prudent to consider whether their selected architecture will fulfill regulatory obligations and meet audit and business requirements in the coming years and well into the future. Assessments should be conducted at a global level and across the entire Basel framework, not limited to credit or market level.”
One criticism of the Basel framework currently in force is that there is an imbalance in the regulatory expectations for smaller regional banks, compared to global giants with more significant investment. Organizations have been expected to follow all the rules, regardless of the degree of complexity or risk in their business models.
Under Basel IV, a proportionality principle has been introduced to put requirements on banks based on their size and risk level. Small, simpler banks do not have to deal with complex calculation methods and requirements. Banks in general will face standards as demanding as their size, complexity and risk levels warrant.
The proportionality principle is being put into practice somewhat differently in Europe. Risk assessment standards and calculation methods there will vary for several types of risk – such as market risk or CCR, or for determining the credit valuation adjustment (CVA) – depending on a bank’s size and the complexity of its operations.