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2017/03/29 07:00:00 GMT+2

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What’s in store for Basel IV?

What’s in store for Basel IV?

The major regulatory project Basel IV has lost momentum at the international level. How it will develop from here is difficult to gauge at this time. In addition to a significant delay, it is also possible that there will be a change of direction in terms of its content.

Basel III, the reform of the Basel Committee on Banking Supervision (BCBS) standards for capital adequacy and liquidity regulation, has been implemented in the Swiss financial centre in line with the international standards and the prescribed timelines. Certain elements are still in the regulatory pipeline and will soon come into force. These include, for example, the introduction of a non-risk-based capital requirement (leverage ratio) and a longer-term liquidity ratio (net stable funding ratio).

Basel III or Basel IV?

In addition to this, in a further wave, the Basel Committee is already in the process of substantially tightening the international standards for prudential regulation. This primarily involves the placement of restrictions on the internal model approach and the revision of the standard approach within the framework of capital adequacy regulation. While in the eyes of the Basel Committee this reform represents an integral part of Basel III, it is already unofficially being dubbed “Basel IV” due to its scope.

Basel III has been implemented in the Swiss financial centre in line with the international standards and the prescribed timelines

From a technical perspective, this impacts the Internal Ratings Based Approach (IRB) for credit risks on the one hand and the Advanced Measurement Approaches (AMA) for operational risks on the other. Also part of Basel IV, or related to it, is the revision of the corresponding Standardised Approach.

In an effort to reduce variations between the model and standard approaches, so-called output floors are to be introduced for cases where the internal model approach is applied. These define minimum thresholds for capital adequacy and could become a binding constraint in terms of capital requirements for those banks that apply the model approach.

The political aspect

In the intensified competition between financial centres, Basel IV has long become a global political issue. The adoption of the reform package by the Group of Governors and Heads of Supervision (GHOS) initially foreseen for the beginning of January 2017, has been postponed indefinitely due to significant differences of opinion, in particular between the US and the EU. The further development of the content of Basel IV also appears unclear, particularly in light of the recent intentions of the new US government regarding the future orientation of US banking regulation.

In the intensified competition between financial centres, Basel IV has long become a global political issue.

Against this backdrop, Switzerland must also place a clear focus on preventing competitive disadvantages. Of particular importance is that the competitive aspects of stricter regulation be given the necessary attention both at the international as well as national levels.

Switzerland will not get around national transposition if Basel IV is adopted as a new international standard. In this event, the objective must be to ensure that the changes under Basel IV do not further increase the complexity of the regulatory requirements, but instead reduce them.

Implications unclear

In terms of the quantitative implications, the Basel Committee has announced that there is to be no increase in capital requirements under Basel IV. However, it remains unclear how this can be ensured, and raises the question of the extent to which it will be possible to effectively adhere to this objective in light of the cumulation of the various revisions that have been outlined.

Secondly, it can be assumed that the objective is attainable at best in the global aggregate; in contrast, individual regions, countries and institutions could likely be significantly affected. The effects that this would give rise to, or how these effects would be distributed cannot be reliably estimated at present, because there is still insufficient transparency in terms of the details of the reform package.

The general aim should be that a conclusive, methodologically sound and timely impact assessment (regulatory impact analysis, cost/benefit analysis) be conducted for regulatory projects. It is in particular necessary to assess the impact of the various reforms under Basel III and IV as a whole, and to conduct the corresponding cost estimates on a cumulative basis.

The general aim should be that a conclusive, methodologically sound and timely impact assessment be conducted for regulatory projects.

In the greater context of medium-term economic development, it will be important to ensure that the burdens arising from Basel III and Basel IV do not become a disproportionate hindrance to growth for the overall economy.

Where to from here?

From today’s perspective, neither the timelines nor the focus of the content of Basel IV can be assessed with any certainty. In addition to the potential for a further delay or a prolonged period of uncertainty, the possibility should not be excluded that significant amendments could be made to its content or that the entire exercise could be discontinued. The banking sector will therefore need to be prepared to deal with a number of different scenarios.

From today’s perspective, neither the timelines nor the focus of the content of Basel IV can be assessed with any certainty.

The SBA will continue to give high priority to following the developments of Basel III and IV. As part of the responsible national working group under the leadership of FINMA, we will be closely involved should the reform be implemented in Switzerland. One of the key areas of focus in this event would be to achieve a moderate transposition without an excessive “Swiss finish” (level playing field), as well as working towards appropriate differentiation (principle of proportionality), which takes into due account the divergent situations of the various institutions.