Basel 4 – Emerging From The Mist?

Regulators around the world – and the banks themselves – have fast-tracked the implementation of Basel 3 as a safeguard against another financial crisis, raising the capital levels that banks must hold.

Recent developments are likely to result in three changes that might form the basis of Basel 4:

• Requiring banks to meet a higher minimum leverage ratio;
• Restricting the advantages to banks of using internal models to calculate their capital requirements; and
• Greater disclosure by banks.

Possible implications for banks

These moves towards Basel 4 have three major implications. First, banks are likely to face significantly higher capital requirements. Second, banks will likely need to improve their capital management. Third, a less risk-sensitive approach to both capital ratios and internal modelling is likely to force banks to re-evaluate the balance between lower and higher risk businesses.