Basel IV: impact on balance re-shaping in EU banks

London, April 24, 2018


In December 2017, the Basel Committee published its new set of amendments to its regulatory standards on banking solvency, which have become known in the industry as “Basel IV”.

These are focused on the calculation of the so-called risk-weighted assets (RWA). The Basel Committee acknowledges there is an “excessive variability” of RWA across the industry and country-by-country. Within Europe, statistics show a remarkable dispersion in “RWA density” (i.e. the ratio between banks’ RWA and their actual assets) among countries, owing to a multiplicity of factors. And this is something Basel IV aims to tackle.

In this regard, although internal (IRB) models will keep in use, among other changes Basel IV makes the standardised the benchmark of the system, by introducing an “output floor” whereby banks’ RWA, even for IRB portfolios, will not be allowed to descend below a certain fraction of the RWA calculated under the standardised approach. This change will be particularly relevant for large banks, which typically apply IRB methods. Operational risk calculation methodologies are also reviewed in depth.

Though the calendar for implementation is very long, markets may be expected to look at “fully loaded” ratios well before regulators actually request them and some countries and industries will see a significant increase in capital requirements, something that may be demanding even under long phasing-in calendars.

Under the new standards, European banks will have to adjust their balance sheets, likely through reducing them. This will create room for new transactions and opportunities in the banking sector, such as sales of non-performing loans (NPLs) and non-core assets or business units.

This event will analyse all these implications from both a global EU perspective and the local standpoints of Germany, France, Italy and Spain.