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Basel IV - Global update
Explore the impact of the Basel IV regulation on the corporate lending landscape.
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As we covered in our last article on Basel IV, different jurisdictions will take their own unique approaches to implementation. While most are, in general, in alignment with the international specifications, the relevant deadlines, calculation approaches and other key factors may vary from region to region.
Some of this boils down to the fact that each country will need to carry out a proper assessment on how each new standard will affect their jurisdiction. Much of this will depend on the current health of the market, how the banking industry is structured and regulated in each jurisdiction, and the financial institutions themselves—whether they are able to handle the level of change proposed. With so many factors at play, not to mention considerations for banks to remain competitive globally while trying to stay on pace with global standards, it’s little wonder that there have emerged different interpretations and paths to reaching the same goal to comply with upcoming regulations.
Let’s explore the nuances of how Basel IV will present itself across four key regions, each with its own unique timeline and calculation approach to highlight the variations.
Naming Convention
The Capital Requirements Regulation (CRR) III
Timeline & Implementation Deadline
The EU originally had a go-live date of January 1, 2025, but as of this summer, the EU recently announced a partial delay to January 1, 2026. It’s important to note that this delay does not encompass the entirety of the Basel IV capital changes but the introduction of FRTB as the mandatory approach to calculate the capital requirements for market risk. Timelines for changes to Credit Risk, Operational Risk and Output Floor remain unchanged. By delaying parts of the Basel IV framework, the EU is helping local banks to be on a level playing field with their US and UK counterparts.
Key Differences in Calculation Approach
At the heart of the new framework is the Output Floor, which sets a lower limit on the capital requirements of the internal models used to calculate risk-weighted assets (RWA). There are also new protocols for calculating capital requirements for mortgage loans. Finally, there will be an immense increase in terms of market risk reporting, with this function expanding from just two reporting templates to as many as 15-30 templates.
On May 30, 2024, the EU Council adopted the new rules of the banking package (CRR III / CRD VI) as the final step of the legislation process. With the final versions of CRR III and CRD published in the EU’s Official Journal on June 20, 2024, banks must use the next few months to navigate these significant changes.
The European Banking Authority (EBA) recently presented a tentative timeline for the Data Point Model (DPM 4.0) updates to the new CRR III rules, with the final taxonomy set to be published in December 2024. The final ITS for the CRR III reporting was published on July 9, 2024 with partially significant changes to the draft version. Affected firms must quickly analyze the reporting requirements and adjust their calculation engines and/or interfaces to software providers.
Naming Convention
Basel 3.1
Timeline & Implementation Deadline
July 1, 2025 (proposed date, pushed back from the original January 2025 deadline)
Key Differences in Calculation Approach
In November 2022, the Prudential Regulation Authority (PRA) published a consultation paper on Basel IV implementation. As of late last year, the regulator has released near-final rules for the implementation of Market Risk, CVA, Operational Risk and Pillar 2. The near-final rules for Credit Risk will follow at a later date.
The PRA’s approach limits the RWA impact of internal models with the introduction of the Output Floor, floors for risk parameters (e.g., LGD), etc. However, this implementation of the Basel IV framework already contains some inconsistencies with the corresponding EU regulation (e.g., alpha factor SA-CCR and no-infrastructure factor) that must be analyzed thoroughly. Banks should prepare to see differences of this nature grow and calcify in the years ahead as we move further into the post-Brexit era.
UK banks should also be aware of the PRA’s efforts to implement its strong and simple framework for small domestic deposit takers (SDDT), which provides an alternative to Basel 3.1 for smaller institutions under certain conditions. While the requirements for liquidity reporting and disclosure have already been published, the details surrounding capital regulation will be released by the PRA at a later date.
Naming Convention
BCAR 2024
Timeline & Implementation Deadline
Canada’s implementation of Basel IV is all but complete, with the Office of the Superintendent of Financial Institutions (OSFI) setting its first batch of compliance deadlines for Q2 2023. This represents an accelerated timeline relative to other jurisdictions.
Key Differences in Calculation Approach
As a heavily regulated nation with relatively few large banks, Canada has historically followed the BIS Basel guidelines very closely and was an early adopter of Basel IV. Implementation began two years ago, with the FRTB and CVA changes implemented in early 2024.
All reporting mandates except for CVA Risk and Market Risk were required at the first deadline, including the new standards for Credit Risk and Operational Risk. The final Q1 2024 deadline incorporates the rest of the Market Risk changes, including FTRB and CVA.
In a bit of a deviation from the standard regulation framework, OSFI also introduced a more simplified RWA calculation methodology for small and medium-sized deposit-taking institutions (SMSB), reducing the data burden. This was largely done to account for the different risk levels these financial institutions bear compa
Naming Convention
Basel III Endgame
Timeline & Implementation Deadline
Targeted for July 1, 2025, with a 3-year transition period ending July 1, 2028
While the final proposals have yet to be revealed, US regulators (the Fed, OCC and FDIC) made a joint announcement on July 27, 2023 to release their draft version for consultation. US regulators continue to face pressure to delay and scale down the reforms of Basel IV. It does seems likely as the FED has already been floating a weaker version to the other US Regulators for review.
Key Differences in Calculation Approach
The US approach to Basel IV introduces the new Standardized Credit Risk methodology, Output Floor, FRTB/CVA calculations and Operational Risk. One major deviation: unlike other countries, the US has decided to abandon the IRB approach altogether for Credit Risk RWA. This will result in higher capital requirements for larger financial institutions that were able to take advantage under the previous iteration of Basel.
Historically, the United States’ Basel III implementation deviated significantly from the BIS guidelines. Basel III Endgame represents a pivot to a more standardized and streamlined framework that brings the US closer to international standards. In light of numerous recent bank failures in 2023, new calculation methodologies such as OpRisk are being introduced. Still, reporting requirements only apply to the top banks over the $100 billion threshold, whereas the EU applies a one-size-fits-all approach.
Large US banks will likely face implementation challenges, as they must now take a dual-structure approach: following the Basel III Endgame regulations while simultaneously complying with the current regulation.
Optimizing technology and data management infrastructure to comply with Basel IV will look different for every bank, but regardless of the jurisdiction, the increased granularity of the required calculations will present significant challenges. Undertaking these modernization efforts early in the implementation process is crucial for identifying issues, optimizing methodologies and taking proactive steps toward efficiency.
Banks must ensure their systems can handle substantial data volumes and complex processing to meet deadlines and avoid reputational risk. Institutions of all sizes can greatly benefit from working with third-party partners that specialize in cross-jurisdictional reporting. Regnology’s cloud-based reporting platform is built to handle Basel IV’s increased requirements around granularity and speed, with a flexible architecture and unified data ingestion model that enables easy integration, calculation and reporting.
In addition to our technical capabilities, Regnology’s worldwide presence and global perspective enable us to serve multinational banks operating across multiple jurisdictions, and to bring a unique perspective as we help these firms solve for regional discrepancies and understand hyper-specific requirements. Our integrated reporting solutions support the entire Basel IV framework, reconciling cross-jurisdictional data requirements.
If you’d like to learn more about how Regnology can help your institution efficiently address Basel IV data and reporting requirements, visit our designated solution page or get in touch with us directly.
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Explore the impact of the Basel IV regulation on the corporate lending landscape.
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