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.
'More and more of everything'
Basel 3 is but one element of the multiplicity of regulatory reforms under way – the 'more and more of everything' approach to regulation. Banks need to consider the combined impact of all these initiatives, in addition to the impact of Basel 3 and of moves towards Basel 4, on their strategies and business models
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