Basel 4 Implementation



Originally due to be implemented in January 2022, Basel 4 has been delayed until January 2023, but that does not mean that banks can sit on their laurels as there is still much work to be done to prepare for the new deadline.

What is Basel

The Basel Accords are a set of banking supervision regulations set by the Basel Committee on Banking Supervision (BCBS). The purpose of Basel is to ensure that financial institutions hold enough cash reserves to meet their financial obligations and survive unexpected losses in times of economic crisis.

Basel was created during the 1980s, providing banks with recommendations around regulations, focusing on capital, market, and operational risk. Some updates were made, which became known as Basel 2. However, after the collapse of Lehman Brothers and the financial disaster which followed, the BCBS agreed that the framework needed to be more robust, so in 2010, they introduced Basel 3.

Building on the original Accord, Basel 3 includes reforms designed to provide increased safeguarding, better regulation, improved supervision, and more effective risk management within the banking sector.

What is Basel 4

Basel 4, sometimes known as Basel 3.1, refers to the finalisation of the Basel 3 reform package. Although the Basel Committee agreed on the changes in 2017, implementation has taken some time. It was due to begin on 1st January 2022; however, due to the global pandemic, the start date has now been pushed back to 1st January 2023.

How Basel minimised the damage done by Covid

A 2021 report compiled by the BCBS showed that the reforms already adopted by financial institutions had “helped banks absorb the significant impact of Covid-19 shock” and that if lessons had not been learned and acted upon effectively after the financial crisis of 2008, “The banking system would have faced greater stress during this period”.

New timeline - support and opposition from banks

Seeing the effectiveness of Basel reforms in action during the pandemic has encouraged strong support from UK & EU central banks and regulators to stick to the BCBS timeline and implement the remaining reforms. The US is also aiming for the January 2023 deadline, although final capital rules are still to be agreed upon.

However, financial institutions also have concerns that the pandemic’s impact on their profitability means that they are still recovering from the effects and may not be ready for the final changes, even in time for the new deferred deadline.

A report by KPMG highlights how “profitability was already a concern for many banks pre-COVID-19 – this will now be exacerbated by the prospect of persistently low-interest rates, expected increases in non-performing loans, reduction in asset quality, significant deterioration in funding conditions and the need to rebuild depleted capital and liquidity reserves.”

In addition, another recent KPMG article reports that EU banks have raised concerns with the BCBS that Basel 4 reforms disadvantage them against their US and global competitors as it does not create a ‘level playing field’.

The future

Whatever happens, Basel 4 is coming, and banks will have to be ready for it. There is, of course, the possibility that the BCBS will delay, or at least partially delay elements of the implementation further. However, in this time of uncertainty, there can be no doubt that a more robust framework will hopefully lead to a stronger and more stable banking system able to withstand whatever challenges are thrown at it in the future.

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