Basel IV strengthens financial stability from 2025 with new standards. Gruppo SCAI assists banks in asset upgrading and risk management.
Basel IV is a set of agreements proposed by the Basel Committee on Banking Supervision, (BCBS) introduced to establish international standards for banking regulation to ensure the stability of the global financial system.
The new Basel IV regulatory framework, the latest evolution of the Basel Accords, will be phased in from 2025 to January 2033. The aim of its implementation is to reform the banking sector through stricter capital requirements, stricter monitoring of credit risk and increased transparency.
Basel IV is an important step towards stabilising the global banking system as it brings about significant changes in the operations of banks through various phases and activities.
These include:
- the introduction of an ‘output floor’ limiting the reduction of the required capital using internal models: the new floor stipulates that the capital cannot be less than 72.5% of that of the standardised approach. The aim is to standardise the calculation of the capital requirements in order to increase transparency and parity between financial institutions;
- increasingly stringent reporting for credit risk and increased comparability of banking activities;
- the refinement of the approach to operational risk with a new formula based on banks’ revenues;
- the introduction of a standardised calculation method for the CVA risk in order to address risk exposures arising from changes in the credit quality of counterparties;
- the intensification of the leverage ratio requirement, by requiring higher capital holdings for systemically important financial institutions (SIFIs).
Basel IV increases banks’ financial resilience and global operational uniformity with effects on asset management and infrastructure technology development. Its specific implementations and adaptations may vary from country to country, depending on the specific regulations and requirements of the national banking supervisory authorities. It therefore becomes crucial for a banking institution to integrate technology services and strategic consulting to ensure compliance with regulatory requirements. At the same time, the utility is to obtain competitive advantages from the adoption of technological and operational efficiencies. Implementing a bank adaptation strategy is therefore a decisive step towards financial resilience.
This can happen as a result of various actions and implementations:
- Technology upgrades for banking systems to ensure systems handle the new calculations of the capital requirements, including changes in risk-weighted assets (RWA).
- Development and implementation of credit risk models to review and improve internal risk assessment models.
- Improved data collection capacity with Business Intelligence and Big Data Analytics solutions.
- Optimising more robust reporting processes with customised solutions.
- Use of Compliance and Risk Governance platforms in a consistent and monitored manner, via dashboards and alert systems.
- Development of compliant Stress Testing systems for verifying capital strength.
- Agile and scalable IT infrastructures to enable adaptation to the new standards with a lower cost of capital and credit risk.
- Cybersecurity to protect sensitive data.
- Specialised training on new IT solutions and risk management.
Basel IV is undoubtedly a milestone in international banking regulation, with a transformative impact on global operations. However, while the focus is often on regulatory and compliance aspects, it is equally important to recognise the potential this development offers for innovation and growth within the banking sector.
The implementation of Basel IV will require not only an adjustment to regulatory standards, but also a strategic reorientation towards the adoption of advanced technology solutions and the building of resilient infrastructures. The key to success will be the synergetic integration of innovative technology solutions with sound risk governance and a commitment to operational excellence. In this way, Basel IV could not only improve financial stability, but also stimulate an era of growth and innovation in the global banking sector.
