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26. 10. 2020

Building for the Future with Basel IV

The regulatory environment for banking and financial services is continually evolving to optimize risks, meet expectations of regulators and investors, and provide customers a safe, reliable experience. In addition to standardizing banking operations and reporting processes, regulations play a key role in keeping the economy stable by preventing financial crises.

In 1988, the Basel Reforms were introduced by the Basel Committee on Banking Supervision (BCBS) to lay a risk mitigation framework for banks. Starting with Basel I, each installment of the Basel Reforms has built on that foundation to address financial risks, improve oversight, and make the banking industry more resilient.  

The Final Set of Basel III reforms, also commonly referred to as the “Basel IV reforms” were published in December 2017 to address weaknesses in banks’ resiliency that were revealed during the financial crisis and strengthen the regulatory environment in light of current challenges. The reforms are set to be implemented on 1st January 2023.

The key objective for changes proposed as a part of Basel IV is to reduce variability of risk-weighted assets (RWAs) reported by banks. The reforms aim to bring more transparency and uniformity into the calculations by revising the regulatory framework to address capital, risk coverage, leverage, liquidity, risk management and supervision, and market discipline. Basel IV classifies these elements into 3 different pillars, which are covered in the article at length.

Unlike its predecessors (Basel I to III), which were not designed to be applied to smaller, non-internationally active banks, the Basel IV reforms introduce the concept of “proportionality”, taking into account the size, complexity, and nature of business of smaller banks. Based on these criteria, treatments, and approaches to be taken by Small and Mid-Sized Banks (SMSBs) will vary for different risks. This article delves into the categorization of SMSBs, and the approaches that have been prescribed to them for various risks.

The article also talks about how Adastra can support Basel IV compliance in small and big banks. The changes proposed by Basel IV will require significant changes to operational systems, data requirements, and reporting solutions, and smaller banks, especially, will need to understand the revised regulations and the impact to their systems to become fully compliant in a timely manner.

Lastly, we will deliberate on the need to view these reforms as an opportunity to build for the future. Our experience with the earlier installments of the Basel Reforms has clearly shown a pattern of evolution in regulatory frameworks, and both from a long-term cost and capabilities perspective, it will be prudent to modernize your operational and reporting systems with an eye to the future as you implement Basel IV.

As we advance towards the implementation deadline, banks have started planning enhancements to make themselves more competitive by modernizing their operational systems, IT architecture, reporting systems and data management processes. For those who are new to Basel Reforms, this article provides a great starting point to build your understanding and plan in a timely manner, so that your organization is future-ready and primed for growth.

Building for the Future with Basel IV (8.8mb)

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Author

Ilia Bolotine

Ilia Bolotine

SVP Financial Services & Head, Adastra Business Consulting (Canada)