The Basel Committee on Banking Supervision (BCBS) works toward addressing the problem of excessive variability in risk-weighted assets.
Specifically, the committee addresses the shortcomings identified, following the financial crisis that has not been touched upon under Basel 3: (1) the reliance on the banks’ own estimates of risk and (2) the standardized risk-weighted approaches. An overview of the Basel Committee reforms is set out in its most recent report to the G20 Leaders. The main reform areas are:
The strategic and business implications for banks have become more pronounced than in 2013, when KPMG published for the first time on Basel 4. Many banks have raised more capital and/or reduced on- and off-balance sheet activities. These banks have improved capital management, but do not have an overarching 'Basel 41 project and are therefore dealing with each component individually. The banks perform on-going re-evaluation on the balance between high- and low-risk activities as regulation takes a less risk-sensitive approach for those allowed to use internal models. Furthermore, the banks respond to the data and system implications of Basel 4, not least in calculating (and disclosing) revised standardized approaches, leverage ratio, stress testing and liquidity metrics.
In 2013, KPMG predicted the emergence of Basel 4 even before the full implementation of Basel 3. In October 2015, KPMG assessed its predictions to identify the ones that came true and gauge what may lie ahead for banks.
Author: Gert-Jan Thomassen, partner KPMG Advisory