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. But there are strong signals that we are already moving beyond this to the emergence of the next iteration of the capital standards framework, or ‘Basel 4’.
Recent developments are likely to result in three changes that might form the basis of Basel 4:
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.
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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