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Basel 4 – formal call for advice

Implementing Basel 4

The European Commission has issued a formal call for advice (PDF 287 KB) to the European Banking Authority (EBA) on the potential impact of Basel 4.

The European Commission is requesting the EBA to assess the potential impact (on individual banks and on the wider economy) and possible implementation challenges for banks of the various elements of the package of reforms published by the Basel Committee in December 2017, and the further revisions to the framework for market risk on which the Basel Committee consulted in March 2018.

The EBA is asked to report to the Commission by 30 June 2019. The report will inform the Commission’s preparation of revisions to the Capital Requirements Regulation and the Capital Requirements Directive (‘CRR 3’ and ‘CRD 6’).

Impact on banks

The main immediate impact on banks is likely to be a call on them to provide detailed impact data on capital ratios and on operational and administrative costs.

Further ahead, the EBA findings may influence the Commission in introducing a greater element of proportionality to CRR3 and in its choices on the use of national discretions.

Detail

The call for advice covers the Basel Committee’s revisions to the standardised and internal ratings based (IRB) approaches to credit risk, new standardised approach for operational risk, overhaul of the credit valuation adjustment (CVA) framework, new output floor, and proposed further revisions to the market risk framework. 

The EBA is asked to assess:

  • The impact of each of these revisions (individually and their combined impact) on individual banks; and on types of bank (size, location and business model), with a particular focus on systemically important banks and on small banks.
  • The scope to apply the proportionality principle by exploring possible simplifications in order to reduce the burden on small non-complex banks and on banks with specific business models.
  • The impact on banks’ capital ratios and on their operational and administrative costs. The call for advice highlights the potential costs to banks of implementing the revised standardised approach to credit risk (including the strengthened due diligence requirements for the use of external credit ratings and the valuation requirement criteria for real estate) and the new standardised approach for operational risk (including the requirements on loss databases).
  • Whether the new standards might result in any significant shifts to or from certain types of activities, exposures, business lines or business models.
  • A cost/benefit analysis of the application of the new national discretions introduced by the Basel Committee, in particular those relating to operational risk (including loss data for small banks with a business indicator of less than € 1 billion; setting the Internal Loss Multiplier equal to 1 for all banks; increasing the loss data collection threshold to €100,000 for banks with a business indicator of above € 1 billion; using less than five years of loss data; and setting materiality thresholds under which some operational loss events could be excluded). 
  • The possibility of introducing new provisions relating to other aspects of operational risk, such as specific requirements to cope with legal, IT, cyber security and other risks; the use of insurance and other techniques for mitigating operational risk; and incentives (including adjustments to Pillar 2 capital requirements) on banks to adopt a more granular measurement of operational risk (by business line or across products and services) a more forward looking assessment of risk (using business environment and internal control factors, scenario analyses and external loss data.

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