Prospect of Basel IV Looms Over Industry

While Basel III will not be fully in force for another three years, its successor is already looming over the industry. Basel IV, a term some bankers are giving to a group of proposed rules that will increase the capital requirements of Basel III, is expected to have three main elements, according to a recent Financial Times article. The first will focus on an overhaul of the capital treatment of banks’ trading books. The other elements are a more pointed departure from Basel III, focusing on restricting the way risk-weighted assets are calculated.

Industry participants are concerned that such a regime could make banks less sensitive to risk. If there is minimal difference between the capital required for high-risk and low-risk loans, banks might be likely to make more high-risk loans as they will typically carry higher rewards, according to the article. “The solution to this is not having blunt and equally applying instruments,” says a senior executive at a large European bank speaking off the record. “It’s having a more intelligent discussion bank by bank.”

Other banks argue that the Basel Committee’s latest initiatives are unnecessary, given the big changes banks have made following the financial crisis.

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