doi.org/10.52340/eab.2024.16.02.04

Basel IV is the latest package of international banking reforms in international agreements. Built on Basel I, Basel II and Basel III accords, it was developed by the Basel Committee regarding the global financial crisis of 2008-09.
Basel IV, also known as Basel 3.1, aims to strengthen liquidity and solvency of the global banking system, ensure safety and stability across countries by introducing uniform standardized rules, including risk assessment rules. Its implementation started on January 1, 2023, will be accomplished until 2028, phases vary by countries.
The article discusses and analyzes the main recommendations of Basel IV, alongside with updated approach to banking risk assessment, including operational risk, their implementation peculiarities, challenges; the impact of new operational risk assessment standards on capital standards is also analyzed and opinions about further refinement of some regulations are expressed.
During the implementation period of Basel III, confronting the current challenges in the global banking sphere, BCBS continued to adjust its provisions and consequently developed a new package of international banking reforms – Basel IV. It provides more stringent requirements, of which the following are particularly important:
• Improvement of BCBS previous agreements standardized approaches (including: credit risk, credit assessment adjustment risk (CVA), operational risk assessment). These rules establish new risk ratings for various types of assets, including bonds and real estate. Credit rating risk is attributed to the pricing of derivative instruments.
• Considerable limitation of internal models used by some banks to calculate capital standards. Banks will generally have to follow a standardized approach unless they receive a regulatory organization approval to use an alternative. The main shortcoming of the internal models rating-based approach (A-IRB) is that it prevents banks from proper (objective) assessment of riskiness of their portfolios and the recommended amount of capital in reserve.
• Introducing a leverage ratio buffer to further limit the leverage of systemically important global banks (they are considered so large and dominant that their bankruptcy would threaten the global financial system). The new leverage ratio requires to hold additional capital in reserve. Namely, for systemically important banks, a higher increasing leverage ratio (50% of the risk-adjusted capital norm) is provided.
• Financial transparency standards are tightened, namely: the requirement for more detailed disclosure of charter reserve levels and other financial information is established.
• Changed lower risk limit provided by Basel 2 with a more risk-sensitive lower limit. This provision refers to the difference between the amount of capital that a bank is required to hold in reserve under its internal model and not under the standardized model. The new rules bind banks to maintain a capital reserve equal to at least 72,5% of risk-weighted assets in the standardized model by the beginning of 2028, regardless their assumed internal model.
• The revised operational risk assessment standard considers two components of risk calculation - business indicator (BI) and loss indicator (LP). Three intervals (buckets) with different thresholds were assigned; their weighting coefficients were sharply adjusted.
• The service component was relatively simplified and the financial component was changed.
• Loss multiplier settings were changed. Due to the application of an indicator of 0,8 the excess of loss amount over the average value was considered in a lower weighting multiplier. Additionally, to weigh loss by its volume is unfeasible: all operational risk losses are equally considered in the multiplier (regardless the amount of each individual loss). It is noteworthy that if the bank does not have a five-year history of operational losses and the loss multiplier calculated for this period is more than 1, in some cases the bank will be obliged to use an "increased" loss multiplier.
The BCBS provides various options for implementation of the loss multiplier at the level of the national regulator enabling them to better consider the specifics how the country's banking system functions.
The results of BCBS study to evaluate and refine the impact of the new operational risk assessment approach on capital standards, show a moderate impact of the new approach on the amount of capital standards: on average, capital standards will decrease by 3% for large banks, for small banks it will increase by 0,6%. Concurrently the impact of the new approach on individual banks could be significant, i.e., the new approach will remarkably increase capital standards. Therefore, preliminary calculation of the operational risk value by the new approach is recommended since capital standards may increase significantly. If the capital requirement (capital standard) is predetermined, the bank will be meeting this standard for several years.
Launched on January 1, 2023, the new approach will be fully adopted until 2028 and implementation phases will vary by countries. Hence, banks have several years to accomplish it, so measures need to be taken in time to prepare for implementation.
Consequently, the updated approach will replace the three current approaches to calculating capital standards to cover operational risk, which will contribute to a moderate increase in capital standards. However, many banks may face increased operational risk. To avoid unpleasant surprises, banks should prepare beforehand to implement a new approach (namely: create a base, calculate capital standards, adjust internal processes, etc.). However, it is notable that in response to current challenges in the global banking sector, the implementation period of the updated standards may be extended and some provisions may be subsequently amended before they enter into force.

References:
• Bank for International Settlements. Basel Committee Membership(Updated2024,May 14).https://www.bis.org/bcbs/membership.htm
• Bank for International Settlements. Governors and Heads of Supervision Finalise Basel III Reforms(2017, December). https://www.bis.org/press/p171207.htmFull publication: Basel III: Finalising post-crisis reforms (December 2017)
• Bank for International Settlements. The Global Policy Reform Agenda: Completing the Job( 2016, May 4). https://www.bis.org/speechs/sp160405.htm
• Bank for International Settlements. History of the Basel Committee and Its Membership (2014, October 9).https://www.bis.org/publ/bcbs101.pdf
• Basel Committee on Banking Supervision. High-Level Summary of Basel III Reforms (2017, December ). https://www.bis.org/bcbs/publ/d424_hlsummary.pdf
• «Basel IV»: ObnovlennyyPodkhod k OtsenkeOperatsionnogo Riska (2020, Mart 27)[«Basel IV»: an Updated Approach to Assessing Operational Risk (2020, March 27)]. (in Russian).BEST-PRACTICE.
• https://bosfera.ru/sites/default/files/imgartical/bazel_1.png
• https://bosfera.ru/taxomony/term/49

Keywords: Basel IV; operational risk; business Indicator (BI); loss indicator (LP); loss multiplier; capital standards.
JEL Codes: E50, E51, E58, G32