The latest adjustment to the Basel framework overhauls the calculation of how much capital banks need to hold against each exposure. What impact will this have on their clients? Koen Holdtgrefe provides an update
European banks and European corporates have a very close and long relationship. The latest prudential regulatory package from the Basel Committee on Banking Supervision (BCBS) could well change all of that.
The BCBS, as the leading global standard setter for the prudential regulation of banks, has issued a series of recommendations (standards) over the years – known as the Basel Accords – with the aim of ensuring banks’ resilience to crises.
These standards prescribe how much capital and liquidity banks need to hold against all their exposures.1 The first Basel framework was published in 1988 and, via multiple reviews, the fourth version (Basel IV) will be adopted in Europe over the next couple of years.2
With this latest version, the framework for how banks calculate the amount of capital they need to hold against each exposure is completely overhauled. One of the biggest changes comes from the introduction of the output floor. This will lead to banks focussing more on the use of the standardised approach when calculating their risk-weighted assets (RWAs) instead of applying internal models. The risk weights under the standardised approach are in general much higher than under the internal model approaches, and will therefore lead to an increase in the amount of capital banks need to hold.