At some point in the next few weeks, the US Federal Reserve will likely issue a formal notice of proposed rulemaking on how US banks must comply with the revised capital rules that the Basel Committee on Banking Supervision finalized at the end of 2017.
The most important aspect of what regulators continue to describe as Basel 3.1, but which almost everyone else calls Basel IV, is that it will reduce the larger and more sophisticated banks’ ability to game the regulatory capital regime with their own internal ratings-based risk models.
Basel IV imposes an output floor that limits the risk weighted assets (RWAs) and associated capital requirement those internal models throw out to no lower than 72.5%
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