Banks scent victory in Basel IV standoff
As the year-end deadline to finalize Basel III looms, there is growing speculation that the Basel Committee will water down its stance on capital adequacy requirements. The banking industry should, however, wait before popping the champagne corks just yet.
The Basel Committee is known for many things, but sticking to deadlines is not one of them. The next deadline that it may not meet is that of making final revisions to the Basel III framework by the end of this year, as demanded by the G20.
And given the degree of division and dispute that some of those revisions – dubbed ‘Basel IV’ by the banking industry in protest at the level of change being proposed – have provoked, the likelihood of this deadline being fully met is also fading by the day.
In March this year, the Basel Committee proposed scrapping the use of internal models to measure the capital requirement for operational risk for internationally active banks. Controversially, it is to be replaced by a Standardized Measurement Approach (SMA) that Citi analysts estimated at the time would mean an average 130 basis point hit to European banks’ common equity tier-1 ratios. The Committee also proposed standardized mortgage credit risk weight floors along with corporate risk weight floors.
To say that all hell broke loose – at least within Europe – is no exaggeration.