In December 2014, the Basel Committee on Banking Supervision first floated the idea of restrictions to the internal models banks use to calculate their risk-weighted capital requirements. Two years on, the idea stokes as much controversy as ever. Bankers have dubbed the proposed changes “Basel IV” to underline their potential impact, but regulators reject the tag and claim the rules are merely designed to refine Basel III and prevent regulatory arbitrage.
The Basel Committee has struggled to agree a final package, with the US and EU apparently at loggerheads until a crunch meeting on November 28–29. And no wonder: the proposed model curbs mainly affect credit risk exposures, which comprise around 80% of most banks’ portfolios and include such politically sensitive activities as mortgage lending and financing small businesses.
The central bank governors and heads of supervision who oversee the Basel Committee’s work are due to meet in early January 2017 to thrash out a compromise. Ahead of the meeting, here’s a chance to take a closer look at how the proposals have evolved, and what’s at stake for specific business lines at the banks.