Basel IV and Capital Adequacy Contraction

What is the impact of Basel IV on capital adequacy according to EBA?

What will be the impact of Basel III reforms, also known as “Basle IV”? Although a phase-in approach is planned, 2022 – 2027, it may prove to be the greatest challenge yet for the banking sector, and Romanian banks will make no exception.

The European Banking Authority (EBA) published on 07 December 2017 the impact of the revised Basel framework in the EU. The assessment reveals that the weighted average CET1 ratio, calculated in accordance with the revised framework, will drop by 0.6%.

Main triggers of the change are:

• New aggregated output floor of 72.5% of standardised RWA
• Leverage ratio surcharge
• Additional constraints for IRB internal models
• New approach SMA on operational risk
• Increased sensitivity of CVA.

What is the impact of Basel IV on capital adequacy according to market?

Several market led studies forecasted that capital adequacy ratios will drop with a 3.9%.

Main triggers of the change are:

• Basel III deductions
• FRTB
• IRRBB
• Revised credit risk SA
• Removal of IRB for LDPs
• IRB parameter floors
• Aggregated IRB RWA floor
• Revised operational risk SMA
• IFRS 9
• Risk Weight for sovereigns.

What is the estimated impact for Romanian banks?

The projected impact of EBA (0.6%) is much more optimistic than market estimations (2.4%). Both analysis stated that IRB banks will have a more severe impact than standardized ones mainly due to the aggregated IRB RWA floor. However, in the Romanian market the impact may come primarily from new LTV criterion involved in RWA calculation and from the shift from AMA to SMA on operational risk. An expected impact may be in the region of 2% decrease in capital adequacy. The magnitude of the impact will depend on the way financial institutions will adapt to these changes to prepare for the 2022 deadline.

How can we help?

Our team can help you simulate the effect of the future regulation in advance to better prepare your capital agenda. Please schedule a consultation with our team for further details