Basel IV agreement holds mixed results

© World Bank

In December 2017, a political agreement about the Basel IV package was reached. Harmonising global rules diminishes risks and contributes to more integrated capital markets. Likewise, the access to finance for the real economy must be ensured in the implementation process, particularly for medium-sized companies.

The decisions are supposed to come into force in 2020 and gradually  be implemented until 2027. The rules are designed to promote a fairer global competition and contribution to a more integrated capital market around the world. The new rules concern in particularly the use of internal risk-based approaches (IRBA) in calculating tier-one capital quotas. Additional new risk-based market regulation in the framework of the Fundamental Review of the Trading Book (FRTB) formed the core of the negotiations. That implies new (standardized) calculations of risk-weighted assets and the introduction of the new liquidity ratio Net Stable Funding Ratio (NSFR).

Capital requirements of bank continue to increase

The changes affect many large credit institutes applying IRBA models; a so-called „Output Floor“ of 72.5 percent to the credit “Standard Approach” was fixed. Calculations with internal models must therefore not fall below this threshold. Estimations of the European Banking Authority (EBA) show a significant rise of the tier-one capital at about 39.7 billion euros - a rise of 12.9 percent.

Blurred effects on real economy

The effects on financing conditions of small and medium-sized enterprises (SMEs) depend on the concrete implementation into EU law, in particular the capital requirements regulation and directive. Many SMEs could negatively be affected by rising risk-weights and consequential financing costs. The new “Loan-to-Value” quota could constrain construction investments. Above all, leasing companies making up for about 25 percent of German equipment investments could be harshly affected by these new rules.

Ensuring global level playing field

It is fundamental to build up a global level playing field: all economies have to commit to the full implementation of the common rules within the stipulated period. Gold-plating (regulation beyond the goal) as well as non- or partial implementation should be avoided