BASEL-IV

Basel IV BCBS Basel III finalization 2017 reforms.

Definition

Basel IV (Basel III Finalization) key reforms: (1) Output Floor 72.5%: limits banks Risk-Weighted Assets (RWA) calculated via Internal Ratings-Based (IRB) approaches cannot be lower than 72.5% of RWA calculated via Standardised Approach (SA), eliminates excessive RWA reduction via Internal Models gaming, increases capital requirements for IRB banks with low risk weights vs SA. (2) FRTB Fundamental Review Trading Book: revised market risk framework, Internal Model Approach (IMA) more stringent (Expected Shortfall ES replaces Value at Risk VaR, longer liquidity horizons, P&L attribution tests), Sensitivities-Based Method (SBM) Standardised Approach revised. (3) Operational Risk: Standardised Measurement Approach (SMA) replaces AMA Advanced Measurement Approach + Basic Indicator Approach BIA + Standardised Approach STA, simpler universal SMA based Business Indicator Component (BIC) + Internal Loss Multiplier (ILM). (4) CVA Credit Valuation Adjustment: revised CVA risk framework, Standardised Approach SA-CVA + Basic Approach BA-CVA, eliminates Internal Model Approach for CVA. (5) Credit Risk Standardised Approach revisions: risk weights refinements per asset class (residential real estate, commercial real estate, project finance, etc.). Implementation timeline: phased 1 January 2023 - 1 January 2028 (Output Floor phased 50% 2023 -> 72.5% 2028), EU CRR3 Regulation 2024 finalizes Basel IV transposition EU, US Federal Reserve + UK PRA proposals 2023-2024.

Origin

Basel IV (Basel III Finalization) published BCBS 7 December 2017 ; implementation phased 2023-2028 (delayed COVID-19 from 2022 originally) ; EU CRR3 Regulation 2024 (Capital Requirements Regulation 3) transposition.

Example in context

Deutsche Bank IRB approach historical low risk weights via Internal Models large corporate loan portfolio: pre-Basel IV ~30% average risk weight, post-Basel IV Output Floor 72.5% increases effective risk weight to ~50%, RWA increase ~$50B, additional CET1 capital required ~$3.5B 13% capital ratio target, motivates Deutsche Bank shrink risk-weighted assets via portfolio rationalization 2024-2028.

Related terms

• BCBS Basel III — parent framework.