The Basel Committee is expected to finalize early next year its revisions to the standardized and internal ratings based approaches to the calculation of risk weighted assets for credit risk; a shift to a single standardized approach to operational risk; and the application of a capital floor to limit the extent to which regulatory capital requirements calculated using internal model approaches to credit and market risk can diverge from calculations using standardized approaches.
It remains to be seen how far the Basel Committee will amend its earlier consultation proposals to achieve its stated objective that these revised standards should not increase overall capital requirements significantly. Some banks will certainly be subject to a further increase in their regulatory capital requirements.
These revised standards will also largely complete what KPMG has been calling ‘Basel 4’, following the finalization in January 2016 of the Basel Committee’s revised framework for market risk.
In addition to higher regulatory capital requirements, many banks will face significant operational costs in implementing the revised standards, and will need to align their responses to the plethora of other regulatory reforms and commercial pressures they face.
The revised standards from the Basel Committee will put further downward pressure on banks’ profitability and will reinforce the need for some banks to change.