New ‘Basel IV’ capital requirements proposed for banking sector

BY Fraser Tennant

In what is a crucial period for the European economy, new proposals for setting the capital requirements for the banking sector have been officially unveiled by the Basel Committee on Banking Supervision (BCBS).

The proposals, supposedly the final set of revisions being made to the Basel III Framework (part of the BCBS’s continuous effort to enhance the banking regulatory framework), clarify rules on combating money laundering and terrorist financing in correspondent banking. Many commentators have dubbed the latest modifications, ‘Basel IV'.

The first accord, Basel I, had three objectives: (i) to make sure banks held sufficient capital to cover their risks; (ii) to level the playing field among international banks competing cross-border; and (iii) to facilitate comparability of the capital positions of banks.

The BCBS’s revised proposals are intended to ensure that banks conduct correspondent banking business with the best possible understanding of the applicable rules on anti-money laundering and countering the financing of terrorism. According to the BCBS, the draft proposals reflect growing concerns in the international community about banks avoiding these risks by withdrawing from correspondent banking, which may, in turn, affect the ability to send and receive international payments in entire regions.

"The proposed revisions develop the application of the risk-based approach for correspondent banking relationships, recognising that not all correspondent banking relationships bear the same level of risk," says the report.

The proposals follow the publication by the Financial Action Task Force (FATF) of its guidance on correspondent banking services (October 2016). The BCBS seeks to clarify the expectations of banking supervisors, consistent with the FATF standards and guidance.

In response to the BCBS’s proposed revisions (as well as those already globally agreed), the European Commission has published its first proposals for calibrating capital and liquidity requirements in the form of a Capital Requirements Directive and Resolution (CRD V and CRR II) – proposals which address the market risks inherent in banks’ trading activities, as well as introducing the concept of “proportionality".

“Europe’s move to implement ‘proportionality’ is an important step," said Colin Brereton, PwC’s EMEA FS advisory services leader. “As in the US, the largest EU banks will remain subject to the full scope of regulation; ultimately, this should improve the ability of smaller banks to compete, to the benefit of bank customers.”

The consultation on the BCBS’s proposals is open until 22 February 2017.

Report: Basel Committee on Banking Supervision - Consultative Document

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