• Industry: Financial Services
  • Type: Regulatory update
  • Date: 1/29/2014

Basel 4 - Emerging from the mist? US implications 

Following the release of KPMG’s Basel 4: Emerging from the Mist (PDF 561 KB) report we have delved deeper into the US implications.

There are concerns that the standards which have been imposed by the flurry of new, complex regulations—both underway and proposed—may have now become ‘a bridge too far’ for both the financial institutions trying to keep pace with this increased activity and the supervisors charged with overseeing their compliance. The Basel Committee has even signalled that simplifying the current capital standards and improving the comparability of their outcomes across different global banks will be an important component of its agenda to improve the accord and make sure that it remains ‘fit for purpose.’

This revised sentiment, along with regulatory reform actions currently underway, may move the US implementation of a Basel 4 accord toward a standard that will likely be characterized by:

  • Higher minimum supplementary leverage ratio requirements, although currently mandated only for the largest systemically-important banks, which may eventually trickle down to the smaller financial institutions
  • Calls for narrowing the differences derived from internal modeling versus a standardized approach when calculating capital requirements, which may lead to the end of the current risk-sensitive approach and along with it, banks’ competitive advantage
  • A liquidity proposal by Federal Reserve Board Governor Daniel Tarullo that advocates for banks substantially dependent on wholesale funding holding additional capital, which might revise or even replace the net stable funding ratio requirement within Basel 3
  • An expanded bail-in regime, whereby regulators could impose more losses on bondholders instead of implicitly guaranteeing taxpayer bail-outs during times of financial crisis
  • A data-driven reflection on the impact and unintended consequences of certain rulemakings, such as the proposal requiring large foreign banking organizations (FBOs) to create an intermediate holding company for their U.S. subsidiaries and to hold stronger capital and liquidity positions in the United States as a result, the implementation of which may prove to be too costly for some FBOs who may decide to exit the U.S. market as a result
  • Alternatives to the capital accord that might include stress testing or, perhaps more radically, replacing the accord altogether with a firm-wide leverage ratio.

We encourage you to read through the full piece (PDF 561 KB) and welcome the opportunity to speak with you about any issues and concerns you may have related to this evolving regulatory topic.


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