What the UK’s Banks Need to Know About Basel IV

Basel IV is the latest set of international bank regulations by the Basel committee.

The official GOV.UK website notes that these updated standards are meant to regulate the amount of capital that banks need to cover the risks they take. Banks from all over the world—including UK banks—are expected to adhere to these regulations. Fortunately, there’s still time to prepare before the compliance deadline. On that note, here are a few things UK banks need to know about Basel IV.

Banks will have to analyse their internal risk models
Basel IV’s most significant difference from past Basel regulations is that it plans to standardise banks’ calculations of their risk-weighted assets. As such, the Basel IV framework expects banks to examine their risk in creative ways and rethink their strategies and business models. Thus, UK banks’ current internal risk models will likely change to accommodate these regulatory changes. In particular, banks will not be able to use complicated internal risk models for large corporates with at least a €500 million turnover. These regulations result from the Basel committee wanting to encourage banks’ growth, competitiveness, and profitability.

UK banks can ensure that their internal risk models comply with these standards through a Basel solution. This helps banks make changes to their processes, guaranteeing Basel compliance and avoiding trouble with the regulation committee.

Basel IV will significantly impact European banks more than others

While Basel IV is aimed at banks worldwide, European banks—including UK banks—will experience its impact far more than others. This is because banks in this region are heavier users of internal risk models. For instance, the European banking system needs around 19% additional Tier 1 capital to adhere to Basel IV. Therefore, UK banks will need to put more effort into analysing and revising their risk models than their foreign counterparts.

Given this, banks should start working on their internal risk models as soon as possible. It takes time to analyse their models’ compliance with Basel IV, especially if they need to make certain adjustments. Favourably, they’ll have more time to do so, which we will discuss more in the next section.

The Basel IV compliance deadline has been moved

The deadline for Basel IV compliance was initially January 1, 2023. However, due to the COVID-19 pandemic’s effects on the economy, the European Union proposed to move the deadline to January 2025. This left European countries with the decision to stick to the previous deadline or align with the European Union’s proposal. In the end, the UK followed suit to give banks more time to make the necessary changes to their internal operations. Overall, the extension of the Basel IV compliance deadline aids banks in creating better internal systems.

Non-compliance with Basel IV will bring consequences

Basel IV was created to make sure that banks can take responsibility for the risks they take. As a result, banks that don’t comply with Basel IV will lack risk management. This can lead to lower profits due to losses. In extreme cases, they can face lawsuits, like the ones a handful of major British banks currently experience. Although these banks aren’t facing charges because of Basel non-compliance, there is no doubt that this event will harm their reputation amongst clients and business partners. To avoid situations like this, UK banks should adhere to Basel IV by its deadline.

Basel IV is centred on ensuring that banks can manage the risks they take. UK banks should make an effort to comply with Basel IV to safeguard themselves and their clients.