Basel IV is the latest set of global regulatory standards for banks, and its aim is to enhance the resilience of the global financial system. It’s decided upon by the Basel Committee on Banking Supervision, a group of central banks and financial regulators from around the world. 

It builds upon the previous three Basel frameworks:

• Basel I, which came into force in 1988, defined minimum capital requirements for banks to help them minimise credit risk
• Basel II introduced more sophisticated risk management techniques and considered more kinds of risk. This framework was established in 2004
• Basel III was developed in response to the 2007-08 global financial crisis and introduced new capital and liquidity requirements

Although it’s being called Basel IV, it’s more of an update to Basel III than a whole new framework. Key elements include:

• Tighter rules on how banks calculate risk-weighted assets (RWAs – a bank’s off-balance-sheet exposures, such as commercial loans, weighted according to how risky they are)
• Limits to the permitted variability in the output of risk models that banks use
• Stricter capital requirements to ensure banks can absorb losses and avoid insolvency during periods of financial stress 

There are some significant changes from the Basel III framework, mainly focusing on how banks measure risk and calculate capital requirements.

One of the biggest changes is the introduction of the so-called 72.5% output floor, which is designed to ensure that internally calculated capital requirements cannot fall too far below standardised levels. 

Meanwhile, the Fundamental Review of the Trading Book is a set of rules within Basel IV governing how banks must measure and manage risks from their trading activities. It makes them set aside more accurate amounts of capital to cover potential losses and ensures more consistent methods are used across the industry.

Basel IV involves changes to a bank’s approach to assessing credit risk, making it more risk-sensitive, and again limits the use of internal models, especially for low-default portfolios like corporate loans.

The updated framework overhauls how banks must assess operational risk by replacing internal-model-based approaches with a new standardised approach based on a bank’s income and past losses. Changes to the leverage ratio for large, complex banks are also being introduced. 

The Basel IV framework was developed in 2017 and its implementation was originally scheduled to begin on 1 January 2022. But this was postponed to the late 2020s for a variety of reasons, including the disruptions caused by the pandemic.

The EU and UK subsequently planned to start implementation by 1 January 2025. While the EU has stuck to this date for most of the framework, it has delayed adopting the Fundamental Review of the Trading Book requirements until 1 January 2026.

For its part, the UK has delayed the planned implementation of the entire framework until 1 January 2027 to give it time to assess how it is being approached in the US. This is because President Trump has made clear his intentions to deregulate the banking industry rather than impose new restrictions.

In the US, the Federal Reserve’s so-called Basel III Endgame proposal was supposed to start coming into effect on 1 July 2025 and be phased in over the subsequent three years. However, the exact details are still to be determined, with pushback from major US banks having already resulted in increases in capital requirements being reduced from 16% to 9% and the Trump administration’s plans still unclear. Fed Chair Jerome Powell has stated that “broad and material changes” are likely to be made to the final rules. 

Basel IV is expected to have a major impact on banks, the broader financial system and the companies that rely on banks for funding.

By tightening capital requirements and standardising the way risk is measured, it aims to create a more resilient banking sector that is better able to withstand a range of shocks.

However, the requirement for banks to hold more capital against risky assets than previously may hit their profitability and force them to increase lending costs. Smaller banks could face particular challenges due to the increased complexity of the regulation and the cost of complying with it.

Basel IV aims to make risk-weighted asset calculations more uniform, which should make it easier for investors and regulators to compare banks’ financial strength. And while it may become more difficult to access credit, the framework is intended to enhance the stability of the whole financial system, and by extension the broad economy, over the long term.

Something that needs to be monitored closely is the divergence in the timelines of how Basel IV is being implemented across regions. This is likely to create challenges – and opportunities – for firms and impact the competitive environment, with capital being shifted around the globe. It could even lead to systemic risks – exactly what the regulation is designed to avoid. 

Basel IV is set to have a major impact on banks, with profound implications for how they manage capital and assess risk. They will also need to think hard about how they go about maintaining their profits at previous levels. That said, they have had years to improve their capital ratios and make other necessary changes in preparation.

With banks forced to hold more capital against risky assets they will need to reconsider their lending practices, possibly shifting away from high-risk loans. Profitability may be at particular risk for banks that use complex models or that focus on lending to higher-risk customers. Many banks will need to invest heavily in new systems, data management and reporting capabilities to comply with the new regulations.

With the introduction of the output floor, Swedish, German and Danish banks are likely to experience the biggest increases in capital requirements as they generally make the heaviest use of internal risk models.

We expect some banks to respond by making changes to their product offerings, with a shift towards lower-risk or secured lending. Others may restructure their balance sheets or look to acquire smaller competitors to achieve economies of scale. 

Changes to the ways that banks allocate capital and manage risk are likely to have an indirect impact on asset managers. With banks potentially lending less, there could be new opportunities for asset managers to step in and fill the funding gaps vacated by banks. They may experience increased demand for non-bank financing solutions such as private credit, infrastructure funds and other alternative investments.

On the flip side, Basel IV may also lead to reduced liquidity in certain asset classes, such as structured products and high-yield corporate bonds, which asset managers will need to factor into their investment decisions and risk assessments. Meanwhile, changes in banks’ trading practices could affect pricing, spreads and volatility across asset classes.

The exact implications of Basel IV remain to be seen, but it’s not difficult to envisage asset managers being compelled to beef up their risk management capabilities, make changes to their product ranges and seek new forms of yield, potentially in collaboration with institutional investors. 

With banks adjusting their lending practices, a range of new opportunities for NBFIs, including insurance companies, pension funds and private lenders are likely to present themselves. But these opportunities will also involve risk, which will have to be assessed carefully.

We believe the private credit, real estate financing and alternative lending markets, which NBFIs are heavily involved in, could be set for expansion as companies seek new sources of funding. However, this may lead to greater competition in these markets, and NBFIs may also face increased regulatory scrutiny as they play a more prominent role within the overall financial ecosystem.

And just like for the other market participants we’ve discussed, the tighter liquidity conditions resulting from the changes in bank behaviour could compel many NBFIs to reassess their risk management frameworks to account for increased asset price volatility and less predictable liquidity. 

Basel IV’s main impact on companies in general will be through changes to how banks lend. In short, the cost of lending is expected to rise. This means that loans to companies – especially those deemed to be at relatively high risk of struggling to repay – could become more expensive or harder to obtain. Firms that rely heavily on bank financing, such as SMEs or those with lower credit ratings, may be hit disproportionately.

Companies will need to decide what to do in response to the changes. Some may turn to the capital markets or alternative lenders to meet their financing needs, increasing competition for funding from these sources. And while they may still be able to secure funding from banks, they may be more selective about the types of projects they are willing to finance, which will have implications for the kinds of projects that higher-risk companies can take on.

Some firms may choose to delay their planned investments. Those seeking to persist with their plans may need to diversify their sources of funding. 

Basel IV has the potential to lead to wholescale changes to how banks lend to companies, so we believe corporate treasurers shouldn’t be wasting any time – they need to start preparing now by assessing their financing strategies and strengthening their relationships with lenders.

With banks potentially less inclined to lend, treasurers could be set to face higher borrowing costs, more selective credit availability and increased scrutiny of their loan structures. So rather than just looking for traditional bank loans, our view is that treasurers need to diversify their sources of funding, with bond issuance, private placements and non-bank lenders all becoming possibilities depending on the nature of the company.

Optimising a company’s credit profile through strong financial metrics, transparent reporting and prudent risk management will be critical if it wishes to secure financing at the best possible terms. Securing a credit rating will also be important for large firms as unrated groups will be designated high-risk, whatever their credit history.

It goes without saying that treasurers should closely monitor how banks’ risk appetites evolve in the run-up to, and in the aftermath of, Basel IV being fully implemented in different regions, and adjust their treasury policies accordingly. This may involve extending debt maturities in advance or securing committed credit lines. Actively managing their companies’ liquidity, funding risks and counterparty exposures will also be important considerations for corporate treasurers looking to ensure their firms continue to prosper.

NatWest’s experts are on hand to keep you up to date with the latest developments on how Basel IV is being implemented and provide advice on what you need to do. Please get in touch with us here to find out more about how we can help you navigate regulatory change and its impact.