Basel Standards for capital adequacy have been around since 1988, increasing in complexity and scope ever since. We can pinpoint three significant revisions to Basel since the first standards were introduced.

• The Evolution of Basel II: Enhancing Risk Calculation Methods

These started with Basel II in 2004, prescribing increasingly sophisticated methods for banks to calculate their capital ratios across credit risk, operational risk, and market risk. The efficacy of these changes was questioned as a result of the financial crisis in 2007-8.

• Impact of the Financial Crisis 2007-2008 on Basel III Implementation

This culminated with Basel III in 2010, introducing changes to the quality and quantity of regulatory capital, additional capital buffers, the introduction of a leverage ratio, and the incorporation of liquidity risk for the first time.

• Understanding Basel 3.1, Basel IV, and Basel ‘End Game’ Revisions

Lessons were then learned from the crisis, resulting in a set of revisions between 2012 and 2017. These changes are now referred to as Basel 3.1, Basel IV, or Basel ‘End Game’ depending on where you sit in the world.

While Basel III addressed some of the weaknesses in the framework highlighted by the crisis, it was widely recognized that three key issues remained.

• Challenges with Risk Weighted Assets (RWA) Variability

The credibility of the framework was being questioned due to the wide variability in risk-weighted assets (RWA) across financial institutions, causing reduced confidence in the reporting of RWA amounts.

• Concerns with Internal Models and Capital Optimization

The use of internal models and possibilities for capital ‘optimization’ were also a concern, with opportunities for banks to minimize risk weights through some of the parameter and calibration choices made in their models.

• The Need for a New Market Risk Framework Post-1996

The market risk framework, having not changed since its introduction in 1996, needed a fundamental review due to issues with capitalizing trading activities that the crisis exposed.

With years having passed since the Basel Committee on Banking Supervision (BCBS) finalized the prudential regulatory reforms following the financial crisis, and with the prescribed 2028 end date of the transitional arrangements on the horizon, we are now in the last stages of what has been a monumental program of regulatory change.

In our latest whitepaper, we recap the genesis and key objectives of the Basel reforms, explore the key changes, and the current status of implementation around the world. We dive into the detail on how these latest Basel changes are being implemented in key jurisdictions, highlighting similarities and differences, and taking a deeper dive into some of the complexities and challenges – those issues that only arise when you really look at the detail of the changes.

We discuss what firms should be thinking about now from a practical perspective, from business model changes to the ongoing optimization of the use of regulatory capital, to embracing the latest changes as an opportunity to consider how they are processing data for both internal purposes and regulatory reporting and risk calculations.

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