07.12.2023 Articles

The ever-changing and stricter banking regulations pose significant challenges for Risk departments. In particular, the demanding and constantly evolving Basel (CRR/CRD) framework presents hurdles that financial institutions must overcome.  

In this article, we explore the recent developments in the implementation of Basel IV in Europe and discuss how utilizing a natively integrated Risk & Compliance management platform can benefit banks in navigating this complex landscape. 


Basel IV Implementation in Europe (CRR III)

In June 2023, the EU Council reached a provisional agreement with the European Parliament navigating Basel IV implementation through the Capital Requirement Regulation (CRR 575/2013) and Capital Requirements Directive (CRD 2013/36) – CRR III and CRD VI, respectively. This agreement followed the EU’s publication of its position on the Basel III implementation in the EU in October 2022, which marked the beginning of a negotiation period culminating in the provisional agreement. 

The Basel III reforms, also referred to as Basel IV, were introduced in response to lessons learned from the Global Financial Crisis (GFC) and were initially slated for implementation in January 2022. However, the Group of Central Bank Governors and Heads of Supervision (GHOS) decided in March 2020 to postpone the deadlines by one year due to the economic impact of Covid-19. 

The EU made substantial reforms to enhance the resilience of its banks to financial turbulence, drawing heavily from the Basel Committee on Banking Supervision (BCBS) standards. The regulatory landscape has been shaped by a series of amendments and acts, including CRR II and CRD V in 2019, Liquidity Coverage Ratio rules in 2014, and a quick fix in response to the Covid-19 pandemic in 2020. 


Major Reforms in EU Banking Framework 

The ongoing review of the EU banking regulatory framework has been driven by impact assessments designed to strike a balance between simplicity, comparability, and risk sensitivity while avoiding excessive capital requirements and competitive disadvantages for EU institutions. Specific alignment with international standards is also proposed. 

On September 26,2023 EBA released the second round of the Basel III monitoring exercise which provides an assessment of the impact of the full baseline Basel IV implementation for a sample of 157 EU/EEA banks with December 31,2022 data. According to the main results of the exercise, EU banks would combined need a total of EUR 0.6 billion of additional Tier 1 capital at the full implementation date in 2028 compared to the figures from the current EU implementation of the Basel standards (CRR 2/CRD 5). Moreover, the weighted average relative increase in total Tier 1 minimum required capital (MRC) after of the reform is +12.6% across all banks. In September 2023 BCBS released a Basel III monitoring exercise as well, analyzing a global sample of 178 banks with data as of 31 December 2022. As reported in the exercise banks that have a Tier 1 capital of more than €3 billion and are internationally active (Group 1 banks) will experience a change in Tier 1 minimum required capital (MRC) by +3%, while other banks (Group 2 banks) by +6.6%. 

Credit Risk 

The reforms in the general approach proposal of October 2022 include various elements affecting credit risk, for both standardised and internal ratings-based (IRB) approach. Notable changes encompass the introduction of output floor, revisions to the standardised approach to be more risk sensitive in a number of areas, and modifications to the IRB approach to enhance its robustness and the results of the financial system. 

Operational Risk 

The current operational risk framework, often criticized for its lack of risk sensitivity, has been replaced by a single standardized approach to ensure comparability and simplicity. The revised approach relies on a Business Indicator Component (BIC) based on an institution’s business size. Enhanced data collection and governance requirements have been introduced to improve operational risk management. 


Navigating Basel IV


Environmental, Social, and Governance (ESG) 

In alignment with the European Green Deal roadmap, the EU is introducing regulatory requirements and definitions for identifying, disclosing, and managing environmental, social, and governance risks (ESG risks) for financial institutions. These measures aim to promote a sustainable and climate-neutral financial sector in response to the ongoing climate crisis. 

Crypto Assets 

Prudential treatment rules for crypto asset exposures, published by the BCBS, are set to be implemented by January 2025. The European Parliament has proposed interim risk-weight measures for crypto assets until December 2024 to mitigate potential turbulence in the EU banking industry. 

CVA Risk 

The new framework amends the previous CVA standard approach (S-CVA) and renames it as the CVA basic approach (BA-CVA), while it develops a new standardised approach to CVA (SA-CVA). 

Provisional agreement 

Following negotiations, a provisional agreement was reached in June 2023, subject to final approval, covering capital requirements, environmental and crypto risks, and amendments to the Capital Requirements Directive (CRD). The agreement addresses issues such as the ‘output floor,’ credit, market, and operational risk, management board assessments, and third country regime framework for access to the EU market. 

Utilising Technology to Fully Comply with CRR III 

To tackle the challenges of evolving regulatory Directives, financial institutions are advised to invest in flexible, robust, and fully integrated RegTech platforms. These platforms can streamline the complex process of regulatory risk calculations and reporting, freeing up time for primary risk management objectives and analysis. 

RiskAvert, provides a natively integrated, modular environment to achieve regulatory compliance regarding capital and liquidity requirements. It acts as a single point of truth, ensuring data consistency and integrity while delivering personalized reporting tailored to each institution’s unique needs. 



Banking sector: Provisional agreement reached on the implementation of Basel III reforms [European Council]

Consolidated Basel Framework [BIS]

Draft European Parliament Legislative Resolution [European Parliament]