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Basel IV: What’s next for European banks?

By Stefan Koch, Roland Schneider, Sebastian Schneider, and Gerhard Schröck

A new report finds that European banks will need more capital under the so-called Basel IV reforms. While rule making continues, banks can take no-regret measures now.

The changes proposed by the Basel Committee on Banking Supervision (BCBS), currently a mix of consultation papers and finalized standards, would rework the approach to risk-weighted assets and possibly internal ratings, as well as set regulatory capital floors. According to our analysis, if European banks do nothing to mitigate their impact, these rules will require about €120 billion in additional capital, while reducing the banking sector’s return on equity by 0.6 percentage points. This impact is much greater than initially anticipated and will be a game changer for the European banking industry.

Our new report, Basel “IV”: What’s next for banks? (PDF–1,996KB), provides a comprehensive perspective on the capital and profitability implications, with recommendations on how banks should react. It not only examines the latest status of BCBS changes (as of March 2017) but also considers efforts by the BCBS to harmonize capital calculations under Pillar 1. Our results consider the effects on a sample of 130 European banks drawn from the latest European Banking Authority transparency exercise, in 2016.

The repercussions will vary, depending on banks’ geography and business model and will require actions tailored to the individual bank’s circumstances. Banks will likely have to take some unconventional measures to comply. Potential phase-in arrangements are still under discussion and may not take full effect until 2025. While policy makers deliberate, banks should create transparency based on the expected rules, define mitigating actions, and start implementing no-regret measures, while also managing appropriately the expectations of rating agencies and investors.

Download the full report on which this article is based, Basel “IV”: What’s next for banks? (PDF–1,996KB).

About the author(s)

Stefan Koch is an associate partner in McKinsey’s Cologne office; Roland Schneider is an expert in the Frankfurt office, where Gerhard Schröck is a partner; Sebastian Schneider is a partner in the Munich office.
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