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Basel IV: IRB 2.0 and interdependencies with the new capital floor
The trust that market participants once put in banks’ internal models of calculating capital requirements was severely impacted by the 2007/8 financial crisis. This has led to many proposals to reform the methodology for the calculation of Risk Weighted Assets. This also includes the internal ratings-based approach (IRBA). This paper looks at the final version of the revisions advocated by the BCBS, which was published in December 2017 — ‘Finalising post-crisis reforms’. The focus will be on the changes to the IRBA and the introduction of a new capital floor. Even if the implementation of the new requirements was to last until 2022, banks and other financial markets participants expect a much bigger impact on the business models than in previous regulatory reforms.
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Martin Neisen is the global Basel IV leader of PwC and coordinates PwC’s initiative for the implementation of Basel IV. This initiative covers all aspects regarding the impact and the implementation of Basel IV, including strategic implications, standardised approaches, internal models, business implications, IT and also knowledge management. He leads the regulatory management department in PwC Europe and is our central expert in the area of Basel II/III/IV and projects regarding other regulatory topics.