The evolution of the Basel framework: Are we back to where we started?

Abstract

While the ‘Basel IV’ standards have been finalised since December 2017, the jury is still out on its global implementation. This paper asks whether all Basel Committee on Banking Supervision (BCBS) jurisdictions will implement the standard consistently within the same timeline? Or whether there will be pervasive regulatory divergence resulting in regulatory fragmentation and an unlevel playing field? Does ‘Basel IV’ mark the endgame of internal-ratings based (IRB) models? Regulatory fragmentation is a corollary of the one-size-fits-all Basel standards that are calibrated based on internationally active banks’ data. In particular, these calibrations might not necessarily be appropriate for Asian banks. A more granular calibration approach or proportionality strategy might be tenable alternatives to make the Basel standards more relevant to specific geographies. Above all, the reason banks exist is because they play an important role as financial intermediaries to allocate funds to support productive investments in the real economy. Capital requirements must be appropriately calibrated and not be excessively conservative; banking regulations fail if the banking system becomes stronger because banks are lending less to the real economy.