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Commentary on the EC’s new banking package proposal for Basel IV

On October 27th, the European Commission (EC) published the proposal for its 2021 European Banking package which focuses around 3 key topics. These 3 aspects will be centre stage for the years to come within European legislation and supervision.

  1. The word is finally out, financial institutions will receive an additional two years (until 2025) to adopt and implement the Basel III reforms (commonly known as Basel IV in the market)
  2. ESG confirms its status as talk of the town with the new package focusing on sustainability and the transition towards ‘green’.
  3. Following the Covid-19 pandemic, increased focus will go towards stronger supervision and better protection of the financial stability within the European Union.

In the weeks and months to come we will dig deeper into each of the above. But for those working within financial institutions being it in finance, risk or compliance, there is definitely a lot of food for thought.

The push forward of the Basel III reforms offers some additional breathing room for institutions. The sheer extent of the changes meant that a lot of institutions were preparing themselves for a full blown digital transformation, questioning old legacy systems whilst exploring the market, looking at challengers to the old software establishment

But rather than seeing the additional 2 years as a period to relax and sit back, it should instead be used by institutions to further explore, challenge the current way of working and to take the opportunity to not only adopt the new regulatory requirements but use it to reimagine the current E2E process and to implement new technologies/applications which will provide peace of mind for the future years to come.

Another elephant in the room is ESG. A lot has been written about ESG in the financial sector in the recent months. Although little is known on how ESG will impact Basel IV, its importance is again highlighted with the European Commission including explicit rules on the management and supervision of ESG risks in line with the EU’s sustainable finance strategy.

ESG has already found its way into the Stress test requirements for 2022. And with the European Commission declaring its exploration of a framework in which capital requirements would get adjusted for green or brown assets, one thing is certain: ESG will remain a hot topic.

Lastly the package also focuses on the creation of more enforcement tools for supervisors by ensuring the power given to supervisors are equal within nations, and that they are enforced in a more coordinated way.

Want to know how you can prepare for Basel IV?

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