The impact of the revised Basel III banking standards, dubbed in the industry as "Basel IV," will differ materially between banks but may not be as large as some regions expected, according to S&P Global Ratings.
In a report, S&P said it expects the updated rules, once fully introduced in 2027, to materially decrease the pillar 1 capital ratio of several banks, particularly those in Europe and Japan, where banks tend to be heavy users of internal models and will thus be particularly affected by the output floor and restrictions around model-based approaches. Banks in these regions are also likely to hold a larger proportion of traditionally low-risk assets, such as mortgages, on their balance sheets. The agency therefore expects banks in Europe and Japan to further their capital accumulation.
S&P noted, however, that the final rules regarding standardized risk-weights for mortgages are less stringent compared with the initial proposal, which it said had "materially overstated the risk profile of mortgages in a number of markets." The final rules' main approach still assigns increasing risk weights depending on the loan-to-value ratio, but at a lower scale than the original proposals.
The agency warned of a significant risk of uneven implementation of the rules, as a number of local regulators have already indicated their intentions to minimize the potential increase in overall capital requirements on banks in their jurisdictions even before the new standards, which are not legally binding, were finalized. Such a trend would undermine efforts to restore market confidence in regulatory capital metrics and heighten the risk of regulatory fragmentation, S&P said.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.