Since its original publication in 2010, the Basel Committee on Banking Supervision (BCBS) has undertaken a comprehensive review of the Basel III capital framework. Due to their scope and significance, these revisions have been collectively dubbed ‘Basel IV’.

Revisions to Pillar 1 Capital Requirements

Revised standards cover approaches used to calculate risk-weighted assets (RWAs) that determine Pillar 1 capital for nearly all types of risk:

Risk Revision to Basel III Approach to RWA calculation
Credit risk Revisions to the Standardised Approach for credit risk
(BCBS Finalising Basel III)
Standardised approach
Constraints on the use of internal models
(BCBS Finalising Basel III)
Internal models approach
Securitisation risk Revisions to the securitisation framework
(BCBS Revisions to Securitisation Framework)
Standardised approach
External ratings based
Internal ratings based
Market risk Minimum capital requirements for market risk (following FRTB)
(BCBS Revised capital requirements for market risk)
Standardised approach
Internal models approach
Counterparty risk Standardised Approach for Counterparty Credit Risk (SA-CCR)
(BCBS SA for counterparty credit risk)
Standardised approach1
Review of the Credit Valuation Adjustment (CVA) risk framework
(BCBS Finalising Basel III)
Basic approach
Standardised approach
Internal models approach
Operational risk Standardised Measurement Approach (SMA)
(BCBS Finalising Basel III)
Standardised approach2

1 SA-CCR replaces both Current Exposure Method (CEM) and the Standardised Method (SM).

2 SMA replaces Basel II Standardised (TSA), Basic Indicator (BIA) and Advances Measurement Approach (AMA).

Other Revisions (IRRBB & LE)

In addition to the above, the following standards have been revised that are not part of Pillar 1 / RWA calculations:

Risk Revision to Basel III Other (non-RWA) approach
Interest Rate risk Interest rate risk in the banking book (IRRBB)
Internal assessment
as part of  ICAAP
Concentration risk Supervisory framework for Large Exposures (LE)
(Large Exposures - BCBS final standards)
Large exposure limits

Standardised Approach for Credit Risk

Revisions to the Standardised Approach for credit risk that are summarised below follow a second review of the Basel II/III standards and reintroduce the use of external ratings (albeit subject to due diligence requirements).

External Credit Risk Assessment Approach (ECRA)

Exposures to counterparties incorporated in jurisdictions that allow the use of external ratings for regulatory purposes will be assigned “base” risk weights determined by external ratings to their rated exposures:

Rating: Above A+ A+ to A- BBB+ to BBB- BB+ to BB- Above A+
  • MDBs meeting eligibility criteria
  • MDBs /Banks – base risk weight (RW)
20% 50% 100% 150%
  • Banks – Short-term RW
20% 50% 150%
  • Corporates – base RW
  • Object/Commodity finance base RW
  • Project finance base RW
20% 50% 100% 150%

Banks are expected to perform due diligence to ensure that the external rating conservatively reflects the credit risk. If their assessment indicates a higher degree of risk, then a higher risk weight must be applied.

Sovereigns / PSEs

Exposures to sovereigns and public sector entities (PSEs) are not within the scope of the proposed revisions.

Standardised Credit Risk Assessment Approach (SCRA)

This approach applies to exposures to unrated counterparties, or incorporated in jurisdictions that do not allow the use of external ratings for regulatory purposes.


Bank exposures must be graded according to set criteria as part of the bank’s due diligence:

Classification: Grade A Grade B Grade C
  • MDBs meeting eligibility criteria
  • MDBs – base risk weight (RW)
  • Banks – base risk weight (RW)
50% 100% 150%
  • Banks – short-term risk weight (RW)
20% 50% 150%


Corporate exposures are assigned “base” risk weights as follows:

Classification: General SME Inv. Grade
  • Non-specialised lending
100% 85% 75%

Specialised Lending

Specialised lending exposures are assigned “base” risk weights as follows:

Classification: Pre-operational Operational
  • Project finance
150% 100%
  • Object & Commodity finance


Retail exposures that meet regulatory criteria are risk-weighted at 75%, otherwise 100%.

Lending Secured by Real Estate

Risk weights for lending secured by property are broadly based on loan-to-values (LTVs) where regulatory criteria are met:

Classification: <=40% <=60% <=80% <=90% <=100% >100%

Residential risk weight (RW)

25% 30% 35% 45% 55% RWCP*

Where dependent on income

70% 90% 120%

Commercial risk weight (RW)

Min (60%, RWCP*) RWCP*

Where dependent on income

80% 100% 130%

* RWCP = Risk-weighting for counterparty

Where criteria for above treatment is not met, a 150% RW will apply where repayment dependent on income generated by property; otherwise the RW for the counterparty will be used (up to 100% where secured by residential property).

Land acquisition, development and construction (ADC) lending is risk-weighted at 150%.

Other Assets

Classification: RW
  • Cash / gold
  • Cash items in collection
  • Mismatched currency exposures (add-on)
  • Defaulted residential real estate (RRE) exposure
  • Defaulted unsecured exposure or RRE dependent on income
  • Subordinated debt & other regulatory capital instruments
  • Equity holdings

* Add-on to risk-weighting (RW) resulting in a RW up to a maximum of 150%

Off-balance Sheet Items

Off-balance sheet items are converted into credit exposures by multiplying the committed but undrawn amount by a credit conversion factor (CCF):

Off-balance sheet commitment CCF
  • Retail commitments unconditionally cancellable
  • Issuing / confirming letters of credit (LCs)
  • Contingent items e.g. warranties, standby LCs
  • Other commitments not unconditionally cancellable
  • Direct credit substitutes e.g. guarantees / acceptances
  • Sale/ repurchase agreements
  • Securities lent as collateral
  • Other off-balance sheet items

Market Risk

Following the BCBS’s Fundamental Review of the Trading Book, the revised market risk framework consists of the following key enhancements:

  • Revised boundary between the trading book and banking book to reduce incentives to arbitrage capital requirements between the two regulatory books, while continuing to respect banks' risk management practices.
  • Revised internal models approach (IMA) aimed to improve risk capture and the model approval process as well as constrain the capital-reducing effects of hedging and diversification. The revised approach replaces VaR with the Expected Shortfall (ES) metric.
  • Revised standardised approach (SA) to make it sufficiently risk-sensitive to serve as a credible fall-back (and floor) to IMA, as well as suitable for banks with limited trading activity. There are three main components:
    • Sensitivities-based Method for capturing risk sensitivity to price/rate shocks, volatility for options and additional risk due to price changes
    • Standardised Default Risk Charge (DRC) to reduce potential discrepancy in capital requirements for similar exposures across the banking book and trading book
    • Residual Risk Add-on to capture any other risks beyond the main risk factors already captured in the sensitivities-based method or standardised DRC.

Standardised Measurement Approach for Operational Risk

The Standardised Measurement Approach a single non-model-based method for the estimation of operational risk capital, intended to replace all previous approaches. The approach comprises two components:

  • Business Indicator (BI) Component – a proxy of operational risk exposure
  • Internal Loss Multiplier (ILM) – based on bank-specific loss data.

Business Indicator (BI) Component

The Business Indicator (BI) is calculated from the aggregation of three components:

  • ILDC (interest, lease and dividend) component based on average income/expenses
  • SC (services) component based on average operating income/expenses and fee and commission income/expenses
  • FC (financial) component based on average profit/losses in the trading and banking books.

The BI Component is then calculated according to the BI value:

Bucket BI Range BI Component
1 €0 to €1bn 0.11*BI
2 €1 to €3bn €110m + 0.15*(BI-€1bn)
3 €3 to €10bn €410m + 0.19*(BI-€3bn)
4 €10 to €30bn €1.74bn + 0.23*(BI-€10bn)
5 €30bn+ €6.3bn + 0.29*(BI-€30bn)

Internal Loss Multiplier (ILM)

The Loss Component (LC) is calculated based on average annual losses over a 10-year period (or 5 years or more during the transition period) and weighted to take account of loss events above €10m and €100m.

The Internal Loss Multiplier (ILM) is calculated using a logarithmic function of the loss component (LC) divided by the BI Component, adjusted by a calibration constant.

SMA Capital Requirement

The SMA capital requirement where the BI range falls into ‘bucket 1’, as shown above, is simply the BI Component. This is also the case for banks failing to qualify for ILM treatment. Otherwise, the SMA capital requirement is calculated as follows:

Banks in Bucket 1

SMA CR = BI Component

 Banks in Buckets 2 - 5

SMA CR = €110m + (BI Component - €110m)*ILM

Interest rate risk in the banking book

Revised standards for the management and supervision of interest rate risk in the banking book (IRRBB), which set out supervisory expectations for banks' identification, measurement, monitoring and control of IRRBB as well as its supervision. The key principles include:

  • Greater guidance on the expectations for a bank's IRRBB management process in areas such as the development of interest rate shock scenarios, as well as key behavioural and modelling assumptions to be considered by banks in their measurement of IRRBB
  • Enhanced disclosure requirements including quantitative disclosure requirements based on common interest rate shock scenarios
  • Updated standardised framework, which supervisors could mandate their banks to follow or banks could choose to adopt
  • Stricter threshold for identifying outlier banks, which is has been reduced from 20% of a bank's total capital to 15% of a bank's Tier 1 capital.

EU Implementation of Basel IV: CRD V / CRR II

Although the Basel Committee formulates international supervisory standards and guidelines it has no legal authority. In the past, Basel banking standards have been passed into EU legislation through Directives, which in turn have hitherto been implemented through national measures.

In order to “maximise harmonisation”, the EU has chosen to implement the majority of Basel III rules through direct regulation, without the need to be written into national law. This is designed to prevent EU member states ‘gold-plating’ or adding to EU legislation.

CRD V (and CRR II) are a package of proposed amendments to the CRD IV directive and previous regulation, which implement remaining components of Basel III as well as some of the new reforms. The majority are implemented through direct regulation, so-called CRR II, and include:

CRD V / CRR II proposals are expected to commence coming into force no earlier than 2019.