Basel IVâs stricter rules will reshape US bankingâhereâs how
US banking regulators are finalising the implementation of Basel IV, a set of stricter global rules designed to strengthen financial stability. The new framework will require banks to hold more capital, which could push up costs for both lenders and borrowers.
The Federal Reserve, alongside the OCC and FDIC, is leading the rollout in the US. While the full impact remains uncertain, some adjustmentsâlike higher risk weights for certain loansâare already expected to reshape lending practices.
Basel IV introduces a more detailed approach to assessing risk across different types of lending. Banks will now have to evaluate borrowers more holistically, adjusting risk weights if a borrowerâs financial situation changes during a loanâs term. The rules also maintain a lower credit conversion factor for uncommitted lines of credit compared to committed ones, keeping their risk weighting unchanged.
For larger US banks, the framework will apply a dual-stack system for credit risk calculations. The stricter of the two methods will always prevail, forcing institutions to set aside more capital. Operational risk reserves will also be determined by a fixed formula rather than internal models.
Hedging derivatives will face higher risk weights under the new rules, increasing costs for funds using them. To offset rising expenses, banks may raise fees, adjust pricing, or shift risk through trades. Meanwhile, some risk weight percentages will change, particularly for unused credit lines, as loans get recategorised or new risk classes emerge.
The Federal Reserve, OCC, and FDIC are coordinating the final stages of adoption. However, questions remain about how strictly the US will enforce Basel IV, with hints that a softer version could be introduced instead.
The new regulations will demand more capital from banks, likely leading to higher borrowing costs for customers. Larger institutions must also adapt to stricter risk calculations and operational reserve rules.
While regulators aim to prevent bank failures and improve cross-border consistency, the final shape of Basel IV in the US is still taking form. Its full effects on lending markets will become clearer once implementation is complete.
