"Basel IV" is the latest regulatory capital standard introduced by Basel Committee on Banking Supervision for internationally active banks. It builds on the Basel III framework which was devised in 2009 by a consortium of central banks from 28 countries, mainly in response to the financial crisis of 2007–2008 and the subsequent economic recession.
The implementation of Basel IV in South Africa is a critical step in enhancing the banking sector's risk management and capital adequacy standards. The South African Reserve Bank ("SARB") is the primary regulatory authority overseeing the implementation of Basel IV and has aimed for phased approach to the implementation thereof. The SARB oversight involves various stakeholders, including banks, financial institutions, and industry associations, to gather insights and address concerns about compliance requirements.
Monocle has recently conducted a comprehensive Basel IV implementation and regulatory capital impact survey across the South African banking industry, which concluded that South African banks' implementation measures are progressing well, with 100% of respondents confident that they will achieve full implementation by the 1 July 2025 deadline.
Basel IV requires a significant increase in a bank's capital. Increased capital requirements require banks to raise more equity or lend less, resulting in higher costs for banks and borrowers.
Basel IV also introduces revised Credit Conversion Factors ("CCFs"), which determine the amount of capital that banks must hold against off-balance-sheet exposures, such as loan commitments. This will, in turn, affect the fees (including commitment fees) charged to borrowers.
If loan commitments are assessed as higher risk, in terms of Basel VI's risk weightings assigned to various asset classes, banks will need to allocate more capital, which is likely to lead to higher commitment fees.
In sum, Basel IV's increased capital requirements and revised CCFs will make loan commitments more expensive and are likely to result in heightened commitment fees for such loans as banks adapt to the new regulatory landscape.
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