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Basel IV Rules:

The Impact Upon Capital Markets and

the Securities Finance Industry

Mark Faulkner
Co-Founder, Credit Benchmark

Executive Summary In 1966 Robert F. Kennedy made a speech about the
& Introduction importance of individual action to drive necessary
change. In the speech he said “Like it or not, we live
• The forthcoming Basel IV regulations will in interesting times. They are times of danger and
impact the global capital markets and have uncertainty; but they are also the most creative of any
potentially serious consequences for the time in the history of mankind.”
securities finance industry.
We are again living in interesting and uncertain times.
• Under Basel IV, banks’ internal ratings models The creativity invoked by Kennedy is not just relevant
will be set aside and unrated counterparts will to the political and cultural spheres his speech referred
carry a 100% RWA. to; it also serves to remind us today of the power of
positive change in the face of any challenge.
• Tens of thousands of high-quality but unrated
obligors will attract this 100% risk weight. It is In these turbulent times it is not surprising that
estimated that applying data from an external the regulatory direction of travel has been towards
credit assessment institution (“ECAI”) could encouraging stronger risk management within key
reduce the RWA dramatically, and produce financial networks and demanding more capital
a cost saving of 2 million USD per notional 1 dedicated to support the key players and their
billion USD of exposure. counterparts. The Basel IV regulations were conceived
prior to the Covid-19 crisis and are a further step along
• A potential solution to this dilemma is the that regulatory journey.
regulatory-approved use of alternative
sources of credit data to supplement the gaps The purpose of this paper is to help raise awareness
in the “issuer paid” credit rating agency model. of the forthcoming Basel IV regulations, to highlight
their potential impact and to issue a call to action. For
• The impact of the Covid-19 crisis to the the sake of efficient markets, the provision of liquidity,
global financial network has accelerated the and the security of investment returns, the creativity
downward transition of creditworthiness at a mentioned by Robert Kennedy is critical to the response
rate comparable to the 2008 Global of capital markets and the securities finance industry. In
Financial Crisis. such “interesting times” as these, creativity is essential.

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