The Basel Committee on Banking Supervision’s revisions to the global regulatory capital framework have presented a unique opportunity for alternative lenders and fostered more innovative partnerships between private funds and banks. The Basel guides were created post the 2008 financial crisis to encourage liquidity during financial downturns, laying out how regulators worldwide should handle capital requirements.
The progression into Basel IV, which is set to start in January 2025, is likely to cause a significant shift in lenders’ landscape. Private credit funds may take a larger share of some lending markets as banks become less competitive – in turn, alternative lenders could see an increase in deal financing sources as banks reassess their participating financings.
Banks may even look towards back-financing of alternative lenders to replace their earlier lending activities, as doing so would carry a lower capital charge. This could lead to credit funds selling their wares to banks, further disrupting, and adapting traditional banking models.
Reflecting on the post-global financial crisis regulation and the rising competition from alternative lenders, the market has begun to understand the crucial role of regulatory capital calculations in determining the size and type of a bank’s lending activities.
Basel IV, or Basel III.1, as it is referred to popularly in the market, has stipulated restrictions on the use of internal models that big banks used for assessing risk-weighted assets. Moreover, these rules will introduce an “output floor” to ensure a minimum risk-weighted assets amount, leading to increased capital requirements, thus restricting low-risk loans at a lower rate of regulatory capital.
Basel IV also ushers in an increased level of sophistication to the standard models, consequently increasing the amount and complexity of data needed by banks to perform their calculations. The requirements have contributed to significant increases for regulatory capital in real estate and corporate transactions, loans to other banks or broker-dealers, and new provisions for exposure to covered bonds and subordinated debt.
Implementation of Basel IV will likely lead to certain loans, such as those involving general commercial real estate, income-producing commercial real estate, and acquisition, development, and construction, witnessing an increase in the required risk weight.
This article is based on information gathered from Bloomberg Law.