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Basel IV in Europe: What Changes, Who Is Affected, and Why It Matters

  • aminetahour8
  • Nov 18
  • 7 min read
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As regulators worldwide adopt Basel IV, banks, for their part, must deal with divergent timelines and interpretations at the local jurisdictional level. Implementation differs considerably between the EU, UK, US, and other regions. In Europe, the framework is now set to take effect in January 2026, while the UK and US aim for mid-2025, and Canada began implementation as early as 2023 (Basel IV – a Jurisdictional Breakdown, 2024b).

Basel IV aims to standardise risk-weight calculations, strengthen reporting standards, and reduce variability across internal models. The objective is to ensure banks hold sufficient capital to absorb shocks, while preserving confidence in the stability of the financial system (Basel IV Is Here: What You Need to Know, 2025b).


The framework significantly raises the stakes for the banks, with changes pushing banks to rethink capital allocation and upgrade infrastructure. Large European institutions face an average 20 - 25% increase in minimum capital requirements, alongside demands for stronger governance, better data systems, and stricter reporting (European Banking Authority [EBA], as cited in JCMS, 2020). These reforms raise a serious question: did regulators fully anticipate the consequences, and could stricter requirements have unintended effects on lending, customers, and the wider economy?

 

Challenges for Banks

 

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Behind the scenes, banks are tackling a complex set of changes - and it all starts with the key shifts introduced under Basel IV:

  • Banks have long relied on advanced internal models to estimate credit risk, often producing lower risk than the regulator’s standard approach. Under Basel IV, these models can no longer be used for large corporates with turnover above 500 million euros, and stricter limits are placed on key risk parameters. This cuts back the resilience of internal modelling

  • Basel IV introduces a capital output floor - a minimum level designed to prevent banks’ internal models from producing risk-weighted assets (RWAs) that are too low compared to the standardised approach. Risk-weighted assets represent a bank’s assets adjusted for risk level and are used to determine minimum capital requirements. In the EU, the floor is phased in gradually - 50% from January 2025, rising each year to reach 72.5% in 2030, with transitional relief (a temporary easing measure that softens the immediate capital impact of the new rules) available until 2032. Once fully in, internal-model RWAs can’t fall below 72.5% of the standardised figure. These transitional arrangements were agreed by the Basel Committee to give IRB banks (institutions approved to use Internal Ratings-Based models to estimate risk instead of relying only on standardised weights) time to adapt.

  • Once fully kicked in, the output floor limits the benefit of internal models to 27.5% of RWAs. Consequently, the flexibility is reduced for banks that rely heavily on model-driven risk sensitivity (Nordea, 2025).

  • By altering the definition of a bank’s total exposure, the new reforms also revise the leverage ratio. As the total exposure, to include not only on-balance-sheet assets but also off-balance-sheet items (like derivatives, repos, and unused credit lines), is redefined, it tightens how much leverage banks can carry relative to their Tier 1 capital. This capital needs to be at a minimum of 3% of the bank’s total exposure (Ali, Hobson, & Burrows, 2018).

  • For the first time, ESG risks are formally embedded into prudential regulation. Banks must now report their exposure to climate and environmental risks, disclose them publicly, and integrate short-, medium-, and long-term ESG scenarios into their governance, strategies, and stress testing. This means sustainability risks are treated with the same seriousness as credit or market risks. The result is a new layer of complexity requiring enhanced data collection, scenario analysis, and reporting capabilities (Hörauf et al., 2024).


Finally, Basel IV reengineers operational risk management by implementing a single standardised approach. Instead of different methods and complex internal models, banks must now calculate capital needs using a single formula based on their size and past loss history. And the result? More consistency across banks, but less flexibility for banks that previously customised models to their own operations (BIS, 2024).



Impact on Banks and End-Users 


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While Basel IV is aimed at strengthening banks, its repercussions inevitably reach customers - from households taking out mortgages to corporates relying on bank loans:

  • Basel IV adds new pressure to banks’ already weakened returns. Since the 2008 - 2009 financial crisis, profitability has dropped by about a third, and the latest rise in capital costs leaves banks with a choice: absorb the hit or pass it on to customers. For large unrated corporates - especially those with revenues above €500 million that notably rely on loans - this likely means tougher terms and higher costs (Nordea, 2025).

  • Similar risks had already been predicted in earlier academic research, such as Bakare (2018). According to this study, banks provide around 76% of business funding in Europe, and because mortgage lending depends heavily on the borrower’s repayment ability, mortgages are harder to secure here than in the US.

  • Back in 2018, analysts already warned that low growth and rising regulation were squeezing banks’ profitability, forcing them to cut dividends and build capital buffers. With Basel IV, higher RWAs are set to increase capital requirements, which adds strain on banks that have invested heavily in internal models.

  • Earlier research argued that banks with higher capital demands and implementation costs for Basel IV might choose to de-leverage and limit access to credit available to European companies. Consequently, these costs could be passed on to borrowers in the form of higher loan prices and pivot Europe towards a more capital-market-based funding system like in the US.


As a final point, large corporates are encouraged to diversify their funding sources rather than rely solely on bank lending, as Basel IV could alter access and pricing. Securing a credit rating will also gain importance, since unrated firms are automatically assigned to higher risk categories, no matter their actual credit risk history (Nordea, 2025).

 

Economic Consequences of Basel IV 


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Beyond banks and their customers, Basel IV also carries wider consequences for the economy, as lending patterns play a key part in driving investment and growth.

As loans to households and businesses fuel investment and growth, Basel IV has been criticised for over-emphasising finacial stability at the expense of lending. Analysts warned that stricter requirements could induce banks to scale back credit, dampening economic activity. Nevertheless, the impact would be softer for well-diversified institutions such as mortgage banks with low loan-to-value portfolios (Bakare, 2018).


To understand the wider economic consequences, Moody’s (2023) identifies the following pressure points that banks and corporates cannot overlook:

  • Basel IV makes low-risk lending more expensive. Previously, banks could employ their own models to show that prime mortgages or creditworthy corporates carried minimal default risk. This kept their risk weights as well as funding costs low. Basel IV restricts those models and ties calculations to a less flexible standardised approach. Inevitably, even safe assets are assigned higher risk weights, forcing banks to hold more capital than their actual risk would justify.

  • Basel IV applies the same capital treatment to mortgages across jurisdictions. This means that even in countries like the Nordics, the Netherlands, and Germany, where social systems and creditor protections make mortgage defaults rare, banks must hold capital as if those loans carried the same risk as in the US. The outcome is higher capital requirements for mortgages that are, in practice, very safe.

  • Basel IV changes the funding landscape for corporates. In Europe, companies largely depend on banks rather than capital markets, but the new rules affect them unevenly. Large corporates without external credit ratings lose the preferential treatment they enjoyed under internal models and are pushed into a flat 100% risk weight, making their loans more expensive. SMEs, though also bank-dependent, are less directly penalised because their risk weights were already higher under earlier rules.

  • Taken together, these rules transform the cost and availability of credit across Europe. Beyond individual banks and borrowers, the cumulative effect risks slowing investment and shifting the region further toward capital-market-based financing.

  • Basel IV pressures low-risk, low-return lending. When risk-weighting floors raise capital requirements, banks may try to recover profitability by raising prices. If that fails, they could shift low-yielding assets off their balance sheets to ease capital strain, but this reduces their capacity to finance the wider economy, including essentials like mortgages for first-time buyers.


To sum up, banks should systematically test their lending capacity under Basel IV, including in times of economic downturns or crises like the COVID-19 pandemic or the Ukraine war. This is necessary because regulators are unlikely to relax or suspend the output floor, even in scenarios of severe stress.


Conclusion


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Throughout this report we have tracked how Basel IV is reshaping European banking: from key shifts in capital and risk frameworks, through the tangible impacts on banks, end-users and the wider economy. We’ve shown how limits on internal models and tougher treatment of low-risk portfolios reshape lending capacity, profitability, and growth - making Basel IV not just a compliance task but a strategic shift for banks and their clients. At Morrison Finance, we help financial institutions navigate today’s evolving regulatory landscape by strengthening their risk management, governance, and compliance frameworks. Through a practical and data-driven approach, we support banks in turning complex regulatory demands into sustainable performance and strategic resilience.



References

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