What Basel IV means for maritime finance

Background

Since its establishment in 1974, the Basel Committee on Banking Supervision ("BCBS") has strived to enhance financial stability by regulating the management practices of financial institutions at an international level. This has taken the form of a series of banking regulations known as the Basel Accords.

In 1988, Basel I set a minimum capital requirement aimed at minimising credit risk. This required financial institutions to maintain a capital adequacy ratio of at least 8%. In 2004, Basel II refined the calculations introduced by Basel I and prescribed the use of standardised measurements for credit risk, market risk and operational risk. Banks still had to maintain a capital reserve of 8%, but 4% or more of that had to be Tier 1 capital. In response to the 2008 financial crisis, Basel III increased the 4% capital requirement for Tier 1 to 6% and introduced additional capital buffers that banks were required to maintain. As a result, the total capital requirement was raised to 13%.

In 2017, the BCBS agreed on some amendments to Basel III to increase the standardisation of the banking system worldwide. These were originally named Basel 3.1 but because the changes are very comprehensive, they are often seen as a new framework referred to as Basel IV. Its incremental implementation started on 1 January 2023. The compliance deadline for all eurozone banks is 1 January 2025. In the UK, the rules will be introduced from 1 July 2025 and will be phased in over 4.5 years to ensure full implementation by 1 January 2030.

This article focuses on the key changes introduced by Basel IV and their impact on the ship finance market.

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