Basel III, Basel IV, Basel III Endgame, & Basel 3.1: Terminology Explained

The global financial crisis (GFC) of 2007-09 was a watershed event in financial markets that demanded a huge change in how banks are regulated. The main regulatory response to the GFC was labeled Basel III by the Basel Committee on Banking Supervision (BCBS), the primary global standard-setter for prudential regulation of banks, when first set out in 2010. This note is intended to clarify the differences in terminology that have emerged around this Basel Framework.

The main focus of Basel III was requirements relating to capital adequacy, liquidity, and leverage, with an implementation timeline set for January 1, 2019.

In December 2017, the BCBS published further “final changes” to Basel III. This was followed by a revised market risk framework in January 2019. The term Basel IV has been widely used for these updates by the media and some in the industry, but they continue to be referred to as part of the Basel III reforms by the BCBS. Other terms for these have also since emerged, including the Basel III Endgame (primarily used in the US by bodies such as the Federal Reserve) and Basel 3.1 (used in the UK by the Bank of England).

Despite the differences in terminology, all of these terms – Basel III, Basel IV, Basel III Endgame, and Basel 3.1 – refer to the same thing, specifically the “final changes” and revised market risk framework published under the Basel III label by the BCBS and that are currently being implemented in various jurisdictions.

The table provides a summary of the changes introduced by the original Basel III publications and those published in January 2017.  

Original Basel III Further Basel III (aka Basel IV, Basel III Endgame, & Basel 3.1)
Capital Adequacy: Ratios
  • Increased minimum ratio
  • Additional capital conservation and countercyclical buffers
  • Revised eligibility criteria
  • No change
Capital Adequacy: Calculations
  • Revised standardized and models-based approaches
  • New or amended requirements for credit value adjustment, counterparty credit risk, securitizations, and central counterparties
  • Further revisions to standardized and models-based approaches for credit risk and credit value adjustments to increase risk sensitivity
  • Restrictions on the use of models for banks, corporates and equities
  • Updated and additional input floors
  • Revised output floor
Liquidity Ratios
  • New liquidity coverage ratio and net stable funding ratios
  • No change
Leverage Ratio
  • Newly-introduced ratio
  • Amendments to the exposure measure
Operational Risk
  • Various options to calculate operational risk capital
  • Single standardized approach
Globally systemically important banks
  • Additional capital and other requirements for largest banks
  • Higher leverage ratio for globally systemically important banks
Pillar 2
  • Updated requirements extend the scope and include interest rate risk in the banking book
  • No change
Pillar 3
  • Revised and expanded framework for reporting requirements using standard formats
  • No change

For market risk, some amendments were first announced in January 2016 but were then rolled up into the revised market risk framework in 2019, as detailed below.

Original Basel III Further Basel III (aka Basel IV, Basel III Endgame, & Basel 3.1)
Basel III: January 2016 Revised Framework: January 2019
Banking/Trading Book Boundary
  • Tweaks to boundary definition
  • Update of boundary definition
  • More precise definition of boundary
Use & Validation of Models
  • Approval/removal on a bank-wide basis
  • Approval/removal at a trading desk level
  • New performance test metrics
Capital Calculations
  • Based on value at risk
  • Expected shortfall replaces value at risk
  • Capital for non-modeled risk factors added
  • Some tweaks
  • Revised non-modeled risk factor criteria
Standardized Approach
  • Measurement based on exposure building block approach
  • Measurement based on use of risk sensitivities under a stress scenario
  • Some refinements

Glossary

CCP = Central counterparties

CCR = Counterparty credit risk

CVA = Credit value adjustment

LCR = Liquidity coverage ratio

NSFR = Net stable funding ratio

G-SIB = Globally systemically important bank

IRRBB = Interest rate risk in the banking book

ES = Expected shortfall

VaR = Value at risk

NMRF = Non-modeled risk factor

It is these revised requirements in the table above that national regulators have, or are in the process of, implementing, albeit using different terminology in some jurisdictions and with tweaks to suit local circumstances.

Intuition Know-How has comprehensive coverage of the overall Basel framework. While the tutorials are titled “Basel III,” our coverage incorporates all of the changes and revisions that were subsequently made.

  • Basel III – An Introduction
  • Basel III – Pillar 1 & Capital Adequacy
  • Basel III – Measurement Approaches
  • Basel III – Liquidity & Leverage
  • Basel III – Pillar 2 & ICAAP
  • Basel III – Pillar 3 & Risk Reporting
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