Financial Services Foresight

Our latest thinking addressing the challenges and opportunities in the financial services industry.

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Prevailing challenges require financial institutions to take bold actions

On Dec. 8, 2017, the Basel Committee on Banking Supervision (BCBS) published its final Basel IV reform proposals, outlining the latest recommendations for international banking standards and regulations. A key compromise included in the final reform proposals: the BCBS called for a 72.5% output floor.

As a result, we expect significant risk-weight asset (RWA) inflation (between 14% and 22%) for European banks. RWA impact will be most severe for banks in central and northern Europe, driven by their high reliance on internal ratings-based (IRB) models.

The implications of Basel IV are still unknown, but they could include reduced financing supply or increases in lending margins in markets, with banks heavily affected by the reforms.

Have you already digested your Christmas present from Basel yet?


Meanwhile, the regulatory agenda for 2018 is no less exciting than in previous years. Most notably, the European Banking Authority (EBA) announced its 2018 EU-wide stress test. New this time, the EBA will require the application of International Financial Reporting Standards (IFRS) 9 in the assessment of banks’ credit risk. This is a key change in the stress test methodology since it was last exercised in 2016. We expect the change to significantly increase the complexity of the stress test. Under the adverse scenario, it would significantly affect banks’ Common Equity Tier 1 (CET1) ratios.

Strategy& has a long-standing track record helping leading European institutions master the stress test exercise and optimize their stress testing capabilities. Our stress test validation tool is a powerful way to validate banks’ stress test results in an efficient and extensive manner. The tool’s automatic benchmarking feature will provide distinct value and insight to bank executives and decision makers.

Check out how the Strategy& Stress Test Validation tool can help your institution in the 2018 EBA stress test.

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Dr. Peter Gassmann

Managing Director Europe, Strategy& Germany

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Partner, Strategy& Germany

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Principal, USA

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Partner, Australia

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