Banking supervision is a crucial part of maintaining financial stability in any country. To strengthen global banking systems, the Basel Committee on Banking Supervision (BCBS) introduces international banking guidelines known as Basel Norms.

For students preparing for UPSC, Banking, SSC, and State PSC exams, understanding the difference between Basel III and the proposed Basel IV is essential.
This article explains both frameworks in simple, easy-to-grasp language with clear comparisons and exam-ready highlights.

What Are Basel Norms?

Basel Norms are international banking regulations created to ensure that banks maintain adequate capital, risk control, and liquidity to prevent failures during financial crises.

They help banks:

• absorb shocks
• manage risks
• maintain customer confidence
• ensure smooth financial operations

What Is Basel III?

Basel III was introduced after the 2008 Global Financial Crisis, when many banks collapsed due to weak capital structures and poor risk management.

Key Features of Basel III

1. Higher Capital Adequacy Requirements (CAR / CRAR)

Banks must maintain a stronger capital base to absorb losses.
Minimum requirement increased to 10.5% (or more).

2. Capital Conservation Buffer (CCB)

Additional 2.5% buffer to protect the bank during periods of stress.

3. Leverage Ratio

A rule to ensure banks do not lend excessively without enough capital.

4. Liquidity Rules

Two major liquidity measures were introduced:

• Liquidity Coverage Ratio (LCR): Banks must hold enough liquid assets to survive a 30-day crisis.
• Net Stable Funding Ratio (NSFR): Ensures long-term stable funding.

5. Tier 1 Capital Strengthening

More focus on common equity, the most reliable form of capital.

Basel III Objective

To make banks stronger, safer, and more resilient against shocks.

What Is Basel IV? (Proposed Framework)

Basel IV is not an official term but commonly used to describe the latest set of revisions made by the Basel Committee after Basel III.
It aims to fix gaps and inconsistencies found in Basel III.

It is expected to be implemented between 2025–2030 globally (phased manner).

Key Features of Basel IV

1. Revised Standardised Approach for Credit Risk

A more detailed method to assess how risky a loan or investment is.

2. Output Floor (Major Change)

Banks cannot reduce their risk-weighted assets (RWAs) below 72.5% of the standardized model, even if they use internal models.
Prevents manipulation of risk calculations.

3. Stricter Rules for Operational Risk

Simplified but tougher calculations for risks like:

• cyberattacks
• fraud
• legal failures
• system breakdowns

4. Changes in Leverage Ratio

Includes adjustments for global systemically important banks (G-SIBs).

5. More Sensitive Risk Weights

Different assets will get more realistic risk weights, forcing banks to hold appropriate capital.

Basel IV Objective

To improve consistency, accuracy, and transparency in bank risk calculations.

Basel III vs Basel IV: Key Differences

Here is a simple comparison to help you understand:

Why Basel IV Was Introduced

Because banks were:

• Underestimating risks using internal models
• Keeping lower capital than required
• Manipulating risk weights
• Taking high exposure without proper buffers

Basel IV fixes these issues with more transparency and tougher standards.

Impact on India

1. Stronger Banking Sector

Indian banks, especially PSBs, will become more stable.

2. Higher Capital Requirement

Banks may need to raise more capital.

3. Better Risk Management

RBI will align many Basel IV features with Indian conditions.

4. Enhanced Customer Confidence

A safer banking system benefits depositors and investors.

Easy Way to Remember

• Basel III = Strong banks
• Basel IV = Even stricter, more accurate risk rules

Think of Basel IV as an upgrade or advanced version of Basel III.