How capital pressure exposes what banks actually are – and what they are willing to become
Why Basel IV feels different
I have lived through Basel I, II, II.5, III, and their countless national inflections. Each wave was presented as an incremental refinement – more risk sensitivity here, more resilience there. Basel IV is different, not because the rules are harsher, but because they close avenues that banks quietly relied on for decades.
For most of modern banking history, capital was something to be managed. Under Basel IV, capital becomes something to be endured. That distinction matters enormously for ExCos.
Basel IV does not just increase capital requirements. It compresses strategic optionality. It narrows the space between regulatory minimums and economic viability. It forces long-deferred questions about business models, portfolio composition, and institutional identity into the open.
Many ExCos instinctively frame Basel IV as a technical challenge: model changes, output floors, RWA inflation, reporting complexity. That framing is understandable – and dangerously incomplete. Basel IV is not a regulatory upgrade. It is a strategic stress test of the bank’s core logic.
1. The capital illusion Basel IV destroys
Before Basel IV, many banks operated with a comforting illusion: that capital intensity was, to a meaningful degree, a modelling choice.
Internal models allowed banks to express their view of risk sophistication. Lower RWAs were interpreted as evidence of better risk management. Capital efficiency became a proxy for excellence.
Basel IV breaks this illusion.
By constraining model variability through output floors and standardised approaches, Basel IV asserts a blunt truth: beyond a certain point, regulators do not trust banks’ internal expressions of risk, no matter how sophisticated. Capital becomes less about insight and more about acceptability.
For ExCos, this is psychologically destabilising. Years of investment in modelling capability yield diminishing marginal relief. The bank’s “true” risk view becomes irrelevant if it cannot be recognised for capital purposes.
The mistake many ExCos make is to fight this emotionally – to seek clever workarounds, marginal optimisations, or regulatory arbitrage. These may buy time, but they miss the deeper signal: Basel IV is telling banks to stop arguing about precision and start confronting structure.
2. Capital pressure as a revealer of economic truth
Basel IV acts like a solvent. It dissolves narratives that banks have used to justify low returns, cross-subsidisation, and strategic ambiguity.
Businesses that only made sense under favourable RWA treatment suddenly look uneconomic. Portfolios that appeared diversified reveal hidden capital concentrations. Marginal activities become visibly destructive to shareholder value.
This is uncomfortable but clarifying.
ExCos often ask, “How do we protect returns under Basel IV?” The more honest question is, “Which returns were never real to begin with?”
Basel IV forces banks to price businesses as regulators see them, not as bankers would like them to be. That does not mean the regulator’s view is economically perfect, but it is the one that determines survival.
3. The three strategic responses – and why most banks pick the weakest one
In my advisory work, I see ExCos gravitate toward three broad responses to Basel IV pressure.
The first is optimisation. Tweak portfolios, refine data, adjust booking models, renegotiate collateral, shave basis points off RWAs. This is intellectually attractive and politically easy. It preserves the existing business model.
The second is repricing. Push capital costs through to clients via higher margins, fees, or tighter terms. This feels commercially assertive but assumes pricing power that often does not exist.
The third is structural change. Exit activities, reshape portfolios, rethink balance-sheet usage, accept smaller scale or different risk profiles.
Most banks start with optimisation and repricing. Very few confront structural change early. Those that delay tend to discover later that the first two responses were insufficient, leaving less time and fewer degrees of freedom for the third.
Basel IV punishes incrementalism. It rewards early, decisive realism.
4. Why “just earn the cost of capital” is not a strategy
One of the most common refrains in ExCo discussions is that businesses must “earn their cost of capital under Basel IV.” This sounds disciplined. It is also lazy.
Cost of capital is not a fixed hurdle handed down from finance. It is an outcome of portfolio composition, volatility, and credibility. Basel IV changes all three.
A business that barely clears the hurdle under benign conditions may destroy value under stress. Conversely, a business with lower apparent returns but stable capital consumption may be strategically invaluable.
ExCos mislead themselves when they apply static capital hurdles to dynamic regulatory realities. Basel IV demands a portfolio mindset, not a deal-by-deal one.
5. Capital allocation becomes the ExCo’s primary moral choice
Under Basel IV, capital allocation is no longer a technical exercise delegated to finance and risk. It becomes the ExCo’s primary expression of values.
Which clients do we continue to serve? Which regions do we retreat from? Which activities are deemed worthy of scarce balance-sheet capacity?
These decisions have social, political, and reputational consequences. Yet they are often framed as inevitabilities: “The regulation made us do it.”
That framing is evasive. Regulation constrains options; it does not choose among them. ExCos do.
Boards and ExCos that fail to own these choices openly create cynicism internally and distrust externally. Basel IV forces leadership, not just compliance.
6. The myth of universal repricing
Many ExCos assume that capital pressure can be offset through repricing. This is only partially true.
In commoditised markets, repricing leads to volume loss. In relationship banking, repricing strains trust. In competitive segments, it simply cedes ground to less constrained players.
Moreover, repricing often pushes risk outward. Clients seek leverage elsewhere, weakening their overall resilience – and, paradoxically, increasing the bank’s tail risk.
Basel IV teaches a harsh lesson: some business models only work if someone else carries the capital burden. When that burden returns home, the model collapses.
7. The competitive distortion nobody talks about
Basel IV applies unevenly across jurisdictions and sectors. Some banks face stricter interpretations, earlier adoption, or higher national add-ons. Others do not.
This creates competitive distortions that ExCos must navigate carefully. Retreating too early can mean surrendering strategic ground. Holding too long can mean value destruction.
There is no neutral position.
ExCos often look to regulators for “level playing fields.” In reality, banking has never had one. Basel IV simply makes the unevenness more consequential.
Strategic realism requires accepting that regulatory asymmetry is part of competition, not an aberration.
8. The cultural impact of permanent capital pressure
Sustained capital pressure changes behaviour inside banks.
Risk appetite narrows. Innovation slows. People become defensive. Internal politics intensify as businesses compete for scarce balance-sheet resources.
This cultural shift is rarely discussed explicitly, yet it shapes execution more than any capital metric.
ExCos that treat Basel IV purely as a numerical challenge miss its human consequences. Without conscious leadership, capital scarcity breeds conservatism that becomes self-defeating.
The paradox is that under Basel IV, banks need clearer strategic conviction, not greater caution. Capital should be scarce by design, not hoarded out of fear.
9. When capital strategy becomes existential strategy
At a certain point, Basel IV forces a binary question: what kind of bank are we willing to be?
A balance-sheet maximiser? A fee-based intermediary? A domestic utility? A specialised lender? A universal bank in name only?
These are not branding choices. They are capital identities.
Trying to be everything under Basel IV usually means being nothing particularly well. ExCos that delay this reckoning often discover that the market and regulators will impose an answer for them.
10. How ExCos should actually respond
Supporting ExCos through Basel IV requires a shift in mindset before a shift in spreadsheets.
First, stop treating Basel IV as a temporary headwind. It is a new climate.
Second, surface the real economics of businesses without nostalgia or defensiveness. Some franchises will not survive in recognisable form.
Third, make capital allocation explicit, principled, and communicable. Silence breeds mistrust.
Fourth, invest political capital early – with boards, regulators, and investors – to create room for strategic moves rather than reactive cuts.
Finally, accept that smaller, simpler, or less leveraged can sometimes mean stronger.
Basel IV as an honesty test
Basel IV is often described as punitive. I disagree.
It is revealing.
It reveals which profits were structural and which were cosmetic. Which strategies were robust and which were regulatory artefacts. Which leaders can make hard choices and which hide behind complexity.
For ExCos willing to engage honestly, Basel IV offers clarity. For those who are not, it will feel like an endless squeeze – until it becomes something worse.
Capital, in the end, is not just a constraint. It is a truth-telling mechanism. Basel IV has turned up its volume.
