Basel IV and the Cost of Hedging

The regulation of banks will be tightened again soon, as the implementation of the so-called "Basel IV" framework in the EU is on the agenda. Among other things, banks will then have to reserve more equity capital for positions in derivatives. This will make it more expensive for non-financial companies to use such derivatives to hedge against risks arising from fluctuations in exchange rates, interest rates and commodity prices. Deutsches Aktieninstitut estimates for a sample of 16 non-financial companies that these extra costs will be between 200 and 280 million euros per year. We therefore advocate that such negative effects be avoided in the implementation of Basel IV.