Many European banks will face significant capital shortfalls under the new rules to be known as Basel IV reforms proposed by the Basel Committee on Banking Supervision, warns management consultancy McKinsey in a new report. "The current state of the suggested changes (a mix of consultation papers and finalized standards) would rework the approach to risk-weighted assets (RWA) and possibly internal ratings, as well asset regulatory capital floors," say McKinsey analysts in the report. "According to our analysis, if banks do nothing to mitigate their impact, these rules will require about €120 billion in additional capital, while reducing the banking sector's return on equity by 0.6 percentage points. "This is a game changer for the European banking industry."The report looks in detail at the capital and profitability implications of the reforms, based on a sample of 130 European banks, with recommendations on how banks should react. It examines the latest status of BCBS changes as well as considering post-financial efforts by the BCBS to harmonize capital calculations under Pillar 1. "In our view, the impact of Basel IV will be much greater than initially anticipated," the analysts say. "Banks will need to raise more capital, and will likely have to take some unconventional measures to comply. The repercussions will vary, depending on banks' geography and business model, and will require actions tailored to the individual bank's circumstances." Potential phase-in arrangements are still under discussion (with a gradual implementation of the new rules from 2021 until 2025 currently foreseen), but the report says that, while final rules are still pending, "banks should create transparency based on the expected rules, already define mitigating actions, and start implementing 'no-regret' measures to appropriately manage the new rules as well as expectations of rating agencies and investors."