EBA published the second part of its advice on the implementation of Basel III in EU, which complements the report published on August 05, 2019. This work is in response to the call for advice from EC. The publication includes an impact assessment of revisions to the credit valuation adjustment (CVA) and market risk frameworks and the corresponding policy recommendations. It also provides a macro-economic impact assessment of the full Basel III package. The results are based on a sample of 189 banks from 19 EU countries.
When accounting for the 2019 fundamental review of the trading book (FRTB) standards, the impact assessment shows that the full implementation of Basel III, under conservative assumptions, will increase the current minimum capital requirement by 23.6% on average. This impact is lower than the 24.4% originally estimated in the August 2019 report and would imply an aggregate shortfall of EUR 124.8 billion in total capital. The lower impact compared to the August 2019 Report (24.4%) is due to a reduction in the impact of market risk (2.2% compared to 2.5%) and the lower impact of the output floor (8.6%, compared to 9.1%). This reduction has been observed almost entirely among large banks. Under a scenario in which the standardized approach for CVA (SA-CVA) and basic approach for CVA (BA-CVA) capital requirements are recalibrated downward by 10%, the impact on CVA will move from 3.9% to 3.4% (reducing the total impact from 23.6% to 23.1%). Since the impact is broadly linear, a 20% reduction (the lower bound proposed by BCBS) would produce an impact of 2.9%.
The assessment of the macroeconomic costs and benefits of the finalization of Basel III framework was carried out in cooperation with ECB. The results show that the implementation of Basel III will have net benefits for the economy in EU. EBA also put forward detailed policy recommendations in the areas of CVA and market risk:
- In the area of CVA risk—EBA recommends that as the CVA risk generated by the CVA exemptions can be substantial, it should be captured prudentially. This will allow alignment with international standards on CVA risk and adherence to a risk-based capital requirements framework. The use of the simplified treatment for CVA risk should be based on the proportionality framework for counterparty credit risk (CCR) already envisaged in the revised Capital Requirements Regulation (CRR) 2.; its use should be allowed to firms eligible to employ the simplified standardized approach for CCR under the CRR2.
- In the area of market risk—EBA recommendations aim to ensure a smooth and consistent implementation of the revised market risk framework in EU and, therefore, focus on issues identified in the market risk standards, as implemented in the CRR/CRR2. The recommendations clarify the treatment for unrated covered bonds under the standardized approach for market risk under the FRTB and support the use of the recalibrated (Basel II) standardized approach as a simplified approach for institutions not subject to the FRTB reporting requirement under the CRR2.
Overall, EBA continues to support full implementation of the final Basel III standards, which will contribute to the credibility of the banking sector in EU. These reforms will increase financial stability, while allowing the continued use of risk-sensitive approaches.
- Press Release
- Impact Assessment and Recommendations (PDF)
- Policy Advice: CVA and Market Risk (PDF)
- Call for Advice and Related Documents
Keywords: Europe, EU, Banking, Basel III, Impact Assessment, Basel III Finalization, Proportionality, Call for Advice, Basel III Monitoring, CVA, Market Risk, FRTB, Regulatory Capital, EC, EBA
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