EBA published a report that assesses the impact of implementing the final Basel III reforms on banks in EU, based on data as of December 31, 2019. The report assesses, among others, the impact of the final revisions of credit risk (split into four sub-categories), operational risk, and leverage ratio frameworks, and introduction of the aggregate output floor. It also quantifies the impact of the new standards for market risk and credit valuation adjustments. The report is accompanied by an interactive tool that shows the key findings of this monitoring exercise. Overall, the analysis shows that full Basel III implementation, in 2028, would result in an average increase of 15.4% on the current Tier 1 minimum required capital of banks in EU.
The cumulative impact analysis of the report uses a sample of 106 banks, split between 40 Group 1 banks and 66 Group 2 banks. Group 1 banks are banks that have tier 1 capital in excess of EUR 3 billion and are internationally active. All other banks are labeled as Group 2 banks. The Basel III capital monitoring report shows the results separately for Group 1 and Group 2 banks. The results do not reflect the economic impact of the COVID-19 pandemic on participating banks as the reference date of this impact assessment is December 2019. For three G-SIIs that are outliers owing to overly conservative assumptions under the revised market risk framework, the results showing reduced estimation bias assume zero change between the current and the revised market risk framework. The following are some key findings of the Basel III monitoring exercise:
- Compared with the current fully phased‐in Capital Requirements Regulation and Directive (CRR/CRD IV), under Basel III full implementation, the Tier 1 capital shortfall increases for all banks, but particularly for global systemically important institutions or G‐SIIs.
- When considering the entire sample of banks, the risk‐based capital ratios, namely the common equity tier 1, tier 1, and total capital ratios, decline by 240, 260, and 290 basis points, respectively, following the implementation of the reform.
- The leverage ratio is slightly higher under the current regime, than under the revised (final Basel III) framework (5.4% versus 5.3%, respectively), when the entire sample is considered. The decline in risk‐based ratios is slightly larger for Group 1 banks than for Group 2 banks.
- Excluding the leverage ratio contribution, the impact of the reforms is 18.3%, of which the leading factors are the output floor (6.2%) and credit risk (5%).
- In December 2019, EU banks required additional stable funding of EUR 24.3 billion to fulfil the minimum net stable funding ratio (NSFR) requirement of 100%. Compared with the June 2019 exercise, the shortfall of stable funding decreased by EUR 9.4 billion. The improvement is mainly attributable to Group 1 banks (EUR 16.4 billion versus EUR 29.3 billion in previous report), which compensate for a slight worsening for Group 2 banks (EUR 8 billion versus EUR 4.3 billion). Taking a longer‐term perspective, for the constant sample of banks over time, it can be observed that the compliance with the NSFR has steadily improved since the start of the monitoring exercise in June 2011.
- For three Global Systemically Important institutions, that are outliers owing to overly conservative assumptions under the revised market risk framework, the results showing "reduced estimation bias" assume zero change between the current and the revised market risk framework. According to the “conservative estimation,” based on the original conservative assumptions, the total impact would be 16.7%, with a total risk-based impact of 19.7% and market risk impact of 2.3%.
EBA plans to publish, on December 15, 2020, a more detailed ad hoc report that will respond to the EC Call for Advice on Basel III, based on the same reference date. The cumulative results of the present report are not directly comparable to those of the EC Call for Advice, as they are based on slightly different samples and on two key methodological differences.
Keywords: Europe, EU, Banking, Basel III Monitoring, Credit Risk, Operational Risk, CRR/CRD, Regulatory Capital, G-SII, Basel, Market Risk, Liquidity Risk, EBA
Previous ArticleBDF Publishes AnaCredit Reporting Specifications for OneGate Portal
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Hong Kong Monetary Authority (HKMA) announced that the Green and Sustainable Finance (GSF) Cross-Agency Steering Group has launched the information and data repositories and outlined the progress made in advancing the development of green and sustainable finance in Hong Kong.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
The Network for Greening the Financial System (NGFS) published a report that explores the feasibility of integrating the G-Cubed general equilibrium model into the NGFS suite of models.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.