EBA published a report updating the ad-hoc impact study on Basel III implementation in EU, based on data as of December 31, 2019, in response to the EC Call for Advice. The report, which considers data from 99 banks, presents qualitative reflections on the potential interactions between different elements of Basel III framework and the estimated adverse impact of the COVID-19 crisis. A quantitative credit risk sensitivity analysis is also included in the COVID-19 assessment. Moreover, the report provides an update on the previous EBA impact assessment for the Basel III framework on Minimum Requirement for own funds and Eligible Liabilities (MREL). Under the full implementation of Basel III and conservative assumptions, the updated impact is meaningfully lower than previously estimated, using the June 2018 data and a consistent sample.
The overall impact of Basel III implementation is presented under two implementation scenarios. The first one is the “Basel III scenario,” which updates the impact presented in the previous call for advice reports, while the second one is the “EU-specific scenario,” which considers the additional features requested by EC in its call for advice. Overall, the impact differs significantly across the sample. Large and systemically important institutions experience a materially higher impact than the medium-size and small institutions, accounting for almost the entire total capital shortfall. The key impact drivers remain the output floor, followed by credit risk and operational risk. The following are the key highlights of the results of this study:
- The updated impact in terms of Tier 1 minimum required capital is +18.5% under the Basel III scenario, which is meaningfully lower than previously estimated using June 2018 data for the consistent sample (24.1%). The lower impact is due to a reduction in the impact of Credit valuation adjustment (CVA) risk (+2.1% compared to +4.3%) as a result of the introduction of the revised CVA framework and the lower impact of the output floor (now +6.7%, compared to +9.5% using 2018 data).
- The estimated total capital shortfall is about EUR 52.2 billion (EUR 30.2 billion in terms of common equity tier (CET) 1), down from EUR 109.5 billion shortfall in total capital (EUR 74.6 billion in CET1), using June 2018 data for the consistent sample. The reduction in shortfall is driven by a combination of institutions’ improved capital positions and lower minimum required capital. Under the EU-specific scenario, the minimum required capital impact would reduce further to +13.1%, resulting in a total capital shortfall of EUR 33.0 billion, of which EUR 17.4 billion of CET1.
- Considering the limited size of the sample and the difficulty to estimate future MREL decisions laid down in the revised Bank Recovery and Resolution Directive (BRRD2), under the Basel III scenario, the total estimated MREL shortfall, attributable to the final Basel III framework, is within the range of EUR 7 billion to EUR 8.6 billion. Under the EU-specific scenario, the MREL shortfall would account for around EUR 2 billion.
- The study revealed uncertainty around how banks’ balance sheets will change as a result of the COVID-19 crisis. To alleviate the effects of this crisis, mitigating policy measures were adopted. The effects of Basel III, taken in conjugation with COVID-19, are not likely to be additive, as pass-through effects are in some cases off-setting. While it is certain that the Basel III framework will become fully applicable in January 2028, the losses related to COVID-19 crisis are likely to be transitory and, therefore, the timing of the effects may not coincide.
The cumulative results of the present report are not directly comparable to those of the Basel III monitoring report, which was published on December 10, 2020; this because the results are based on slightly different samples in terms of composition and size and the two key methodological differences. However, the policy analysis conclusions and recommendations presented in the original report remain unchanged, as the analysis has not changed fundamentally with regard to the overall benefits stemming from the introduction of the Basel III framework in EU. On the contrary, the positive effects of the reform remain unchanged, whereas the capital impact decreased overall. In line with the findings in the previous Call for Advice reports, the main drivers of the impact remain the output floor, credit risk, and operational risk. EBA also reaffirmed the policy recommendations put forward in its previous advice and supports the full implementation of the final Basel III standards in EU, which will contribute to the credibility of EU banking sector and ensure a well-functioning global banking market.
Keywords: Europe, EU, Banking, MREL, BRRD2, COVID-19, CVA, Regulatory Capital, Credit Risk, Operational Risk, Basel, EC, EBA
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