Featured Product

    EBA Updates Basel III Impact Study Following EC Call for Advice

    December 15, 2020

    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.

     

    Related Links

    Keywords: Europe, EU, Banking, MREL, BRRD2, COVID-19, CVA, Regulatory Capital, Credit Risk, Operational Risk, Basel, EC, EBA

    Featured Experts
    Related Articles
    News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News
    News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News
    News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News
    News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News
    News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News
    News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News
    News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    News

    FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates

    The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.

    December 20, 2022 WebPage Regulatory News
    News

    FSB Reports Assess NBFI Sector and Progress on LIBOR Transition

    The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.

    December 20, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8697