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    EBA Report Assesses Impact of Implementation of Basel III Reforms

    September 29, 2021

    The European Banking Authority (EBA) published a report that assesses the impact of the full implementation of the final Basel III reforms on banks in EU. The report assesses, among others, the impact of the final revisions of credit risk (split into four sub-categories), operational risk, leverage ratio frameworks, and the introduction of the aggregate output floor. It also quantifies the impact of the new standards for market risk (FRTB) and credit valuation adjustments (CVA). The report is accompanied by an interactive tool that shows the key findings of this monitoring exercise. The analysis shows that full Basel III implementation in 2028 would result in an average increase of 13.7% on the current tier 1 minimum required capital of banks in European Union.

    The cumulative impact analysis of the report uses a sample of 99 banks, including 40 Group 1 and 59 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 categorized as Group 2 banks. The Basel III capital monitoring report shows the results separately for Group 1 and Group 2 banks. The present report shows the evolution of the common equity tier 1 (CET1), tier 1, and additional tier 1 minimum required capital impact as well as the associated capital shortfalls. The overall impact reflects the economic impact of the COVID-19 pandemic on participating banks that materialized up to December 2020, the reference date of this report. The following are the key findings of the Basel III monitoring exercise:

    • Compared with the current fully phased-in Capital Requirements Regulation and Directive (CRR/CRD IV) rules, under Basel III, full implementation of the tier 1 capital shortfall increases for all banks, but particularly for global systemically important institutions.
    • When considering the entire sample of banks, the risk-based capital ratios, namely the CET1, tier 1 and total capital ratios, decline by 260, 280 and 320 basis points, respectively, following the implementation of the reform.
    • Excluding the leverage ratio contribution, the impact of the reforms is 18%, of which the leading factors are the output floor (7.1%) and credit risk (5.1%).
    • In December 2020, European Union banks required additional stable funding of EUR 8.1 billion to fulfil the minimum net stable funding ratio (NSFR) requirement of 100%. Taking a longer-term perspective, for the constant sample of banks over time, it can be observed that compliance with the NSFR has steadily improved since the start of the monitoring exercise in June 2011.
    • For three G-SIIs, which are considered 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 methodology applied in this report differs from the methodology used by EBA in the separate Calls for Advice from the European Commission to assess the impact of Basel reforms on banks and from the methodology that is used as the basis for European Commission's legislative proposals on the implementation of Basel III in the European Union.


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    Keywords: Europe, EU, Banking, Basel, Basel III Monitoring, Credit Risk, Operational Risk, CRR, Regulatory Capital, G-SII, Market Risk, Liquidity Risk, FRTB, CRD IV, EC, EBA

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