EBA advises the European Commission on the implementation of the final Basel III framework

05 August 2019

The EBA published its advice on the implementation of Basel III in the EU, which includes a quantitative analysis of the estimated impact based on data from 189 banks, and a set of policy recommendations. This work responds to a Commission call for advice.

The impact assessment shows that the full implementation of Basel III, under conservative assumptions, will increase the minimum capital requirement (MRC) by 24.4% on average. This increase in capital requirements will imply an aggregate shortfall in total capital of about EUR 135.1 billion (EUR 91.1 billion in terms of common equity tier 1, CET1). The majority of the capital impact occurs in large globally active banks, while the impact on medium-sized banks is limited to 11.3% in terms of MRC, leading to a shortfall of EUR 0.9 billion, and on small banks to 5.5% MRC with a EUR 0.1 billion shortfall. The EBA supports the full implementation of the final Basel III standards, which will contribute to the credibility of the EU banking sector and ensure a well-functioning global banking market.

It is important to stress that the estimated impact included in these reports cannot be directly compared to the figures the EBA publishes periodically in the context of regular Basel III monitoring exercises (e.g. latest one in March 2019) which limit the impact analysis to Pillar 1 minimum requirements and specific buffer requirements (capital conservation buffer and G-SII buffer where applicable). The analysis published includes Pillar 2 requirements and the full set of combined buffer requirements in the calculation of banks' minimum required capital and assumes that these requirements remain at current levels.

These results should also be read in conjunction with a set of conservative assumptions underlying the assessment. Mainly, the lack of any adjustment carried out by banks or authorities in response to the implementation of Basel III. Banks' balance sheets are assumed to be static, meaning that banks will not alter their current exposures and all maturing assets are expected to be replaced by similar instruments.  Pillar 2 and macro-prudential requirements (expressed in percentage of risk weighted assets) are also assumed to remain unchanged. This adds a significant degree of conservatism.

Detailed policy recommendations are also provided for a number of areas of the Basel III framework in the four policy advice reports published. These recommendations include:

• In the area of credit risk: all the newly agreed revisions should be implemented in the EU, maintaining a prudential framework based on external ratings and the loan-splitting approach to exposures secured by real estate. The report also recommends that no EU-specific supporting factors for SME and infrastructure lending exposures are retained.
• In the area of securities financing transactions: all the newly agreed revisions should be implemented in the EU, except for the minimum haircuts floor framework where EBA believes further analysis is needed.
• In the area of operational risk: the new Standardised Approach (SA) should be implemented. The SA should be based on the institution-specific historical loss component for larger institutions to maintain a risk-sensitive approach. For the same reason, smaller institutions may be allowed to also use the historical loss component on a case-by-case basis. The EBA advises the Commission to consider a phase-in period for the SA.
• The output floor should be introduced and, where applicable, should be used to compute all capital requirements, including EU-specific requirements such as the systemic risk buffer. The output floor should be applied at all levels of consolidation.

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