EBA updates the estimates of the impact of the implementation of Basel III and provides an assessment of its effect on the EU economy

04 December 2019

The European Banking Authority (EBA) published today the second part of its advice on the implementation of Basel III in the EU, which complements the Report published on 5 August 2019. Today’s publication includes an assessment of the impact of the revisions to the credit valuation adjustment (CVA) and market risk frameworks, and the corresponding policy recommendations. It also provides a macroeconomic impact assessment of the full Basel III package. When accounting for the 2019 FRTB standards, the impact assessment shows that the full implementation of Basel III, under conservative assumptions, will increase the current minimum capital requirement (MRC) by 23.6% on average. This impact is lower than the 24.4% originally estimated in the August 2019 report, and would imply an aggregate shortfall in total capital of EUR 124.8 billion. The macroeconomic impact assessment shows that the implementation of Basel III will have net benefits for the economy of the European Union. The EBA reaffirms its support for a full implementation of the final Basel III standards in the EU.

Key findings of the quantitative analysis

Considering the 2019 FRTB standards, the revised weighted average increase in the current MRC is 23.6% for the entire sample, under conservative assumptions. The lower impact compared to the August 2019 Report (24.4%) is due to a reduction in the impact of market risk (2.2% compared to 2.5%) and the lower impact of the output floor (8.6%, compared to 9.1%). This reduction is observed almost entirely among large banks. The estimated total capital shortfall is about EUR 124.8 billion (EUR 83.0 billion in terms of CET1), down from the EUR 135.1 billion shortfall in total capital (EUR 91.1 billion in CET1) estimated in the August 2019 report.

 

Table 1 Percentage change in T1 MRC (relative to current T1 MRC), by size

 

∆ SA

∆ IRB

∆ CCP

∆ SEC

∆ MKT

∆ OP

∆ CVA

∆ LR

∆ OF

∆ Total

All banks

2.7

2.7

0.1

0.6

2.2

3.3

3.9

-0.5

8.6

23.6

Large

2.3

2.8

0.1

0.7

2.2

3.4

4.1

-0.5

9.0

24.1

of which: G-SIIs

1.7

3.5

-0.1

1.2

3.9

5.5

5.1

0.0

6.4

27.2

of which: O-SIIs

2.3

1.7

0.2

0.3

1.2

2.1

3.7

-0.5

12.0

23.0

Medium

9.7

0.1

0.0

0.0

0.9

0.3

0.5

-1.1

0.9

11.3

Small

10.7

0.0

0.2

-1.9

0.0

-3.7

0.3

-0.1

0.0

5.5

 

Table 2 Capital ratios and shortfalls, by size

 

CET1 capital

Tier 1 capital

Total capital

 

Current ratio (%)

Revised ratio (%)

Shortfall (EUR billion)

Current ratio (%)

Revised ratio (%)

Shortfall (EUR billion)

Current ratio (%)

Revised ratio (%)

Shortfall (EUR billion)

All banks

14.4

11.6

83.0

15.3

12.4

119.0

17.9

14.4

124.8

Large

14.2

11.4

82.9

15.2

12.2

118.2

17.8

14.3

123.8

of which: G-SIIs

12.7

10.1

46.8

13.8

10.9

62.6

16.2

12.8

75.3

of which: O-SIIs

15.4

12.5

32.2

16.3

13.3

49.5

19.2

15.6

41.1

Medium

17.3

15.2

0.1

17.5

15.4

0.8

18.9

16.6

0.9

Small

17.0

16.0

0.0

17.2

16.1

0.0

18.3

17.1

0.1

 

These results reported in Tables 1 and 2 do not take into account the targeted revisions to the CVA framework proposed by the Basel Committee in November 2019, which are expected to further reduce the overall impact. Under a scenario in which the SA-CVA and BA-CVA capital requirements are recalibrated downwards by 10%, the impact on CVA will move from 3.9% to 3.4% (reducing the total impact from 23.6% to 23.1%). Since the impact is broadly linear, a 20% reduction (the lower bound proposed by BCBS) would produce impacts of 2.9%.

Key findings of the macroeconomic impact assessment

The assessment of the macroeconomic costs and benefits of the finalisation of the Basel III framework was carried out in cooperation with the ECB.

The results show that the implementation of the Basel reforms will result in modest transitional costs, which fade over time. The long-term benefits are substantial and outweigh the modest transitory costs. The reform would mitigate the severity of future economic downturns through a reduction in both probability and intensity of future banking crises, leading to sizable long-term net benefits of around 0.6 percent of annual GDP level.

Key policy recommendations

The EBA also put forward detailed policy recommendations in the areas of CVA and market risk. Overall, it should be recalled that the EBA continues to support 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. These reforms will increase financial stability, while at the same time allowing the continued use of risk-sensitive approaches.

In the area of CVA risk the EBA recommends that:

  • As the CVA risk generated by the CVA exemptions can be substantial, it should be captured prudentially. This will allow alignment with international standards on CVA risk and adherence to a risk-based capital requirements framework.
  • The use of the simplified treatment for CVA risk should be based on the proportionality framework for counterparty credit risk (CCR) already envisaged in the CRR2, and its use should be allowed to firms eligible to employ the simplified SA-CCR under the CRR2.

In the area of market risk, the EBA recommendations aim to ensure a smooth and consistent implementation of the revised market risk framework in the EU and, therefore, focus on issues identified in the market risk standards as implemented in the CRR/CRR2. In particular, they clarify the treatment for unrated covered bonds under the FRTB-SA, and support the use of the recalibrated (Basel II) standardised approach as a simplified approach for institutions not subject to the FRTB reporting requirement under the CRR2.

 

Notes to editors

  1. Unlike the results published in the August 2019 report, which were based on the 2016 FRTB standards, the analysis published today accounts for the 2019 FRTB standards. Already in 2016, the EBA provided its advice on the implementation of the FRTB in the EU. The policy recommendations put forward today, therefore, build on the CRR2 implementation of the FRTB in the EU.
  2. The analysis 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. Therefore, it 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 October 2019) which limit the impact analysis to Pillar 1 minimum requirements and specific buffer requirements (capital conservation buffer and G-SII buffer where applicable).
  3. These results should also be read in conjunction with a set of conservative assumptions, in particular the assessment does not consider any adjustments in banks’ balance sheets nor authorities’ response to the implementation of Basel III.
EBA raises awareness on key steps consumers should consider when choosing online or mobile banking services

03 December 2019

The European Banking Authority (EBA) published today a factsheet addressed to European consumers to raise awareness on key steps they should consider when choosing financial services through digital means. This document will help consumers make better and more informed choices.

In particular, the factsheet includes tips consumers should bear in mind before choosing a service or when concluding an agreement for a particular service such as:

  • Reading and making sure to understand the terms and conditions before signing;
  • Paying particular attention to all fees and charges;
  • Thinking about security;
  • Filing a complaint in case they believe that their rights have been denied.

This document is also reproduced by the National Competent Authorities in their respective countries and contributes to the fulfilment of EBA’s consumer protection and financial activities’ mandate of reviewing and coordinating financial literacy and education initiatives by the Competent Authorities

EBA confirms progress in banks’ balance-sheet repair but points to a bleak outlook for their profitability

29 November 2019

The European Banking Authority (EBA) published today its annual Report on risks and vulnerabilities in the EU banking sector. The Report is accompanied by the publication of the 2019 EU-wide transparency exercise, which provides detailed information, in a comparable and accessible format, for 131 banks across the EU. Overall, EU banks’ solvency ratios remained stable, while the NPL ratio further contracted. Amidst low profitability, a proactive management of operating expenses is essential.

Overview of key figures

CET1 ratio (transitional)

CET1 ratio (fully loaded)

NPL ratio

Coverage ratio

RoE

Leverage ratio (fully phased-in)

Q2 2019

14.6%

14.4%

3.0%

44.9%

7.0%

5.2%

Q2 2018

14.5%

14.3%

3.6%

46.0%

7.2%

5.1%

EU banks assets rose by 3 % between June 2018 and June 2019. Since 2014, commercial real estate, small and medium-sized enterprise (SME) and consumer credit exposures have been the segments with the highest growth rates. This focus on riskier segments shows banks’ search for yield in an environment of low interest rates and shrinking margins.

Asset quality has continued to improve, although at a slower pace. The NPL ratio declined from 3.6 % in June 2018 to 3 % in 2019. However, the focus on riskier exposures over the past few years combined with a weakening macroeconomic outlook might change this trend. Responses to the EBA’s Risk Assessment Questionnaire (RAQ) also show that an increasing share of banks expect a deterioration of asset quality for most of the loan segments. These include portfolios, which they also aim to expand, like SME and consumer credit financing.

Funding conditions have improved, supported by benign financial markets. Banks should take advantage of the current low interest rate environment to build up their MREL buffers. With an increasing number of banks charging or planning to charge negative interest rates to corporate and household deposits, the effects of such measures on the deposit base remain to be seen.

After material progress over the past few years, capital ratios remained broadly unchanged year on year (YoY). As of June 2019, the CET1 ratio stood at 14.4 % (14.3 % in June 2018) on a fully loaded basis. A parallel increase in risk-weighted assets (RWAs) (2.5 % YoY) and CET1 (3 % YoY) was observed in the last year. Credit risk, which makes up 80 % of total RWA, has increased by roughly 2.5 %, which is lower than the growth in total assets (3 %) and total loans (3.5 %). Such developments indicate that credit RWAs are driven not only by trends in banks’ assets, but also by changes in the composition of banks’ exposures and risk parameters.

Profitability remains at low levels. The RoE for EU banks decreased slightly from 7.2 % to 7 % in 2019. The deteriorating macroeconomic environment along with low interest rates and intense competition not only from banks, but also from financial technology (FinTech) firms and other financial players, is expected to add further pressure to bank profitability. In this challenging environment, the streamlining of operating expenses is presumably the main area to improve profitability.

Technology risks and increasing money laundering/terrorist financing (ML/TF) cases maintain operational risk high. Cyberattacks and data breaches represent major concerns for banks. In addition, the occurrence of ML/TF scandals may imply corresponding legal and reputational costs.

EBA publishes guidelines on ICT and security risk management

28 November 2019

The European Banking Authority (EBA) published today its final Guidelines on ICT and security risk management. These Guidelines establish requirements for credit institutions, investment firms and payment service providers (PSPs) on the mitigation and management of their information and communication technology (ICT) and security risks and aim to ensure a consistent and robust approach across the Single market. These Guidelines will enter into force on 30 June 2020.

 

The increasing digitalisation in the financial sector and the growing interconnectedness across financial institutions and third parties make financial institutions’ operations vulnerable to internal and external ICT and security risks that can potentially compromise their viability. As a result, sound ICT and security risk management are key for a financial institution to achieve its strategic, corporate, operational and reputational objectives.

These Guidelines set out expectations on how all financial institutions should manage internal and external ICT and security risks that they are exposed to. This guidance also provide the financial institutions with a better understanding of supervisory expectations for the management of the said risks, covering sound internal governance, information security requirements, ICT operations, project and change management and business continuity management.

The Guidelines also cover the management of PSPs’ relationship with payment service users (PSUs) to ensure that users are made aware of the security risks linked to the payment services, and are provided with the tools to disable specific payment functionalities and monitor payment transactions.

The Guidelines are addressed to credit institutions and investment firms as defined in the Capital Requirements Directive (CRD), for all of their activities, and to PSPs subject to the revised Payment Services Directive (PSD2), for their payment services.

Legal basis and next steps

These Guidelines build on the provisions of Article 74 of Directive 2013/36/EU (CRD) that mandate the EBA to further harmonise financial institutions' governance arrangements, processes and mechanisms across the EU regarding internal governance, and derive from the mandate to issue guidelines in Article 95(3) of Directive (EU) 2015/2366 (PSD2) with regard to the establishment, implementation and monitoring of security measures for operational and security risks.

These Guidelines respond to the European Commission's FinTech Action plan request for the EBA to develop guidelines on ICT risk management and mitigation requirements in the EU financial sector.

The EBA Guidelines will enter into force on 30 June 2020. The Guidelines on security measures for operational and security risks under PSD2 (EBA GL/2017/17) issued in 2017 have been fully integrated into these Guidelines and will be repealed once these Guidelines become applicable.

EBA holding research workshop on the future of stress tests in the banking sector

27 November 2019

The European Banking Authority (EBA) is organising on 27 and 28 November a research workshop on "The future of stress tests in the banking sector – approaches, governance and methodologies". The workshop brought together economists from national supervisory authorities and leading academics to discuss the future of stress testing in the banking sector and explore what measures could be taken by policy makers to best benefit from the exercise.

The EBA Chairperson José Manuel Campa opened the workshop by highlighting the importance of approaching the long-term discussion on the future of stress test “with an open mind and the commitment to consult widely the different stress test users before making any final decisions.”

The proceedings of the conference will be available on the EBA website under the relevant section.

 

EBA launches consultation on disclosure and reporting of MREL and TLAC

22 November 2019

The European Banking Authority (EBA) launched today a public consultation on the draft Implementing Technical Standard (ITS) on disclosure and reporting of the minimum requirement for own funds and eligible liabilities (MREL) and the total loss absorbency requirement (TLAC). This is the first time that the EBA introduces harmonised reporting and disclosure requirements for MREL and TLAC. These draft ITS follow an integrated approach and, in the case of disclosures, are aligned with the Basel Pillar 3 standards. By integrating disclosures and reporting, the EBA seeks to maximise efficiency by institutions, and to facilitate the use of information by authorities and market participants. The consultation runs until 22 February 2020.

The draft ITS include proposals for templates and tables implementing the TLAC/MREL disclosure and reporting requirements. In addition to the draft ITS, the consultation paper includes two recommended reporting templates covering the forecast of MREL and TLAC positions and funding structures, and a file mapping disclosure and reporting requirements.

The integrated approach aims to optimise efficiency by institutions when complying with their disclosure and reporting obligations, to facilitate the use of information by authorities and market participants, and to promote market discipline. For this purpose:

  • MREL and TLAC are integrated for both the reporting and the disclosure templates;
  • Reporting and disclosure requirements are enshrined in a single set of ITS;
  • Disclosure of quantitative information is integrated with supervisory reporting data, and a mapping between both is provided;
  • TLAC disclosure templates have been aligned with the Basel Pillar 3 standards.

This consultation paper is one of the deliverables presented in the EBA Roadmap on the risk reduction measures package, which explains the EBA Pillar 3 strategy to implement a comprehensive disclosure framework with the aim to become the EU-wide Pillar 3 hub and the EBA pathway for a more efficient and proportionate supervisory reporting.                                                                                                          

Consultation process

Responses to the consultations can be sent to the EBA by clicking on the "send your comments" button on the consultation page.

All contributions received will be published after the consultation closes, unless requested otherwise. The deadline for the submission of comments is 22 February 2020.

A public hearing on this consultation will take place at the EBA premises on 2 December from 10:00 to 12:00 Paris time (reporting templates) and from 14:00 to 16:00 Paris time (disclosure templates). Deadline for registration is 25 November 16:00 Paris time. Please note that those two public hearings cover all consultations on reporting and disclosure requirements respectively in the context of the banking package (CRR2, CRD5, BRRD2) that were launched by the EBA.

Legal basis and next steps

These draft ITS have been developed in accordance with:

  • Article 434a of CRR2 and Article 45i(6) of BRRD2, which mandate the EBA to specify uniform disclosure formats, associated instructions, and in the case of MREL frequencies, implementing respectively the TLAC and MREL disclosure requirements;
  • Articles 430(7) of CRR2 and Article 45i(5) of BRRD2, which mandate the EBA to specify the uniform reporting templates, the related instructions and methodology, the frequency and dates of reporting, the definitions and the IT solutions for TLAC and MREL reporting.

 The EBA expects to submit these revised draft ITS to the European Commission in June 2020.

EBA consults on specific supervisory reporting requirements for market risk

21 November 2019

The European Banking Authority (EBA) launched today a public consultation on specific supervisory reporting requirements for market risk, which are the first elements of the Fundamental Review of the Trading Book (FRTB) introduced by the revised Capital Requirements Regulation (CRR2) in the prudential framework of the EU. The consultation runs until 7 January 2020.

This consultation paper includes proposals for a thresholds template, providing insights into the size of institutions’ trading books and the volume of their business subject to market risk, and a summary template, reflecting the own funds requirements under the ‘Alternative Standardised Approach’ for market risk (MKR-ASA). This consultation paper is the first step to address the elements of the mandate of Article 430b CRR referring to the MKR-ASA. The reporting requirements on the new market risk framework will be gradually expanded over time.

Mindful of the importance of expanding the reporting requirements resulting from the FRTB in a proportionate manner, the EBA is taking a gradual approach as institutions will also continue to be subject to the current market risk framework and the associated reporting requirements.

This consultation paper is one of the deliverables presented in the EBA Roadmap on the risk reduction measures package, which includes the EBA’s strategy to implement the CRR2/CRD5, the BRRD2 and the IFR mandates in the reporting framework.

Consultation process            

Responses to the consultations can be sent to the EBA by clicking on the following link.

All contributions received will be published after the consultation closes, unless requested otherwise. The deadline for the submission of comments is 7 January 2020.

A public hearing will take place at the EBA premises on 2 December from 10:00 to 12:30. Please note that this public hearings covers all consultations on reporting in the context of the banking package (CRR2, CRD5, BRRD2) that were launched by the EBA, i.e. the consultation on the ITS on Reporting related to CRR2 and Backstop Regulation, the consultation on the ITS on disclosure and reporting on MREL and TLAC  and the consultation on this ITS.

Legal basis and next steps

These draft ITS have been developed in accordance with Article 430b(6) of Regulation (EU) No 575/2013 which mandates the EBA to develop uniform reporting templates, definitions and instructions and specify the frequency, reference and remittance dates and the IT solutions for the reporting.                                                   

The EBA expects to submit these revised draft ITS to the European Commission in April 2020. The reporting requirements are envisaged to apply from March 2021, with the first reference date for reporting being the 31 March 2021. During the summer of 2020, the EBA will publish draft Data Point Models (DPM) on the proposed changes to supervisory reporting.

links

EBA publishes its roadmap on the risk reduction measures package

21 November 2019

The European Banking Authority (EBA) published today a set of roadmaps outlining its approach and timelines for delivering the mandates stemming from the Risk Reduction Measures Package adopted by the Council of the EU and the European Parliament on 20 May 2019. These mandates are mainly focused in the areas of  governance and remuneration, large exposures, resolution as well as reporting and disclosure. Besides clarifying the sequencing of mandates and the rationale behind their prioritisation, the roadmaps aim at providing a preliminary understanding of the mandates combined with some policy guidance. Through this work, the EBA will contribute to making the European Single Rulebook more comprehensive, proportionate and apt to reflect developments in the banking sector.

The Risk Reduction Package allocates to the EBA more than 100 new mandates under the revised Capital Requirements Directive (CRD V), Capital Requirements Regulation (CRR II), Bank Recovery and Resolution Directive (BRRD II). Most of the mandates aim at completing and updating the Single Rulebook as well at monitoring regulatory practices within the Single Market to ensure the effective and consistent implementation of such rules.

In the area of governance, the EBA will contribute to optimising the existing framework with an emphasis on the finalisation of the remuneration deliverables. In the area of large exposures, the EBA’s priority will be to complete the framework where currently no EBA work exists, namely for determining exposures arising from derivatives. In the area of Pillar 2, the EBA will consider how to make the Pillar 2 framework fit for purpose in view of ongoing and new challenges. In particular, proportionality will be strengthened, and the anti-money laundering and counter-terrorist financing (AML/CTF) and sustainable finance dimensions will be clarified together with Pillar 2 capital add-ons. On resolution, the EBA’s work aims at facilitating effective resolution planning and preparedness, such as on MREL calibration and monitoring In the area of supervisory reporting, the EBA aims at achieving an efficient reporting framework with enhanced proportionality. Finally with its work on disclosure, the EBA aims to become the EU-wide Pillar 3 hub following the completion of the EUCLID project. 

Note to the editors

The risk reduction measures package, which was proposed by the Commission in November 2016 and adopted by the Council of the EU and the European Parliament on 20 May 2019, represents an important step towards the completion of the European post-crisis regulatory reforms. The package is also a response to the June 2016 ECOFIN Council conclusions, which invited the Commission to put forward proposals to further reduce risks in the financial sector no later than by the end of 2016.

The banking package includes the elements of the Basel III framework already agreed at international level at the time of the Commission's proposal.

links

EBA launches consultation on draft amended technical standards on passport notification

13 November 2019

The European Banking Authority (EBA) published today a Consultation Paper on the draft amended Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) on passport notification. The review of the two Regulations aims at improving the quality and consistency of information to be provided by a credit institution notifying its home competent authorities when it intends to open a branch or provide services in another Member State, as well as the communication between home and host authorities. The consultation runs until 13 February 2020.

 

Since their entry into force, the two Commission Regulations have significantly contributed to the convergence of supervisory practices across the EU, streamlining passport notifications by credit institutions and deepening the internal market. However, practice has shown the need for clarification as to the information to be provided by credit institutions in order to allow a better assessment of the passport notification and the credit institution’s arrangements to carry out the planned activities.

 

The proposed amendments focus on the quality and clarity of the information to be provided by the credit institutions to their home competent authorities in the passport notification, as well as to the communication between home and host authorities. In particular, material changes include the indication of the date of the intended start of each activity for which the passport notification is submitted; the assumptions underpinning the financial forecasts; the provision of a statement by an external auditor, in case of a planned termination of a branch, that the credit institution no longer holds deposits nor repayable funds from the public through the branch.

 

Consultation process

 

Responses to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. All contributions received will be published after the consultation closes, unless requested otherwise. The deadline for the submission of comments is 13 February 2020.

 

A public hearing on this consultation will take place at the EBA premises on 21 January 2020, from 10:30 to 12:30 CET.

 

Legal basis

The review of the two sets of technical standards on passport notification, originally enacted by the European Commission under Commission Delegated Regulation (EU) No 1151/2014 and Commission Implementing Regulation (EU) No 926/2014, has been done in accordance with Articles 35, 36 and 39 of Directive 2013/36/EU, in combination with Article 29(d) of Regulation (EU) 1093/2010 establishing the EBA.

EBA announces timing for publication of 2019 EU-wide transparency exercise and Risk Assessment Report

11 November 2019

The European Banking Authority (EBA) announced today that its 2019 Risk Assessment Report and transparency exercise with bank by bank data will be released on Friday 29 November at 18:00 CET.