EBA publishes results of the Basel III monitoring exercise as of 31 December 2011

The European Banking Authority (EBA) publishes its second report of the Basel III monitoring exercise which presents the aggregate results on capital, risk-weighted assets (RWAs), leverage and liquidity ratios in EU member states.
The results of this exercise show an estimated CET1 capital shortfall for Group 1 banks of €8 bn at a minimum requirement of 4.5% and of €199 bn at a target level of 7.0%.
Compared to the previous exercise based on data as of June 2011, the results of the current monitoring show an average increase in Group 1 banks' CET1 ratio of 0.4 percentage points and a decrease in the corresponding capital shortfall, with respect to the 7% target level, by €32.3 bn (i.e. 14%).
These results do not reflect all the additional efforts made by banks to fulfil the requirements of the EBA's recapitalisation exercise whose impact on the forthcoming Basel III monitoring results based on data as of 30 June 2012 is expected to be published in early 2013.

Methodology

This report is based on data as of 31 December 2011 and for the first time shows the evolution of Basel III ratios over time. In this regard, a total of 156 banks, which reported data for all three periods, have been included in the sample. Banks submitted comprehensive and detailed non-public data on a voluntary and best-efforts basis. National supervisors worked extensively with banks to ensure data quality, completeness and consistency with the published reporting instructions.

This exercise is carried out assuming full implementation of Basel III and its results are compared with the respective current national implementation of the Basel II.5 framework.

The monitoring exercise provides an impact assessment of the following aspects:

• Changes to banks‟ capital ratios under Basel III, and estimates of any capital shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable;
• Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including modified rules on capital deductions, and changes to the eligibility criteria for Tier 1 and total capital;
• Changes in the calculation of risk-weighted assets (RWA) resulting from changes to the definition of capital and counterparty credit risk requirements;
• The capital conservation buffer;
• The leverage ratio;
• Two liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).

Background

Since the new EU directive and regulation are not finalised yet, no EU specific rules are analysed in this report. It is important to note that the monitoring exercise is based on static balance sheet assumptions. Planned management actions to increase capital or decrease risk-weighted assets are not taken into account. This allows for identifying effective changes in banks‟ capital base instead of identifying changes which are solely based on changes in underlying modelling assumptions As a consequence, monitoring results are not comparable to industry estimates as the latter usually include assumptions on banks' future profitability, planned capital and/or further management actions that mitigate the impact of Basel III. In addition, monitoring results are not comparable to "Comprehensive Quantitative Impact Study" (C-QIS) results, which assessed the impact of policy proposals published in 2009 that differed significantly from the final Basel III framework.

For the purpose of this monitoring exercise, participating banks were classified into two groups: Group 1 and Group 2. Group 1 banks (44 from 14 EU countries) are those with a Tier 1 capital in excess of €3 bn and internationally active whereas all other banks in the sample fall into Group 2 (112 banks from 17 EU countries).