EBA updates impact of the Basel III reforms on EU banks’ capital

The European Banking Authority (EBA) published today a Report on the impact of implementing the final Basel III reforms in the EU. The full Basel III implementation, in 2028, would result in an average increase of 15.4% on the current Tier 1 minimum required capital of EU banks. The results do not reflect the economic impact of the Covid-19 pandemic on participating banks as the reference date of this impact assessment is December 2019.

Overview of the results

Overall, the results of the Basel III capital monitoring exercise show that European banks' minimum Tier 1 capital requirement would increase by 15.4% at the full implementation date (2028), without taking into account EU-specific adjustments. Excluding the leverage ratio contribution, the impact of the reforms is 18.3%, of which the leading factors are the output floor (6.2%) and credit risk (5%).  The minimum Tier 1 capital requirement for large and internationally active banks (Group 1) would increase by 16.2%. The respective requirement for the global systemically important institutions (subset of Group 1) and that of Group 2 banks would raise by 23% and 11.1%, respectively.    

Change in total T1 Minimum Required Capital, as percentage of the overall current Tier 1 MRC, due to the full implementation of Basel III (2028) (weighted averages, in %)

To comply with the new framework EU banks would need EUR 9.4 billion of additional Tier 1 capital. These estimates are based on the assumption that Basel III requirements are implemented in full.

Notes to the editors

• The Basel III monitoring Report assesses the impact on EU banks of the final revisions of credit risk, split into four sub-categories, operational risk, and leverage ratio frameworks, as well as of 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 cumulative impact analysis of the Basel III monitoring exercise report uses a total sample of 106 banks.
• The Basel III capital monitoring report shows the results separately for Group 1 and Group 2 banks. Group 1 banks are those with Tier 1 capital in excess of EUR 3 billion and are internationally active. All other banks are categorised as Group 2 banks. 
• For three Global Systemically Important institutions, that are 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. According to the “conservative estimation”, based on the original conservative assumptions, the total impact would be 16.7%, with a total risk-based impact of 19.7% and market risk impact of 2.3%.
• Together with the Report, an interactive tool showing the main results is, for the first time, made available for analytical purposes. The official figures and conclusions are the ones presented in the public Basel III monitoring Report. Therefore, any interpretation based on the data provided within the visualisation tool must be taken with caution. 
• On 15 December 2020, the EBA will also publish a more detailed ad hoc Report, in response to the European Commission’s Call for Advice (CfA) on Basel III, based on the same reference date (December 2019). The cumulative results of the present Report are not directly comparable to those of the CfA report, as they are based on slightly different samples by composition and size and on two key methodological differences. The more important methodological difference relates to the application of different buffers. Another, less significant, difference is the sequence of estimating the capital requirements for the output floor and leverage ratio, respectively. The latter difference has an impact on the minimum required capital assigned to these two categories, but not on the cumulative impact.