On 20 March 2019, the Basel Committee on Banking Supervision (Basel Committee) published the results of its Basel III monitoring exercise, based on data as of 30 June 2018. Data is provided for a total of 189 banks, including 106 large internationally active banks. These “Group 1” banks are defined as internationally active banks that have Tier 1 capital of more than €3 billion, and include all 29 institutions that have been designated as global systemically important banks (G-SIBs). The Basel Committee’s sample also includes 83 “Group 2” banks (i.e. banks that have Tier 1 capital of less than €3 billion or are not internationally active).

The report sets out the impact of the Basel III framework that was initially agreed in 2010 as well as the effects of the Basel Committee’s December 2017 finalisation of the Basel III reforms. However, it does not yet reflect the finalisation of the market risk framework published in January 2019.

Key points to note from the exercise are that:

  • the initia lBasel III minimum capital requirements were fully phased in by 1 January 2019 (while certain capital instruments can still be recognised for regulatory capital purposes until end-2021). On a fully phased-in basis, data as of 30 June 2018 shows that all sampled banks continue to meet both the Basel III risk-based capital minimum Common Equity Tier 1 (CET1) requirement of 4.5% and the target level CET1 requirement of 7.0% (plus any surcharges for G-SIBs, as applicable);
  • applying the 2022 minimum requirements for total loss-absorbing capacity (TLAC), six out of 24 G-SIBs reported TLAC data having a combined incremental TLAC shortfall of €68 billion as at the end of June 2018, compared with €82 billion at the end of December 2017. The final Basel III minimum requirements are expected to be implemented by 1 January 2022 and fully phased in by 1 January 2027;
  • Basel III’s Liquidity Coverage Ratio (LCR) was set at 60% in 2015, increased to 90% in 2018 and continued to rise in equal annual steps to reach 100% in 2019. The weighted average LCR for the Group 1 bank sample was 135% on 30 June 2018, compared with 133% six months earlier. For Group 2 banks, the weighted average LCR remained almost stable at 180%; and
  • the weighted average Net Stable Funding Ratio (NSFR) for the Group 1 bank sample remained stable at 116%, while for Group 2 banks the average NSFR increased slightly to 119%. As of June 2018, 96% of the Group 1 banks and 95% of the Group 2 banks in the NSFR sample reported a ratio that met or exceeded 100%, while all banks reported an NSFR at or above 90%.

The final Basel III minimum requirements are expected to be implemented by 1 January 2022 and fully phased in by 1 January 2027.

In addition to the Basel Committee’s publication, on 20 March 2019 the European Banking Authority (EBA) published its report on the Basel III monitoring exercise. The report presents the estimated impact of the Basel reform package on European banks as agreed in December 2017 by the Group of Central Bank Governors and Heads of Supervision.

Overall, the EBA estimates that the Basel III reforms, once fully implemented, would determine an average increase by 19.1% of EU banks’ Tier 1 minimum required capital.  The LCR of EU banks, which was fully implemented in January 2018, stood at around 146% on average in June 2018, materially above the minimum threshold of 100%. The impact of the risk-based reforms is 25.4%, of which the leading factors are the output floor (8.0%) and operational risk (5.5%). To comply with the new framework, EU banks would need EUR 39.0 billion of additional total capital, of which EUR 24.2 billion of Tier 1 capital.

The EBA has also published its report providing a biannual update on the monitoring of the liquidity coverage requirements. The analysis is based on the Common Reporting Framework (COREP) data of June 2018. The report notes that EU banks have improved their compliance with the LCR. At the reporting date of 30 June 2018, EU banks’ average LCR was 146%. The aggregate gross shortfall amounted to EUR 22.5 billion corresponding to four banks that monetised their liquidity buffers during times of stress. A more in-depth analysis of potential currency mismatches in LCR levels, suggests that banks tend to hold significantly lower liquidity buffers in some foreign currencies.