The European Commission has issued a targeted exploratory consultation on the finalisation of the Basel III reforms. The consultation seeks to gather evidence on the potential impact of the following reforms on the EU banking sector:

  • revisions to the standardised approach for credit risk (SA-CR) to improve the robustness and risk sensitivity of the existing approach;
  • revisions to both internal ratings-based (IRB) approaches for credit risk to reduce unwarranted variability in banks’ calculations of risk-weighted assets (RWAs);
  • minimum haircut floors for non-centrally cleared securities financing transactions (SFTs) to limit pro-cyclicality of these transactions and the build-up of excessive leverage in the financial system;
  • an overhaul of the credit valuation adjustment (CVA) framework consisting of the removal of the use of an internally modelled approach and the introduction of a new basic approach (BA-CVA) as well as revisions to the standardised approach (SA-CVA), to enhance the risk sensitivity, strengthen the robustness and improve the consistency of the framework;
  • a new standardised approach for operational risk (SA-OR), replacing all the existing standardised and advanced measurement approaches for this risk to simplify the framework and increase comparability; and
  • replacement of the “Basel II’ floor with an aggregate more risk-sensitive output floor to place a limit on the regulatory capital benefits that a bank using internal models can derive relative to the revised Basel III standardised approaches.

The implementation of the above reforms in the EU would require amendments to current banking regulations, predominantly the Capital Requirements Regulation.

The deadline for responding to the consultation is 12 April 2018.