On 5 August 2019, the European Banking Authority (EBA) published its report to the European Commission, following an earlier call for advice in May 2018, on the assessment of the implementation of Basel III in the EU. The advice presents the findings of the EBA’s quantitative impact assessment analysis based on data from 189 banks and set outs its policy recommendations.

The impact assessment shows that the full implementation of Basel III, under conservative assumptions, will increase the minimum capital requirement (MRC) by 24.4% on average. This increase in capital requirements will imply an aggregate shortfall in total capital of about EUR 135.1 billion (EUR 91.1 billion in terms of common equity tier 1, CET1). The majority of the capital impact occurs in large globally active banks, while the impact on medium-sized banks is limited to 11.3% in terms of MRC, leading to a shortfall of EUR 0.9 billion, and on small banks to 5.5% MRC with a EUR 0.1 billion shortfall. The EBA supports 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.

Section 1.4 of the advice (page 25) sets out the EBA’s main policy recommendations which include:

  • the overall package of revisions to the Basel capital framework agreed upon in December 2017 should be transposed into European legislation in accordance with the implementation calendar set out under that agreement;
  • in the area of credit risk, the EBA recommends that all newly agreed revisions should be implemented in the EU with minor exceptions further explained in the report;
  • the EU legislator is recommended to not adopt any EU-specific supporting factors to SME and infrastructure lending exposures when implementing the final Basel III framework;
  • the EBA supports the introduction of the Basel III reforms affecting the calculation of exposure values of counterparty credit risk exposures stemming from securities financing transactions (SFTs);
  • for operational risk, the EBA recommends the adoption of the newly designed standardised approach, replacing all currently existing regulatory approaches to operational risk capital;
  • for market risk and credit valuation adjustment (CVA), the EBA will further elaborate on policy recommendations when publishing an assessment of the 2019 revisions to the Fundamental Review of the Trading Book (FTRB);
  • banks should use floored risk weighted assets to compute the full stack of capital requirements applicable in the EU, including Pillar 2 requirements and EU-specific systemic buffers; and
  • the output floor, like any other component of the capital requirement, should be applied at all levels of consolidation, unless waivers are granted to individual level capital requirement.

Accompanying the advice, the EBA has published its detailed policy advice on Basel III relating to credit risk, operational risk, output floor and SFTs.