On 4 December 2019, the European Banking Authority (EBA) published the second part of its advice on the implementation of the final Basel III standard in the European Union, complementing its report published on 05 August 2019. The most recent EBA publication focuses on an assessment of the impact of the revisions to the credit valuation adjustment (CVA) and market risk frameworks, accompanied by a set of 18 policy recommendations. It also provides a revised assessment of the impact of the implementation of the final Basel III standard in the EU, foreseeing a lower overall increase of the current minimum capital requirement – 23.6% on average, against 24.4% originally estimated in the August report.
In respect of policy recommendations, the EBA makes specific case for the removal of all existing exemptions from the calculation of capital requirements for CVA risk, as currently provided by Article 382(4) CRR. These exemptions apply to:
- transactions with non-financial counterparties below the EMIR clearing threshold;
- transactions between clearing members and clients in the context of indirect clearing, when the clearing member is acting as an intermediary between the client and a qualifying central counterparties;
- transactions with intragroup counterparties;
- transactions with pension fund counterparties; and
- transactions with sovereign counterparties.
Noting that the Basel III standard does not foresee any exemptions from the CVA framework, the EBA is of the view that “that the CVA risk generated by the CVA exemptions can be substantial and should be captured prudentially” and it recommends that “the CVA exemptions should be fully removed, subject to phasing-in measures that are commensurate with the expected impact of the revisions to the CVA risk framework, when the impact of such revisions can be more accurately assessed.” Arguing in favour of the removal of the exemption, the EBA reiterates its view that “the transactions exempted from the EMIR clearing obligation should always, in principle, be subject to a CVA risk charge, as they are not required to be collateralised and thus — other things being equal — generate a comparatively greater CVA risk” and finally, that the removal of the exemptions “could also serve additional policy objectives, such as incentivising the central clearing of those transactions currently exempted from capital requirements for CVA risk”.
The EBA report will constitute significant input to the ongoing European Commission consultation on the implementation of the final Basel III standard in Union law, which remains open for comments until 3 January 2020. Commissioner Dombrovskis, during a conference in Brussels in November 2019, confirmed that the Commission intends to publish legislative proposals implementing Basel III in Q2 2020.