The European Banking Authority (EBA) has estimated that banks in the European Union can easily comply with the international banking rules known as Basel III, with full implementation scheduled for 2033. on Monday 7 October 2024, this third mandatory monitoring report evaluates the projected impact of the EU-specific implementation of the Basel III framework on European banks. The EBA assessed the overall capital shortfall across the EU banking sector at €5.1bn, of which the Tier 1 capital shortfall is €900m, which it described as “minimal.”
The report’s analysis included all EU-specific capital requirements, as reflected in the capital requirements regulation (CRR3), such as Pillar 2 requirements and various capital buffers. When compared with the December 2022 reference date, the capital shortfall impact has decreased. The EBA highlighted that the minimal capital gap could be easily raised over the coming years, well ahead of the 2033 full implementation date.
Tier 1 capital requirements
The EBA’s findings indicated that the minimum Tier 1 capital requirements for the EU banking sector would increase by 7.8% upon the full implementation of Basel III in 2033. Key contributors to this increase include the output floor and operational risk measures. However, the effect is more pronounced for certain categories of banks.
For large and internationally active institutions, categorised as group 1 banks, the required increase in Tier 1 capital was found to be 8.6%. For global systemically important institutions (G-SIIs), a subset of group 1, the required increase was higher at 12.2%. Meanwhile, group 2 banks, which consist of smaller institutions with Tier 1 capital below €3bn, faced a more moderate rise of 3.6%.
Sector-wide impact
The EBA’s report also addressed the impact of the EU-specific implementation of Basel III (via CRR3) on various banking sectors, including credit risk, operational risk and the leverage ratio. Additionally, the introduction of the output floor--a regulatory constraint designed to limit the extent to which capital requirements can decrease under internal models--played a significant role in determining capital needs.
For market risk, new standards were applied through the fundamental review of the trading book (FRTB), alongside updated credit valuation adjustment (CVA) standards. These reforms are expected to increase capital requirements for affected banks, with the EBA breaking down the results separately for group 1 and group 2 institutions.
The report further examined the capital requirements across three broad banking business models: ‘universal’, ‘retail-oriented’ and ‘corporate-oriented and other’. The EBA stated that each of these models would experience varying degrees of impact due to their different operational focuses.
Leverage ratio and capital buffer
The EBA attributed the reduction in Tier 1 capital shortfall to several factors, most notably the early implementation by G-SIIs of an additional leverage ratio requirement. As of 2023, these institutions were required to meet an additional leverage ratio requirement of 50% of the G-SII surcharge on top of the standard 3% leverage ratio exposure measure. This early compliance mitigated the capital impact that G-SIIs will face during the full Basel III implementation in 2033, with spillover effects to other banks in group 1.
On the other hand, the capital impact for group 2 banks was not affected by these early measures. The point-in-time analysis conducted in the report reflected this distinction between larger, globally active institutions and smaller, regional banks.
The EBA cautioned that the results of this third mandatory Basel III monitoring exercise are not directly comparable to earlier assessments. This is primarily due to the phased implementation of various Basel III components over time and the evolving regulatory landscape.
The full 52-page report is available .