The EBA second mandatory exercise on Basel III full implementation shows a significantly reduced impact on EU banks with shortfalls nearly fully absorbed

The European Banking Authority (EBA) today published its second mandatory Basel III Monitoring Report which assesses the impact that Basel III full implementation will have on EU banks in 2028. According to this assessment -- which uses a sample of 157 banks for the point-in-time analysis -- in terms of minimum Tier 1 capital the impact has significantly decreased in relation to the previous reference date of December 2021. In terms of estimated capital shortfall, the impact of the reform has been nearly fully absorbed.

At EUR 0.6 billion of additional Tier 1 capital required for the entire EU banking sector, the estimated capital shortfall to comply with the Basel III reform has been practically eliminated. The overall impact includes the economic impact of the Covid-19 pandemic that had materialised up until December 2022, the reference date of this Report.  A separate Annex to the Report also includes the impact of the proposals for the EU implementation of Basel III under the revised Capital Requirements Regulation (CRR3). 

Overview of the results

Overall, the results of the mandatory Basel III capital monitoring exercise show that European banks' minimum Tier 1 capital requirement would increase by 9.0% at the full implementation date in 2028.  The main contributing factors are the output floor and credit risk.  The overall minimum Tier 1 capital requirement for large and internationally active banks (Group 1) would increase by 10.0%. The requirements for the global systemically important institutions (G-SIIs, subset of Group 1) and for Group 2 banks would increase by 16.0% and 3.6%, respectively.

Note to the editors

• The results have been visualised in a dynamic way. To facilitate the navigation, here is the full list of results for the different groups of banks that you can find in the interactive graphs. 
• The impact shown in the point-in-time analysis of 2nd annual mandatory exercise report is not directly comparable to the one in the 1st annual mandatory exercise. Thus, when comparing the results over time, Table 6 of the Basel III Monitoring Report should be considered.
• The Basel III Monitoring Report assesses the impact on EU banks of the final revisions to the frameworks of credit risk (split into four sub-categories), operational risk and the leverage ratio. In addition, the introduction of the aggregate output floor is also considered. The report further quantifies the impact of the new standards for market risk (FRTB) and credit valuation adjustments (CVA).
• The Basel III Monitoring Report shows the results separately for Group 1 and Group 2 banks. Group 1 banks are those with Tier 1 capital more than EUR 3 billion, and they are internationally active. All other banks are categorised as Group 2 banks.
• The Basel III Monitoring Report shows the results separately for three broad business models, ‘universal’ which is a business model offering most of the banking services, ‘retail-oriented’, which focuses on retail clientele and ‘corporate-oriented and other’ which incorporates the remaining institutions.
• Together with the Report, an interactive tool showing the main results is made available for analytical purposes. The official figures and conclusions are the ones presented in the public Basel III Monitoring Report. Therefore, any interpretation based on the data provided within the visualisation tool must be done with caution. 
• The annex showing the impact of the implementation of the proposed EU specific adjustments provides an assessment of the impact of the Basel III framework including additional implementation features that are included in the EU Commission legislative proposals on the implementation of Basel III in the EU. The annex shows the impact results applying two different sets of capital requirements. The first scenario includes the same set of buffers as the main Basel III report. The second scenario additionally includes the Pillar 2 requirements and all EU capital buffers.