ESBG welcomes that implementing the latest Basel standards will increase financial stability. We also believe that the European legislators can achieve this while taking into account the specificities of the European banking market and with the proportionality principle in mind. This means that the EU legislation should adjust the Basel text where it is justifiable. More specifically, ESBG believes that the proposals outlined below should be taken into account when implementing the Basel III standards (if at all the decision is made to go ahead with the implementation, against the background of the current economic crisis triggered by the Covid pandemic).
Proportionate implementation: ESBG argues that the implementation of the final elements of Basel III in the
EU should account for factors such as an institution's size, business model, risk profile and interconnectedness.
Proportionate regulation allows savings and retail banks to abide by legal texts whilst still carrying out their
daily activities, such as SME lending.
Maintaining the EU specificities: The EU regulatory framework on capital adequacy (CRR/CRR II) contains
features, such as the treatment of financial equity holdings, exemptions from holding capital against credit
valuation adjustment (CVA) risk on corporate derivatives exposures and supporting factors for SMEs and
infrastructure exposures. These features have been carefully calibrated to support important segments of the
EU economy and should, therefore, be maintained. This is especially important considering that the credit
supply to the economy will be a particularly important theme in the context of the COVID-19 crisis.
New Standardised Approach to Credit Risk (SA-CR): We advocate a proper implementation of the new
SA-CR that aims to avoid large and unwarranted increases in capital requirements for banks in the EU that
apply the standardised approaches and for Internal Ratings Based (IRB) banks that would be constrained by
the output floor based on the SA-CR. The new SA-CR approach should avoid broad-brush measures that
pose a risk of misalignment of underlying risks and capital requirements, e.g. unduly high capital requirements
for low-risk client portfolios. For instance, the following types of exposures will be unduly affected due to lack
of risk sensitivity in the regulatory treatment:
The Basel standards are designed for internationally active banks and as such they do not take into
consideration the nature, scale and complexity of the activities of all individual credit institutions.
A study from Copenhagen Economics (CE), a leading economic consultancy, documented that the finalised
Basel III framework will bring fewer benefits than costs for the European economy.1 With the level of
recapitalisation that European Union (EU) banks have achieved since the 2008 crisis, any additional layer of
capital adds only insignificant improvements to financial stability; even in the most adverse economic
scenarios, research by the International Monetary Fund (IMF) and others suggests that banks will not run into
likely insolvency scenarios.
The EBA pre-COVID-19 figures showed that the capital shortfall in Europe could be around EUR 124.8 billion.
The actual increase in capital can be expected to be significantly higher since banks typically operate well
above the minimal capital requirements. The higher levels of relatively expensive equity capital will increase the
cost of capital for banks and ultimately the borrowing costs for European households and businesses, leading
to a permanent reduction in Gross Domestic Product (GDP) estimated around 0.4%, as well as giving rise to
job losses in the short to medium term. Households and Small and Medium Enterprises (SMEs) are likely to
be most affected as they cannot seek alternative funding through capital markets.
It is also foreseeable that the COVID-19 pandemic will have a significant negative impact on private
households and the real economy, depending on the nature and duration of State measures. Banks might as
a consequence face higher NPLs and higher provisions, but in any case are expected to be able to continue
supporting their clients during and after the crisis. The question is therefore about the best timing to introduce
the new rules: these are undoubtedly imposing additional capital requirements to the banks. Reducing banks’
lending capacity could lead to a significant delay in the recovery of the real economy.
Against this background, the European Commission should once again, e.g. through a new impact
assessment, closely examine the absolute effects of the reform package, independently from the transitory
short-term impacts and, if necessary, postpone its implementation further. In order to avoid competitive
disadvantage, the European legislator should also closely monitor the transitory measures in other regions.
On 7 December 2017, the Basel Committee on Banking Supervision (BCBS) agreed on the final elements of
Basel III. Following the postponements granted by the BCBS due to the Covid-19 outbreak (further outlined
below), the new rules would now need to be implemented by 2023, including the fundamental review of the
trading (FRTB), which is now also due for implementation by 2023.
The general outline of the deal is the following:
As mentioned above, the Basel Committee's oversight body, the Group of Central Bank Governors and
Heads of Supervision (GHOS), has endorsed on 27 March 2020 a set of measures to provide additional
operational capacity for banks and supervisors to respond to the immediate financial stability priorities
resulting from the impact of the COVID-19 crisis on the global banking system: