Updated: October 2019


Basel III finalisation (or: “Basel IV”)​​​​: ​apply standards in a proportionate way and be mindful of the global level playing field


Output floor​: alignment with international standard
The application of the output floor in Europe should take into account the interaction with EU specific capital buffers in order to avoid any undue capital increase compared to the international standards agreement. Moreover, the output floor should to be applied as designed in the Basel framework, i.e. at the highest level of consolidation to recognise diversification effect and avoid any unintended impact on specific business model. 
New internal model approach for credit risk 
We would ask for a review of internal models applications and related procedures. This could significantly reduce the administrative efforts and huge costs on both sides – the banking industry and the regulator (almost 50% of supervisory assessments focused on model specific issues during the last years) whereas the reduction of scope and the new input and output floors largely modify the modelling philosophy. ESBG proposes to replace the complex and time consuming ex-ante models applications with a new ex-post review approach for models.

New standardised approach for credit risk (SARC)
  • Corporate exposures: The new SARC should include a European specificity. Regarding the assignment of unrated corporate counterparts to an “Investment Grade” classification: we propose that the EU replaces the requirement that the corporate entity has to issue securities on a recognized exchange with an objective criterion that is relevant for the European corporate sector. 
  • Specialized Lending (SL): in order to increase the risk sensitivity for SL exposures, ESBG proposes: 1) in the standardised approach: more granular risk weight levels; and 2) In the internal ratings-based (IRB) approach: more granular loss given default (LGD) input floors and asset values haircuts.​
  • Commercial real estate: real estate market portfolios with historically low-defaults (commercial as well as residential) should be treated with a more risk-sensitive approach. 
  • Value at origination for both Commercial real estate and Residential real estate: In ESBG’s view, both the commercial real estate and the residential real estate exposure classes would much benefit if an actual value approach was used instead of value at origination.
  • Acquisition, development and construction (ADC) exposures: it is necessary to allow for more risk sensitivity regarding the treatment of these exposures in EU regulation. In order to discriminate between speculative and non-speculative exposures. Due to this it is very important that in the EU the treatment for these exposures reflects the changes incorporated to the finalisation of Basel III, thus allowing the assignation of a risk weight of 100% if certain conditions are met (e.g. significant amount of pre-sale contracts).​
  • Equity: Basel IV intends to increase the risk weights for equity to at least 250% and up to 400% from currently 100%. For intragroup exposures and those of members of an institutional protection scheme, despite them being usually long-term, low risk and not-for profit, we propose to keep the current 100% risk weight.
  • Off-balance sheet items: Unconditionally Cancellable Commitments (UCC) are essential for financing the economy. Hence, ESBG proposes to maintain the 0% credit conversion factor (CCF) to commitments that are unconditionally cancellable upon the appropriate level of justification, including for retail clients. 

New methods for market risk
  • Trading Book vs. Banking Book boundary for funds and listed equities: There should be the possibility to keep funds and listed equities also in the banking book if the bank can prove that the positions are held without any trading intent and the mandate of the fund is fitting to the investment strategy of the banking book.​
  • Treatment of equity indices in the context of the Default Risk Charge (DRC): As the main equity indices of several European countries do not fulfil all criteria listed in Paragraph 21.31, ESBG believes that there should be the possibility of a fall back approach if the above mentioned criteria are not met and the exposure to the index in general is below a certain materiality threshold.
  • DRC ​requirement calculation for EU sovereigns: Following the current Basel proposal, banks applying a default risk model will have to calculate the default charge, also for exposures to central governments and central banks of Member States denominated in the domestic currency (Art 325bm ff, as there is no specific exemption). In ESBG’s view, this might lead to the situation, that banks applying the standardised method and banks applying a default risk model for trading book assets are treated differently in view of the calculation of the default charge.​
  • ​Internal risk transfer of credit and equity risk from banking book to trading book: ESBG believes that there should be a harmonized treatment of banking book hedges via internal risk transfer. The proposal for interest rate hedges (Paragraph 25.25) should be valid also for equity and credit risk hedges as this would allow external macro hedges for smaller exposures. Moreover, the open risk would be included in the internal risk transfer trading desk. 
Finally, those EU special features already anchored in the CRR II/CRD V, such as the treatment of financial equity holdings, the exemption from holding capital against CVA risk on corporate derivatives exposures and the supporting factors for SMEs and infrastructure exposures, should be retained in the new framework.


The Basel standards are designed for inter nationally active banks and as such they do not take into consideration the nature, scale and complexity of the activities of all individual credit institutions.  

ESBG believes that:

  • Those medium-sized and small banks that use the SACR will face significant administrative burden and additional cost due to the increased complexity of the new SACR.
  • The output floor might interfere with EU-specific capital buffers and EU-systematic application of banking regulation at individual level.​
  • The new SACR as basis for the calculation of the output floor is not risk sensitive enough for EU franchises.


As European decision-makers have so far transposed the Basel standards to all institutions in Europe, it will be crucial for them to act carefully and with the diverse European banking sector in mind. Almost half of European banks are, in fact, locally focused and would therefore need proportionate rules in order to properly finance the economy and compete on a level playing field. ​


The Basel committee on banking supervision (BCBS) sets the standard for international banking prudential regulation. It is a forum for regular cooperation between the national banks and supervisory authorities from 28 countries.

On 7 December 2017, the BCBS agreed on the final elements of Basel III (this deal is commonly referred to as “Basel IV”) to be implemented by 2022.​

The general outline of the deal is the following:​

  • Output floor: target set at 72.5%; transitory implementation until 2027, including a special treatment for low risk mortgages;​
  • Fundamental Review of the Trading Book (FRTB): implementation postponed until 2022 – recalibration of some aspects (including P&L attribution and modellability of risk factors);​
  • Operational Risk: new standardised approach, removal of internal model;
  • Credit Risk: changes to standardised approach and internal model approach (including limitation of use of models for low default portfolios, large corporates); ​
  • Credit Valuation Adjustment (CVA): revised standardised approach, removal of internal models.

The implementation within the EU is still at the very early stages. The Commission’s legislative proposal is expected in the first half of 2020.