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:

  • European mid-sized corporates without an external credit rating;
  • Commercial as well as residential real estate;
  • Development projects (in a Basel context referred to as “specialized lending”);
  • Some equity and off-balance sheet items

Output floor: The application of the output floor in Europe should take into account the interaction with EU specific capital buffers to avoid any undue capital increase compared to the international standards agreement. Moreover, the output floor should be applied as originally designed in the Basel framework, i.e. at the highest level of consolidation, to recognise diversification effects and avoid any unintended impact on specific business models. Otherwise, banks will be incentivised to optimise capital requirements and opt for a cross-border branch rather than subsidiary structures, also known as “branchification”, that often is not well-received by host country regulators.

Operational risk: EBA and BCBS impact studies indicate that EU banks are impacted more than their international peers by the revised standards for operational risk. ESBG recommends to carefully assess the question of supervisory discretion on the setting of the factor that impacts the capital requirement for operational risk, the so-called Internal Loss Multiplier (ILM) introduced in the revised framework. EU banks need a policy that would reward good historical operational risk management without penalising banks for past issues that have been remediated.

Identified Concerns

​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. ​

Why Policymakers Should Act

European decision-makers have, in previous legislative acts, transposed the Basel standards to all credit institutions in Europe, while the Basel Committee on Banking Supervision (BCBS) generally expects the standards to be applied only to the internationally active institutions. Hence, the adoption should be always done with the utmost care in order to ensure proportionate rules to small, simple, locally-focused institutions, which is almost half of the European banks. This is particularly important in the EU where banks play a pivotal role in the economy and provide 80% of financing in the economy as compared to the 25% in the US. Moreover, according to the European Parliament resolution issued in 2016, the implementation of the Basel III should not trigger any significant capital increase, it should promote a levelplaying field at the global level while paying attention to the peculiarities of the EU economy and of European banking models.

Perhaps most important, only a careful and well-thought-out implementation will ensure that borrowing costs for households and companies, including SMEs, will not increase in a substantial manner.


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:

  • Output floor set at 72.5% – implemented from 2023 until 2028 – special treatment for low risk mortgages, which was a big ask by multiple (Northern) European jurisdictions;
  • FRTB implementation postponed until 2023 – recalibration of some aspects (including P&L attribution and modellability of risk factors);​
  • Leverage Ratio G-SIB surcharge;
  • New Operational Risk standardised approach;
  • Changes to standardised approach and internal model approach for credit risk – including limitation of use of models for low default portfolios (e.g. exposures to large corporates);
  • Move to a revised standardised approach on credit valuation adjustment (CVA) charge, removal of possibility of using internal models.

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:

  • The implementation date of the Basel III standards finalised in December 2017 has been deferred by one year to 1 January 2023. The accompanying transitional arrangements for the output floor have also been extended by one year to 1 January 2028;
  • The implementation date of the revised market risk framework finalised in January 2019 has been deferred by one year to 1 January 2023;
  • The implementation date of the revised Pillar 3 disclosure requirements finalised in December 2018 has been deferred by one year to 1 January 2023.

In terms of implementation within the EU, following the BCBS postponement, the European Commission is expected to issue a legislative proposal to implement the final elements of Basel III in the EU in the beginning of 2021. The Commission is in the meantime analysing the feedback to the public consultation concluded in January 2020 and awaiting for the EBA to update its impact assessment following the Covid-19 outbreak.​