European banks, including at least four in Luxembourg, have beefier capital buffers than two years ago, an EU regulator has stated.
The European Banking Authority published its second mandatory Basel III Monitoring Report on 26 September 2023, which assessed the financial resilience of 157 European Union banks against the forthcoming Basel III full implementation in 2028.
EBA found that the impact on these institutions in terms of minimum Tier 1 capital requirements has lessened significantly compared to the initial reference date in December 2021.
Steep decline in capital shortfall
The EBA report stated that the estimated capital shortfall to align with Basel III requirements has been nearly eliminated. Only €600m of additional Tier 1 capital is required for the entire EU banking sector, a figure considerably lower than prior estimations.
EBA mentioned that these numbers include the economic impacts of the covid pandemic up to December 2022. The authority also reported that the impact is 50% lower than in the 2021 exercise, largely due to a reduced contribution of market risk and an increased offsetting effect of the leverage ratio observed in the latest data.
Detailed overview by banking groups
In a point-in-time analysis based on a sample of 157 banks, the EBA concluded that the overall minimum Tier 1 capital requirement would increase by 9.0% by 2028. For large and internationally active banks, termed as Group 1, this increase would be 10.0%. Global systemically important institutions (G-SIIs), a subset of Group 1, would experience a surge of 16.0% while the requirement for Group 2 banks would increase by 3.6%. EBA’s report also found that credit risk and the output floor are the main contributing factors for these increases across all groups.
The sample of 157 banks was divided into 58 Group 1 banks, which have Tier 1 capital in excess of €3bn and are internationally active, and 99 Group 2 banks. Compared to the first mandatory exercise as of December 2021, EBA noted that the sample has decreased by 3 banks mainly due to mergers and corporate actions.
Among the 157 banks examined, four Luxembourg banks made the list: Spuerkeess, Banque Internationale à Luxembourg, RBC Investor Services Bank and Banque Raiffeisen.
All four institutions fall under Group 2 classification, with the first three also designated as Other Systemically Important Institutions (O-SIIs), which EBA stated are more likely to pose risks to financial stability due to their systemic importance.
EBA mentioned that the revisions to the Basel III framework predominantly impact exposures for credit risk, operational risk and leverage ratio. To align with EU co-legislators’ choice of setting ILM=1 for operational risk, EBA used ILM=1 as the baseline scenario for the cumulative impact results. This resulted in a significant reduction in the operational risk impact on a standalone basis.
The EBA also retroactively produced the time series of the cumulative impact based on the ILM=1 implementation option to enable the comparison over time. Additionally, the report adjusted the bias that resulted from overly conservative original data submissions on market risk by several banks, including six G-SIIs.
The 44-page full report is available here.