Basel III monitoring

In monitoring the implementation of Basel III, the Basel Committee on Banking Supervision has been studying the impact of the capital requirements and the new liquidity standards on selected banks since 2011. Monitoring is conducted semi-annually at the end of December and the end of June. The objectives of the exercise are to monitor adaptive behaviours of banks in order to prepare for upcoming regulatory reforms, and to assess the incidental capital shortfall of fully-phased-in frameworks. The statistical annex for the current reporting date (Dec-2018) includes the effects of the finalised Basel III reform package, which the Basel Committee adopted in December 2017.

Results of the Basel III monitoring exercise for German banks as at 31.12.2018

  • The total capital requirement upon full implementation of the finalised Basel III reform package decreased from €15.5 billion to €14.0 billion compared with the previous survey as at 30 June 2018. Based on a consistent sample, this corresponds to around one-quarter of the original total capital requirement from the first survey on the reporting date of 30 June 2011.
  • The aggregate minimum capital requirements show an increase of 22.2%, thus down by 1.4 percentage points from the previous period. This decline can largely be attributed to the Fundamental Review of the Trading Book (FRTB), which the Basel Committee published in January 2019 and which has now been included in the impact studies for the first time. On the other hand, the output floor of 72.5% remains the leading factor behind the overall increase of 22.2%. Throughout its phase-in period, the output floor effect will increase from 0.2% in 2022 to 17.6% in 2027. Once fully implemented, the output floor will represent the binding capital requirement for around one-quarter of banks.
  • When the finalised Basel III reform package has been fully implemented, the Common Equity Tier 1 (CET1) capital ratio will fall from its current level of 14.5% to 10.7%, an increase of 0.2 percentage points from the previous period. The leverage ratio, upon implementation of the finalised framework, will drop by 0.2 percentage points to 4.4%.
  • The impact of the revisions to the credit risk framework (3.6%) is spread across the standardised approach (1.7%), the IRB approach (0.5%) and securitisation (1.5%). While Group 1 banks will be affected most by the revised rules for securitisation, banks in Group 2 will experience the greatest impact from the revision of the standardised approach for credit risk.
  • The impact of the introduction of the FRTB will mainly affect larger trading book banks. For the first time, the impact study takes into account the recalibrated market risk framework published in January 2019. As anticipated, a result of the revisions, the increase of the FRTB on MRC is declining. A period-on-period comparison is made difficult by the large changes in trading book holdings, but the minimum capital requirements are set to decline from 4.6% to 3.3%. Within this sample, both Group 1 and Group 2 banks calculate over 50% of their minimum capital requirements for market risk using internal models.
  • To calculate CVA risk, 73% of the minimum capital requirements of Group 1 banks are computed using the new standardised approach. For Group 2 banks, 84% of these requirements are computed using the new foundation approach. Three of the ten Group 2 banks are below the de minimis threshold and can take their capital requirements from counterparty credit risk. The strong decrease in the impact on minimum capital requirements for Group 2 banks is driven by a small number of banks as well as changes in the sample.
  • Changes to minimum capital requirements for operational risk depend increasingly on how the internal loss multiplier (ILM) is calibrated. Applying bank-specific income and expenditure metrics increases the minimum capital requirements; setting the ILM to a value of one under national discretion reduces the minimum capital requirements. This effect is especially pronounced for Group 1 banks. The minimum capital requirements for operational risk are slightly lower than in the previous period, since the loss calculation for the past ten years as at the reporting date no longer included the year 2008, in which comparatively large losses were incurred.
  • The new standards for banks’ liquidity coverage are met almost entirely across the board. On aggregate, the LCR is 148% and the NSFR is 112%. None of the participating banks would need additional liquidity to meet the minimum requirement for the LCR. To meet the NSFR, there is a residual need for stable funding of around €7.9 billion.