Shearman & Sterling LLP | FinReg | European Banking Authority Publishes Advice on EU Implementation of Basel III
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  • European Banking Authority Publishes Advice on EU Implementation of Basel III

    The European Banking Authority has published several documents setting out its advice to the European Commission on the impact and implementation in the EU of the Basel III 2017 reforms. On December 7, 2017, the Basel Committee on Banking Supervision published the last part of the Basel III reforms. The revisions were to the standardized approach and the Internal Ratings-Based approach for credit risk, the Credit Valuation Adjustment risk framework, the leverage ratio framework, including the introduction of a leverage buffer for Global Systemically Important Banks, the operational risk framework and the new output ratio floor. The revised standards take effect from January 1, 2022, except that the output floor may be phased-in until January 1, 2027.

    The EBA's advice is in response to the Commission's May 2018 request for technical advice on the potential impact of the Basel III revisions on the EU banking sector and the wider EU economy and on any potential implementation challenges. The Commission had also requested that the EBA consider the potential changes to the Basel market risk framework, on which the Basel Committee was consulting at the time. However, the EBA has confirmed that its advice on those aspects will be published before the end of 2019 as it needs to take into account the Basel 2019 revisions to market risk, also due to take effect from January 1, 2022.

    The EBA has set out its advice in an Impact Study and Key Recommendations. More comprehensive recommendations and clarification of EU implementation aspects are contained in four detailed policy advice documents, which cover securities financing transactions, operational risk, the output floor and credit risk.

    Overall, the EBA recommends that the Basel III framework is implemented in the EU without any changes so as to ensure the credibility of the EU banking sector and that the EU follows the Basel III implementation timeframe. The EBA advice sets out how it considers the Basel III national discretions should be implemented in the EU, taking into account the existing capital requirements legislation and the EU banking markets. In particular, the EBA recommends that:
    • In the area of credit risk, the Basel III revisions should be implemented with only minor changes. On the discretions available for the standardized approach, the EBA recommends keeping the external ratings-based approach across exposure classes and adopting the loan-splitting approach to exposures secured by real estate that are not of the income producing type.
    • The EU should not adopt any EU-specific supporting factors to SME and infrastructure lending exposures.
    • The revisions to the exposure values of counterparty credit risk exposures from SFTs should be implemented, but that the newly defined minimum haircut floors framework should not be implemented until further assessments can be carried out.
    • Existing regulatory approaches to operational risk capital should be replaced with the revised standardized approach.
    • EU prudential ratios should be based on floored risk-weighted assets.
    • The output floor should apply at all levels of consolidation, subject to any exemptions for individual level capital requirements.

    View the EBA Basel III Impact Study and Key Recommendations.

    View details of the 2017 Basel III Final Reforms.

    View the EBA Policy Advice on SFTs.

    View the EBA Policy Advice on Operational Risk.

    View the EBA Policy Advice on the Output Floor.

    View the EBA Policy Advice on credit risk.

    View details of the Basel 2019 market risk framework.

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