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 the second part of its two-part technical advice on the impact of the Basel III reforms in the EU. The Basel III reforms aim to reduce excessive variability of risk weighted assets and improve the comparability of banks’ capital ratios, and in 2018, the European Commission requested the EBA to provide technical advice on their implementation in the EU. The first part of the EBA’s advice was delivered in August 2019, relating to Basel III reforms to credit risk, operational risk, output floor and securities financing transactions. The latest advice focuses on the impact of Basel III on market risk and credit adjustment risk, and is comprised of two documents: (i) an Impact Study and Key Recommendations; and (ii) Policy Advice on the Basel III Reforms on Credit Valuation Adjustment and Market Risk.
    The key findings of the Impact Assessment show that the Basel III reforms will increase the current EU minimum capital requirement by 23.6%, although this impact is lower than originally estimated in the EBA’s August 2019 report. The EBA’s assessment also contains a sensitivity analysis of the potential impact of the draft amendments to the Basel III credit valuation adjustment risk framework currently being consulted on by the Basel Committee. It is anticipated that, if implemented, these amendments would further reduce the overall impact of the Basel III reforms. However, the EBA determines that the implementation of Basel III will still have net benefits for the EU economy. The EBA also finds that the Basel III reforms impose modest transitional costs on firms that will fade over time, and that the long-term benefits outweigh these short-term costs.
    The EBA’s Policy Advice recommendations for credit valuation adjustment risk include:
    • Removal of the exemptions for CVA risk under the current EU framework, to ensure that CVA risk is captured prudentially; and
    • Using the simplified treatment for CVA risk on the basis of the proportionality framework for counterparty credit risk envisaged in the revised Capital Requirements Regulation and allowing it to be used by firms that are eligible to employ the simplified standardized approach to counterparty credit risk under CRR2.
    The EBA’s Policy Advice recommendations for market risk include (amongst others):
    • Clarifying the treatment of unrated covered bonds under the fundamental review of the trading book standardized approach;
    • Supporting the use of the recalibrated standardized approach as a simplified approach for those firms not subject to the FRTB reporting requirement under CRR2;
    • Clarifying how institutions should compute the size of their trading book business and their business subject to market risk; and
    • Mandating the EBA to produce a Regulatory Technical Standard for defining the conditions for disregarding an overshooting due to a non-modellable risk factor.
    View the EBA's Impact Statement and Policy Advice.
    View details of the first part of the EBA's technical advice on the implementation of the Basel III reforms.
    View details of the Basel Committee's November 2019 consultation on adjustments to the CVA risk framework.  
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