European Commission Highlights Areas for Further Analysis in Basel III Reforms

The Director General for Financial Stability, Financial Services and Capital Markets Union of the European Commission has written to the European Banking Authority highlighting areas where further analysis is required on the impact and implementation of the Basel III reforms in the EU. The EBA is in the process of finalizing its advice to the European Commission on the impact within the EU of the implementation of the Basel III reforms to credit risk, operational risk, output floor and securities financing transactions. A second set of advice on market valuation and credit valuation adjustment risk is expected to follow in September this year.

The letter states that further analysis is required on the following matters:
 

• A quantitative assessment of impacts arising from application of the "output floor" (a mechanism limiting the extent to which banks are able to lower their capital requirements relative to standardized approaches) at all levels;
• Risk sensitivity in the equity exposure class in connection with the increased risk weights on existing group structures and business models;
• Risk sensitivity for specialized lending: while capital requirements appear to have increased in this area under the reforms, the Commission invites the EBA to conduct a more detailed analysis considering criteria for differentiating between different qualities of specialized lending exposures and reviewing the appropriateness of Basel III input standards for own-estimated loss given default;
• Estimation of total loss absorbing capacity and minimum requirements for own funds and eligible liabilities shortfalls that would be triggered by changes to the calculation of risk-weighted assets.

In May 2018, the Commission issued a request to the EBA for technical advice on the potential impact of Basel III revisions on the EU banking sector and the wider EU economy and on any potential implementation challenges, as well as the Basel market risk framework.

View the Commission's letter to the EBA.

View details of the Basel III reforms.

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