The European Banking Authority (EBA) said on Tuesday that banks in the European Union (EU) have largely complied with the stricter global capital requirements that aim to prevent another financial crisis. The watchdog reported that the total shortfall of core capital for EU banks was only 600 million euros ($635.8 million) as of the end of 2022, and would be reduced further by the proposed phase-ins and waivers by EU policymakers.
Basel Endgame to bolster banks’ resilience
The global capital rules, known as the Basel Endgame, were agreed by the Basel Committee on Banking Supervision (BCBS) in 2017 as the final part of its overhaul of the regulatory framework after the 2008 global financial crisis. The rules require banks to hold more and better quality capital to absorb potential losses and reduce the risk of taxpayer bailouts.
The Basel Endgame consists of several elements, such as:
- A revised standardised approach for credit risk, which reduces reliance on external credit ratings and increases risk sensitivity.
- A revised internal ratings-based approach for credit risk, which limits the use of internal models and introduces input floors.
- A revised operational risk framework, which replaces the existing approaches with a single standardised approach.
- A revised credit valuation adjustment framework, which addresses the risk of mark-to-market losses from changes in the creditworthiness of counterparties.
- A revised market risk framework, which incorporates the outcome of the fundamental review of the trading book and introduces a more risk-sensitive standardised approach.
- A revised leverage ratio framework, which introduces a leverage ratio buffer for global systemically important banks (G-SIBs) and a more comprehensive exposure measure.
- An output floor, which sets a minimum level of risk-weighted assets for banks using internal models, based on 72.5% of the standardised approaches.
The Basel Endgame is expected to increase the resilience of banks and enhance financial stability. According to the BCBS, the rules would increase the minimum Tier 1 capital requirement for banks by 24.4% on average at the full implementation date in 2028.
EU banks ahead of schedule
The EBA, which monitors the implementation of the Basel rules in the EU, said that EU banks already largely meet the Basel Endgame requirements ahead of the 2028 deadline. Based on its sample of 157 banks across the EU, the watchdog estimated that EU banks would need an additional 0.6 billion euro of Tier 1 capital to comply with the new framework at the end of 2022.
The EBA also said that EU banks’ minimum Tier 1 capital requirement would increase by 9.0% at the full implementation date in 2028, compared to 24.4% globally. This is because EU banks have higher average capital ratios and lower average risk weights than their global peers.
The EBA noted that EU policymakers have proposed some adjustments to the Basel Endgame rules to take into account specific features of the EU banking sector and economy. These include longer phase-in periods for some elements, such as the output floor and the leverage ratio buffer for G-SIBs, and temporary waivers for others, such as exposures to central counterparties and sovereigns. The EBA said that these adjustments would reduce the core capital shortfall for EU banks to an estimated 240 million euros.
US and UK lag behind
While EU banks are ahead of schedule in meeting the Basel Endgame rules, their counterparts in the United States and Britain are lagging behind. The US regulators have proposed to start implementing the rules from July 2025 and complete them by 2028, but they are facing strong opposition from US banks who claim that their capital burdens would rise significantly.
Banks in Britain are also lobbying for the Bank of England (BoE) to align its rollout start date with the US and to soften some of the rules in line with the EU. The BoE is expected to announce its final Basel Endgame rules sometime in 2024.
