Timely and consistent implementation of Basel III important for European banks

Basel III reforms

After the 2008-2009 financial crisis, global agreements were reached on capital requirements for banks, known as the Basel III Accord. In late 2017, the Basel Committee, an international committee of banking supervisory authorities, decided on further reforms to banks' capital requirements. For instance, the standardised approaches for calculating capital requirements for credit risk, market risk and operational risk are more risk-sensitive. Basel III also introduces a floor for the capital requirements resulting from banks’ internal models. These measures are meant to ensure that banks hold sufficient capital to cover the risks they face. Globally, it was agreed that the Basel III Accord should be implemented by January 2023. However, its implementation has been delayed due to insufficient progress in the legislative process (both in the EU and in many other jurisdictions).

To implement these agreements in the EU, the European Commission, European Council and European Parliament must jointly agree on the legislation. The European Commission published its legislative proposal in 2021, and the European Council followed in 2022. On 9 February 2023, the European Parliament also published its proposal. The three European institutions will now enter into a negotiation process to arrive at a final legal text.

Strong rules make for strong banks

Timely and full European implementation of the Basel III Accord will provide the following benefits.

1. Implementation will increase the credibility of capital ratios and strengthen the banking sector. The reform package will bolster capital buffers, improve risk management and make banks more resilient to future crises. It will make the banking system more solid so that it can better absorb economic shocks.

2. Implementation sends a signal that banks meet global minimum standards. Full implementation of the Basel III Accord will boost the reputation and competitiveness of European banks. In contrast, deviations from Basel III rules could have adverse consequences for the reputation of European banks and, as a result, their funding costs.

3. Implementation means banks will be better able to maintain lending during an economic downturn. ECB analysis shows that the temporary costs of the reforms do not outweigh the lasting long-term benefits from a permanent increase in euro area GDP because of the higher capital requirements.[1] These benefits stem from the fact that solid banks are better able to continue financing the economy in difficult times.

4. Implementation will ensure global cohesion and a level playing field. Deviation from Basel III rules could undermine global cohesion and weaken the EU’s position in international negotiations. In addition, this could result in an uneven playing field between banks in different jurisdictions and possibly entice other countries to deviate from the global agreement as well.

Deviation from Basel III rules will erode the resilience of the European banking sector

The legislative proposals of the European Commission, the European Council and the European Parliament implement many aspects of the Basel III Accord. At the same time, these proposals also contain significant deviations from the global agreement. One of the biggest deviations is that the capital floor for internal models only becomes applicable to major bank loan portfolios, including some mortgages and corporate loans, after a lengthy transition period. As a result, banks may fail to adequately cover the risks associated with these portfolios with sufficient capital for a long time. In addition, deviations are proposed in the capital requirements for market risk and credit risk, which together represent an important weakening compared to the Basel III Accord. Deviations from Basel III rules will not only have consequences for the resilience of the European banking sector, but also for the credibility and robustness of the EU's regulatory framework and banking sector, as the ECB and European Banking Authority (EBA) have recently pointed out.[2] Deviations from the Basel rules must therefore be limited, which also requires the three European institutions to avoid introducing further derogations in the next round of negotiations. 

Dutch banks can meet capital requirements

The impact of Basel III on Dutch banks is significant, but all Dutch banks are able to meet the higher capital requirements. The EBA has calculated that the total capital requirements of EU banks will rise by 15% if the Basel Accord is fully implemented.[3] For Dutch banks, this figure is 8.9%. However, the current capital level of Dutch banks is above the level required under Basel III. The Dutch banking system can therefore meet the higher capital requirements of the Basel Accord.

Notes

[1] Macroeconomic impact of Basel III finalisation on the euro area (europa.eu)

[2] Strong rules, strong banks: let's stick to our commitments (europa.eu)

[3] The EBA publishes its Report on the first mandatory exercise on Basel III full implementation impact | European Banking Authority (europa.eu)