Implementing Basel III – Key Developments in 2022 and Outlook for the Future

In May 2022, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament published a Draft Report on the Commission’s CRR III proposal, suggesting several amendments. The Council of the EU then adopted its approach on the package on 8 November 2022. Before the trilogue negotiations can start, the European Parliament needs to adopt its report, which is expected to take place in December 2022 or the beginning of 2023, with an ensuing potential compromise agreement in Q2 2023.

Regarding the directly applicable CRR, the requirements are to be applied from 1 January 2025. Different transition rules will apply, e.g., until 1 January 2028 for the output floor.

Key topics are:

Output Floor:

• In terms of limiting the variability of capital levels of credit institutions computed by using internal models, the Council has specified that the limit applies both at banking group level and at the level of each individual bank. Member States will have the power to apply the floor at the highest level of consolidation within their jurisdiction. This would be a deterioration compared to the EU Commission’s proposal, which envisaged application solely at the highest level of consolidation.
• ​​​​​​​Equity Exposures: The Council envisages a 100% risk-weighting for shares in the central institution within an IPS. Likewise, a 100% risk-weighting will apply for already existing long-term strategic holdings (≥ 6 years).SME-Supporting Factor: The factor shall be retained in its current form despite previously proposed amendments to delete or link it to specific taxonomy-aligned economic activities.
• Retail Exposures: Exposures to SMEs or natural persons (retail) continue to receive a risk-weight of 75%, provided certain criteria are met.
• ESG Risks: All institutions will be required to disclose ESG risks. ESG risks should also be part of the supervisory review and evaluation process ("SREP").
• Fit and Proper: The framework for assessing the suitability of members of the managed bodies and key function holders of credit institutions have been amended to further consider national specificities and practices.

Overall, major capital impacts stem from the output floor as well from credit risk and operational risk. Upon its full implementation in 2028 – once transitional rules have lapsed – Basel III would result in an average increase of 15.0% of the current Tier 1 minimum required capital of EU banks, 6,3% thereof stemming from the introduction of the output floor. For large and internationally active banks, the effect of the floor is expected to be even higher. To comply with the new framework, EU banks would need additional EUR 1.2 billion Tier 1 capital to digest the effects.

​​​​​​​All banks are likely to experience a negligible impact during the first two years of implementation of the output floor. The highest increase for large and internationally active banks is anticipated in 2027, with an increase of Tier 1 minimum-required capital of 2.8 percentage points compared to the previous year.

The main considerations for the implementation of the final requirements, including the remaining uncertainty, are:

• Understanding the impact on the institution's capital positions.
• Calculating the CRR III impact on portfolio calculation, taking into account a transitional period which is crucial to understand the impact on business.
• Understanding the impact of transferring portfolios to IRB or SA or vice versa.
• Incorporating ESG risks.