In its latest monitoring report (40 page / 1.14MB PDF) measuring the impact of implementing the Basel III regulations, the EBA said European banks’ minimum Tier 1 capital requirement – the measurement of a bank's core equity capital divided by its total risk-weighted assets – would increase by 16.7% at the full implementation date of the regulations in 2027.
Additional Tier 1 capital comprises €6bn of the €24.5bn required by the banks by this stage.
Large and internationally active banks require an 18.7% increase in their Tier 1 capital requirements by the time Basel III is fully implemented, according to the EBA.
The EBA assessed the impact on EU banks of the final revisions of credit risk, operational risk and leverage ratio frameworks as well as the introduction at the end of 2017 of an aggregate output floor, which places a limit on the extent to which a bank could use internal models to calculate the risk of lending.
The analysis is designed as a first indication of the impact of the finalised version of Basel III and will be followed by a more detailed report based on an expanded sample of data from European banks.
The Basel III regulations were finalised in December 2017 with the aim of reducing the variability of risk-weighted assets.
Banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said: “The results of the report are good news for the banking sector in Europe and demonstrate a far more financially stable market than what existed a decade ago. Since then, the steady ratcheting up of liquidity requirements for credit institutions has produced a safer environment for banking."
“Banks however have had to adapt their product portfolios to meet these regulations whilst competing with a range of new participants who have taken advantage of the opportunities presented by fintech, the revised Payment Services Directive (PSD2) and open banking. As a result bank customers have benefitted substantially over this period,” Anderson said.
In a separate report on liquidity measures (46 page / 2.45MB PDF), assessed under the Capital Requirements Regulation, the EBA found that EU banks are continuing to improve their liquidity coverage ratios (LCR). The LCR promotes short-term resilience by ensuring that a bank has an adequate stock of high-quality liquid assets, such as Treasury bonds, that can be converted into cash easily and immediately in private markets. It is designed to make sure that a bank could survive a 30-day stress period.
At 31 December 2017 EU banks’ average LCR was 145%, and the EBA said the average LCR had increased since September 2016.
The upwards trend was driven by an increase in high-quality liquid assets, and net liquidity outflows have remained stable. Liquid assets represented around 16% of banks’ total assets.
As of December 2017 only four European banks had a LCR of less than 100%, having monetised liquidity buffers in times of stress. The gross shortfall amounted to €20.8bn.
The EBA said several banks financed some of their assets in a different currency from the one in which they are denominated, with the US dollar showing lower LCR levels. The report warned that the ability of banks to swap currencies and raise funds in foreign currency markets could be constrained in times of stress, meaning significant currency mismatches were a “major concern”.
The authority suggested national regulators could consider making greater use of their discretion to restrict these currency mismatches by setting limits on an excess of net outflows denominated in a significant reporting currency.