Announcements

    Drinks

      European Bank Capital Quarterly: different Basel 3.1 timelines create challenges
      TUESDAY, 06/02/2024 - Scope Ratings GmbH
      Download PDF

      European Bank Capital Quarterly: different Basel 3.1 timelines create challenges

      European banks face new capital requirements from a sound position. Higher rates have bolstered organic capital creation and transition periods are long. But different rules and timelines across jurisdictions will be challenging for international banks.

      The UK Prudential Regulatory Authority (PRA) estimates an average increase in Tier 1 capital requirements under Basel 3.1 of around 3% for UK banks when fully phased in by 2030. The European Banking Authority (EBA) estimates that requirements will increase by 9% for EU banks by full implementation in 2032. US federal banking regulators estimate a 16% increase in CET1 capital requirements for large bank holding companies.

      The UK and EU published near-final Basel 3.1 rules in December. The UK PRA published the first of two near final policy statements covering market risk, credit valuation adjustment risk, counterparty credit risk, and operational risk. The second, covering remaining elements of Basel 3.1 (credit risk, output floor, reporting and disclosure requirements) is planned for Q2 2024.

      In the EU, pending final approvals, CRR3 and CRD6 will apply from 2025 with a transition period to end-2032. Member states will need to transpose CRD6 provisions by mid-2025. The EBA has now started consulting on key technical standards to allow for practical implementation.

      The US proposal for final Basel 3 reforms would apply from 1 July 2025, with a three-year transition period to 2028. The proposal applies to all banks with more than USD 100bn in assets, including intermediate holding companies of foreign banks. “This has implications for European banks with large operations in the US, such as Barclays, Santander, HSBC and UBS,” said Pauline Lambert, executive director in Scope’s financial institutions team. The market risk provisions of the proposal would also apply to banks with significant trading activity even if their assets are below USD 100bn.

      Capital requirements to address climate risks

      “With regard to climate-related risks, the ECB and European Systemic Risk Board’s joint proposal for a macroprudential strategy incorporating systemic risk buffers (SyRB) is of particular interest,” Lambert continued. “The SyRB is seen as a viable macroprudential tool for addressing the systemic aspects of climate risks, as well as mitigating the build-up of risk concentrations and improving banks’ resilience to climate risks.”

      A stress-testing approach is seen as the most suitable method for calibrating the SyRB. In an illustrative exercise, aggregate capital requirements would increase by an estimated 59bp if a SyRB targeting transition risk were introduced.

      Pillar 2 add-ons for bank specific risks

      Following the 2023 SREP cycle, the average Pilar 2 requirement (P2R) for banks under the ECB’s direct supervision remained stable at around 2.1% of risk-weighted assets. “However, individual banks received capital add-ons for climate and environmental risks, inadequate provisioning for older non-performing exposures, leveraged finance exposures, and potential risks related to excessive leverage,” Lambert said.

      In our sample, four banks saw an increase of 20bp or more (BNP Paribas, Credit Agricole, Societe Generale and Commerzbank) while three banks (BBVA, Deutsche Bank, ING) saw a slight decline (10bp or less). In aggregate, total capital requirements and guidance applicable in 2024 increased to 15.5% of risk-weighted assets on average, up from 15.1% in 2023. This was largely due to changes in countercyclical capital buffer requirements as several countries reintroduced or increased countercyclical buffer rates.

      European banks are well positioned to meet supervisory expectations. All significant banks have reported CET1 ratios above the regulatory requirements and guidance applicable in 2024. In our sample, banks have buffers of nearly 500bp to their requirements as of Q3 2023 and thus can readily absorb any applicable P2R increases.

      “For investors, capital add-ons are the most visible aspect of the annual SREP cycle. However, the SREP also results in qualitative measures for banks. These are just as important in supporting our constructive view on European banks’ credit fundamentals,” Lambert said. “The banking turmoil last March underlined that not all vulnerabilities stem from a lack of capital and that not all risks can be addressed by capital alone.”

      In the 2023 SREP cycle, the ECB issued qualitative measures to 103 banks. Most of the new measures are intended to address deficiencies in internal governance (27%), credit risk (24%) and capital adequacy (14%). The overall SREP score remained stable at 2.6 compared to the previous year (scale from one to four, with four representing higher risks). In 2023, 71% of banks received the same overall SREP score as in 2022 while 14% received a worse score and 15% a better score.

      Download the European Bank Capital Quarterly here.

      Webinar – Thursday February 22nd, 15:30 CET

      Join us for a webinar where Pauline Lambert will discuss Basel 3.1 implementation, climate-related capital charges and the latest SREP cycle. Register here.

      Make sure you stay up to date with Scope’s ratings and research by signing up to our newsletters across credit, ESG and funds. Click here to register.

       

      Related news

      Show all
      Webinar: French banks head into a more volatile business environment

      15/4/2024 Research

      Webinar: French banks head into a more volatile business ...

      Real Estate Insight - April 2024

      12/4/2024 Research

      Real Estate Insight - April 2024

      French banks quarterly: Heading into a more volatile business environment

      11/4/2024 Research

      French banks quarterly: Heading into a more volatile business ...

      Updated issuer rating report on Sandnes Sparebank

      2/4/2024 Monitoring note

      Updated issuer rating report on Sandnes Sparebank

      Webinar: Commercial real estate – how concerned should debt investors be?

      26/3/2024 Research

      Webinar: Commercial real estate – how concerned should debt ...

      German savings and co-operative banks well positioned to face challenges

      26/3/2024 Research

      German savings and co-operative banks well positioned to face ...