“There will likely be refinements to address emerging risks related to digitalisation, climate change, and the activities of non-bank financial institutions,” said Pauline Lambert, executive director in Scope’s financial institutions team. “In the medium term there should also be a shift in focus to assessing how various reforms interact and on applying regulations proportionally to smaller and less complex banks to avoid undue burdens.”

As the reforms are being implemented gradually, this will allow banks to adapt to the new requirements, although in a context of rising capital requirements, it is not surprising that banks have been relying increasingly on significant risk transfer to mitigate potential impacts on their balance sheets.

“While the expected capital impact from the final Basel 3 reforms in the US and the UK has been reduced, the divergence in implementation between the various jurisdictions will pose challenges for internationally active European banks,” Lambert said.

The timing for implementation in the UK has been postponed by a further six months to 1 January 2026, with a phased transition period of four years to ensure full implementation by 1 January 2030, in line with the original proposal published in 2022.

“Compared to an earlier estimate of an average increase in Tier 1 capital requirements of 3%, the UK PRA now estimates that requirements for major UK banks in aggregate are likely to increase by less than 1% by 1 January 2030,” Lambert noted. “This smaller impact than other jurisdictions is partly because some risks that will now be captured in Pillar 1 capital requirements were already captured in the UK’s Pillar 2 framework.”

US regulators are revising the Basel 3 proposal in response to extensive feedback, with final rules expected after a 60-day comment period and further impact studies. It is unlikely that the proposal for Basel 3 reforms will be finalised before year-end. The principle of tiering will be reinforced, with the largest and most complex firms being subject to the most stringent requirements. However, all categories of banks will be required to recognise unrealised gains and losses on securities in regulatory capital. This is intended to address a factor that played a significant role in the US bank failures of March 2023.

Alongside proposed changes to the G-SIB surcharge, aggregate CET1 capital requirements for US G-SIBs would increase by 9% while for other (non-G-SIB) large banks, capital requirements would increase by 3%-4% over the long run. For other non-G-SIBs subject to the rules, capital requirements would increase by 0.5%. The original proposals were expected to increase average CET1 capital requirements by 16%.

European banks have been significant issuers of capital securities since the last edition of the Bank Capital Quarterly on 11 July. A total of 17 European banks raised over USD 12bn-equivalent of Tier 2 debt to 8 October while 18 European issuers raised USD 16bn-equivalent in hybrid debt. Given discussions about a potential merger of UniCredit and Commerzbank, a highlight of busy AT1 activity was the emergence of both banks with new issues. Liability management was also a feature of recent weeks. Several banks launched AT1 and Tier 2 tenders alongside new issues.

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