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Summary of Basel III Monitoring Exercise Results (31 December 2011)

Core Content

This report presents the results of the second Basel III monitoring exercise, using data from 156 European banks as of 31 December 2011. The exercise evaluates the impact of the Basel III framework on regulatory capital ratios, capital composition, and capital shortfalls, as well as the changes in risk-weighted assets (RWA) and liquidity standards. The results are based on a static balance sheet assumption and do not consider transitional arrangements or future bank actions.

Main Findings

Impact on Regulatory Capital Ratios and Estimated Capital Shortfall

• Group 1 banks (those with Tier 1 capital exceeding €3 billion and internationally active) would have seen their CET1 capital ratio decline from 10.3% to 6.9%, a drop of 3.4 percentage points.

  • 88% of Group 1 banks would meet the 4.5% minimum CET1 requirement.
  • 49% would meet the 7.0% target CET1 requirement (including the capital conservation buffer).
  • The CET1 capital shortfall is €8 billion at the minimum requirement and €199 billion at the target level.
  • The capital conservation buffer increases the shortfall to €312 billion (Tier 1) and €434 billion (total capital).
  • The sum of profits after tax in the first and second half of 2011 for Group 1 banks was €82.8 billion, which is a significant figure for context.

• Group 2 banks (less than €3 billion in Tier 1 capital or not internationally active) would have seen their CET1 capital ratio decline from 10.6% to 7.2%.

  • 92% of Group 2 banks would meet the 4.5% minimum CET1 requirement.
  • 76% would meet the 7.0% target CET1 requirement.
  • The CET1 capital shortfall is €10 billion at the minimum and €26 billion at the target level.
  • The Tier 1 and total capital shortfalls are €14 billion and €18 billion, respectively.

Changes in Capital Ratios

• The decline in CET1 ratios for both groups is driven by:
  • Changes in the definition of capital (numerator).
  • Increases in risk-weighted assets (denominator).
• Group 1 banks:
  • CET1 declines by 20.5%.
  • RWA increases by 18.4%.
• Group 2 banks:
  • CET1 declines by 26.1%.
  • RWA increases by 8.8%.
• The main drivers of RWA increase are:
  • CVA capital charges.
  • Transition from Basel II 50/50 deductions to 1250% risk weight treatment.

Leverage Ratio

• The leverage ratio is introduced as part of Basel III.
  • Group 1 banks have an average leverage ratio of 2.9%.
  • Group 2 banks have an average leverage ratio of 3.3%.
  • 51% of Group 1 banks and 70% of Group 2 banks would meet the 3% target level.
  • If the current leverage ratio (based on Basel II.5) were already in place, Group 1 and Group 2 banks would have leverage ratios of 4.1% and 4.6%, respectively.

Liquidity Standards

• Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are under an observation period, with implementation dates of 1 January 2015 and 1 January 2018, respectively.
• Group 1 banks have an average LCR of 72%, while Group 2 banks have an average LCR of 91%.
• The aggregate liquidity shortfall (difference between high-quality liquid assets and net cash outflows) is €1.17 trillion, representing 3.7% of total assets.
• Group 1 banks have an average NSFR of 93%, and Group 2 banks have an average NSFR of 94%.
• To meet the 100% minimum NSFR, an additional €1.4 trillion of stable funding is needed.

Data and Methodology

• The monitoring exercise uses static balance sheet assumptions and voluntary, confidential data from banks.
• Box plots are used to illustrate the distribution of results among banks.
• The report assumes full implementation of Basel III, excluding transitional arrangements.
• Data quality has improved, though some differences in reported liquidity risk positions may be due to varied interpretations of the rules.

Key Information

• Group 1 banks are more internationally active and have higher capital ratios than Group 2 banks.
• The results are not comparable to industry estimates or prior C-QIS studies due to differences in assumptions and methodologies.
• The capital conservation buffer significantly increases the capital shortfall for both groups.
• The impact of counterparty credit risk (CVA) is a major factor in the increase in RWA, particularly for Group 1 banks.
• Group 2 banks are less affected by CVA charges due to their less exposure to counterparty credit risk.
• Liquidity ratios have improved for both groups, with substantial variation across banks and countries.

Conclusion

The Basel III framework significantly affects the capital and liquidity positions of European banks. Group 1 banks, which are more exposed to counterparty credit risk, experience larger declines in capital ratios and higher shortfalls compared to Group 2 banks. The results highlight the need for banks to increase capital and adjust risk-weighted assets to meet the new regulatory standards. The monitoring exercise provides a baseline for assessing the impact of Basel III, but actual capital and liquidity shortfalls may differ once the framework is fully implemented.