Coverage: weekly note · Information to 10 October 2024
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TGB Weekly Research Note · 10 October 2024
The European Banking Authority's latest monitoring exercise puts the increase in Tier 1 minimum required capital at 12.2% for G-SIIs at full implementation in 2033, with the output floor contributing 8.6%.
The desk view
The European Banking Authority (EBA) published its third mandatory Basel III monitoring report on 4 October 2024, estimating that European banks' minimum Tier 1 capital requirement would rise by 7.8% at full implementation in 2033. The increase is concentrated in the largest institutions: 12.2% for global systemically important institutions (G-SIIs), against 8.6% for Group 1 banks and 3.6% for Group 2 banks. For G-SIIs, the output floor contributes 8.6% and operational risk 3.8%. Yet the floor is back-loaded: its contribution for G-SIIs is 0.5% in 2029 and 1.2% in 2030, and EU transitional treatments that run to 31 December 2032 hold it down until then. The EBA estimates the Tier 1 capital needed to comply at EUR 0.9 billion across the EU sector. Our reading is that the floor is a binding constraint on business models over the coming years rather than an immediate capital-raising event.
The output floor is the main driver at the largest banks
The EBA exercise covers 152 banks, 60 in Group 1 and 92 in Group 2, using data as of 31 December 2023. For the first time, the main report includes the most impactful EU-specific adjustments in CRR3 and CRD6, together with all EU buffers and Pillar 2 requirements.
The headline is a weighted average increase in Tier 1 minimum required capital (T1 MRC) of 7.8% for all banks, of which the output floor contributes 5.7% and operational risk 2.8%. The 7 G-SIIs in the sample sit well above that. Their risk-based requirements rise by 14.8%, made up mainly of 8.6% from the output floor, 3.8% from operational risk and 2.7% from market risk, before a 2.6% offset from the revised leverage ratio brings the total to 12.2%.
The distribution is skewed. The simple average increase for G-SIIs is 11.3%, but the median is 7.1%, against an average of 5.6% and a median of 5.2% across Group 1. The output floor is also the dominant factor for Group 1 other systemically important institutions (O-SIIs), at 5.2% of a 5.5% total, while for Group 2 banks it contributes 2.0% of 3.6%.
Operational risk is the second driver. The operational risk revisions raise operational risk capital by 28.4% across the sample and by 37.2% for G-SIIs.
Change in Tier 1 minimum required capital by bank group, % of current T1 MRC
| Bank group | Output floor | Operational risk | Total risk-based | Revised leverage ratio | Total |
|---|---|---|---|---|---|
| G-SIIs | 8.6 | 3.8 | 14.8 | -2.6 | 12.2 |
| Group 1 | 6.4 | 3.1 | 9.7 | -1.2 | 8.6 |
| O-SIIs (Group 1) | 5.2 | 2.6 | 5.5 | -0.1 | 5.5 |
| Group 2 | 2.0 | 0.8 | 4.0 | -0.3 | 3.6 |
| All banks | 5.7 | 2.8 | 8.8 | -1.0 | 7.8 |
G-SII change in T1 MRC by driver, %
A back-loaded phase-in
CRR3 was adopted on 31 May 2024, published in the Official Journal on 19 June 2024 and applies from 1 January 2025, while CRD6 is to be transposed by January 2026. Once fully in force, the floor stops internal models from producing own funds requirements below 72.5% of those that would apply under the standardised approaches, which limits the risk of excessive reductions in capital from modelled risk-weighted assets (RWA). The factor is 50% in 2025, 55% in 2026, 60% in 2027, 65% in 2028 and 70% in 2029, before reaching 72.5% in 2030.
The EU text adds transitional treatments that run beyond 2030 and lower the floor's impact while they apply. Until 31 December 2032, banks may apply a 65% risk weight to unrated corporates whose estimated probability of default is no greater than 0.5%, and Member States may allow a 10% risk weight on the part of residential mortgages secured up to 55% of the property value. The SA-CCR alpha factor is replaced by 1 until 31 December 2029, and a transitional securitisation p factor applies until 31 December 2032. In its opinion of 24 March 2022 on the proposal, the ECB said that the mortgage, unrated corporate and derivative treatments were not justified from a prudential and financial stability perspective and might leave pockets of risk unaddressed.
In the EBA's year-by-year estimates for G-SIIs, the floor adds nothing to T1 MRC from 2025 to 2028, then 0.5% in 2029 and 1.2% in 2030, before reaching 8.6% at full implementation in 2033. Between 2030 and 2033 the floor contribution for G-SIIs rises by 7.4pp, against 4.3pp for all banks, which the EBA attributes to the greater use of internal models at large banks. As a result, the total G-SII impact is 4.9% in 2030 and 12.2% in 2033.
Two features could change the path. Institutions may, until 31 December 2029, apply a 125% cap on the year-on-year RWA increase from the transitional floor, which the EBA did not model; it could reduce the impact in the first five years but leaves the 2033 result unchanged. Any extension of the corporate and mortgage transitional arrangements is limited to four years. Separately, the European Commission announced on 18 June 2024 that it would postpone the use of the FRTB methods for capital purposes by 1 year, which the report does not reflect.
Output floor impact on G-SII T1 MRC, %
Ratios fall, shortfalls stay small
For G-SIIs, the CET1 ratio falls from 14.3% under the current framework to 12.3% under fully loaded EU Basel III in 2033, a reduction of 200 basis points. Across all banks the fall is 140 basis points, from 15.9% to 14.5%, and the leverage ratio of 5.8% is unchanged.
Shortfalls against fully loaded requirements are limited. The total capital shortfall is EUR 5.1 billion, of which EUR 0.3 billion is CET1, spread across 9 banks with a total capital shortfall and 2 with a CET1 shortfall. G-SIIs account for EUR 3.2 billion, almost two thirds of the total. The EBA puts the Tier 1 capital needed at EUR 0.9 billion and says it can easily be raised over the remaining period to full implementation.
The floor's effect shows more clearly in which constraint binds. Under the fully implemented framework, 33 banks are constrained by the output floor, 110 by the other risk-based requirements and 9 by the leverage ratio. Applied as the last requirement in the sequence, the floor on its own increases MRC by EUR 64.6 billion, or 5.5%.
Why the European figure is higher than the global one
The Basel Committee's monitoring report, published on 7 October 2024 for 180 banks, gives a much smaller figure: an average increase in T1 MRC of 1.3% for Group 1 banks and 0.2% for the global systemically important banks. The Committee's measure excludes Pillar 2 and higher loss absorbency requirements for domestic systemically important banks. The comparison is therefore not like for like.
The EBA's alternative scenarios show how much the requirement stack matters. If only Pillar 1, the capital conservation buffer and G-SII buffers are counted, the G-SII leverage ratio offset widens to -12.5% from -2.6%, and the total increase falls to 0.5%, because all 7 G-SIIs are constrained by the leverage ratio under current rules. Including Pillar 2 and all EU buffers makes the risk-based requirement more binding, which reduces the offsetting effect of the leverage ratio. Pillar 2 is applied to pre-floored RWA, reflecting the CRD6 provision that the nominal Pillar 2 amount should not rise because a bank becomes bound by the floor.
The EU-specific adjustments work in the other direction: they reduce the G-SII impact by 4.8pp relative to the Basel III baseline, mainly through credit risk at 4.1pp, with 1.9pp from the interaction with the output floor. On a constant sample of 149 banks, the overall impact has fallen from 11.7% at December 2021 and 10.1% at December 2022 to 7.8%, while the output floor contribution eased from 6.6% to 5.7%.
The estimates assume static balance sheets and Pillar 2 and buffer requirements as of December 2023, which the EBA says may overstate the impact. In practice, the 12.2% figure reflects the requirement stack as of December 2023; supervisors may recalibrate Pillar 2 and buffers as RWA rise, and the floor's full weight arrives only after 2030. Our view is that the real test for the largest banks lies in portfolio choices over the transition rather than in near-term capital raising.
What to watch
- 1 January 2025: CRR3 applies and the output floor starts at 50%.
- January 2026: deadline for transposing CRD6 into national law.
- 31 December 2029: end of the optional 125% cap and of the SA-CCR alpha treatment.
- 2030: output floor reaches 72.5%.
- 31 December 2032: unrated corporate, residential mortgage and securitisation transitional treatments end.
Primary sources: European Banking Authority, Further Tier 1 capital needs for the full implementation of the EU specific Basel III reform are minimal, the EBA Report finds (press release), 4 October 2024; European Banking Authority, Basel III monitoring exercise: results based on data as of 31 December 2023 (EBA/REP/2024/22), 7 October 2024; European Parliament and Council of the European Union (Official Journal of the EU), Regulation (EU) 2024/1623 of 31 May 2024 amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRR3), 19 June 2024; European Central Bank, Opinion of the European Central Bank of 24 March 2022 on a proposal for amendments to Regulation (EU) No 575/2013 ... and the output floor (CON/2022/11), 24 March 2022; Basel Committee on Banking Supervision (BIS), Basel III monitoring report (end-December 2023 data) and highlights, 7 October 2024.