The European Banking Authority has published the second part of its advice on the implementation of Basel III in the European Union, which complements the Report published on 5 August 2019.
Whilst the first part focused on the Quantitative Analysis of the Impact and Policy Recommendations on Credit Risk, Operational Risk, Output Floor and Securities Financing Transactions, the most recent Report includes the Impact Assessment triggered by the implementation of Credit Valuation Adjustment and Market Risk Reforms, and the corresponding Policy Recommendations.
The results of the Impact Assessment suggest that the full implementation of Basel III (using conservative assumptions), will increase the current Minimum Capital Requirement (‘MRC’) by 23.6% (on average), lower than the estimation in the August 2019 Report, implying an aggregate shortfall in Total Capital of EUR 124.8 billion. However, the macroeconomic impact assessment shows the implementation of Basel III will have substantial long-term benefits for the economy of the ‘EU’, since the reform would mitigate the severity of future economic downturns through a reduction in both probability and intensity of future banking crises. The ‘EBA’ reaffirms its support for full implementation of the Final Basel III Standards in the EU.
In the Policy Advice document, the ‘EBA’ proposes various Policy Recommendations, seeking to address issues related to the ‘CVA’ Framework as implemented in the ‘EU’, and also provided recommendations concerning the review of the ‘CVA’ framework in Basel, together with ongoing revisions to the Standards on the Minimum Capital Requirements for Market Risk.
- In the area of ‘CVA’ Risk, the ‘EBA’ recommends that as the ‘CVA’ Risk generated by the ‘CVA’ exemptions can be substantial and should be captured prudentially, to allow greater harmonisation with International Standards on ‘CVA’ Risk and adherence to a Risk-Based Capital Requirements Framework. In the area of Market Risk, the ‘EBA’ recommendations seek to ensure a smooth and consistent implementation of the revised Market Risk Framework across the ‘EU’ and focuses on issues identified in the Market Risk Standards.
The ‘EBA’ continues to support full implementation of the Final Basel III Standards, contributing to the credibility of the Banking Sector in the ‘EU’. These reforms seek to increase Financial Stability, whilst allowing the continued use of Risk-Sensitive approaches.
Banks, Building Societies and Investment Firms are advised to review the advice from the ‘EBA’ with their Risk Management, Compliance Operations and Finance Functions, identifying the impact upon their Business and their own Financial Models, Risk Frameworks and Calculation of Capital Requirements. ensuring that Executive/Senior Management Teams, Board Members and Audit / Risk Committees are appraised, Firms should also closely monitor the updates and developments in this area.
To read more, please follow this link:
Basel III Reforms: Impact Study and Key Recommendations
Policy Advice on the Basel III Reforms on Credit Valuation Adjustment (CVA) and Market Risk
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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