News from the CRD IV-CRR/Basel III monitoring exercise by EBA
di Emilio Barucci

Mar 16 2017
News from the CRD IV-CRR/Basel III monitoring exercise by EBA  di Emilio Barucci

The European Banking Authority has released its semi-annual evaluation on the implementation of CRD IV-CRR/Basel III by banks (EBA 2017). The analysis refers to June 2016 and looks at capital ratio, leverage ratio, liquidity coverage ratio (LQR) and net stable funding ratio (NSFR).

It is important to notice that the monitoring activity concerns how banks (164 banks from 17 EU member States) comply with the full requirements of the regulation (at the end of the ‘‘phase in’’ period) and so it doesn’t provide a stress test on the solidity of banks. Taking the full requirements as a target, we may interpret the analysis as a signal about the status of the banks with respect to the regulation. Banks are divided in two groups: Group 1 (44 large banks) and Group 2 (120 medium banks).

The main results are the following:

  • (risk weighted) Capital ratios (CET1, Tier 1, Total capital) are not a problem thanks to a significant increase in CET1 capital (around 55% during the last five years) and to a lesser degree by a decrease in RWA (around 20%). Also the leverage ratio showed a significant increase. Leverage ratio shows a higher dispersion among banks than Tier 1 ratio.
  • There is no shortfall on CET1 capital, the capital shortfall to cover risk based ratios is 2.1 bln euro, 3 bln are necessary to cover the leverage ratio requirements. The leverage ratio constraint is more binding for Group 2 banks than for Group 1 banks.
  • Risk-based ratio constraints are more binding than the leverage ratio constraint. As a matter of fact, only 29% of Group 1 banks and 40% of Group 2 banks are more constrained by the leverage ratio constraint than by the risk based Tier 1 capital requirement in a sense that they need more capital to meet the leverage ratio at 3% than the risk based ratio at 8.5% plus G-SII/O-SII buffers.
  • During the last four years Group 1 banks have decreased the quality of their capital, i.e., the fraction of CET1 capital over regulatory capital is on average equal to 77%, the opposite trend is observed for Groups 2 banks that on average have 86% of their regulatory capital as CET1 capital.
  • On the composition of RWA we observe an increase of operational risk (more pronounced for Group 1 banks) and a decline of market risk and of CVA with a cutting of CVA positions.
  • Considering the exposures in the balance sheet, Groups 1 banks have 23% allocated to derivatives, securities, off-balance-sheet items, Groups 2 banks have only 10%.
  • The risk density (the ratio between RWA and exposure) has decreased over time showing that banks have decreased their RWA and increased their exposure, i.e., the main driver was a de-risking rather than a de-leveraging.
  • The liquidity coverage ratio doesn’t bind significantly banks: the 100% constraint, which will be binding by 2018, leads to a shortfall of 2.5 bln. Instead, the Net stable funding ratio produces a shortfall of 159 bln. The shortfall is mostly attributable to Group 1 banks.

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