Basel Committee on Banking Supervision

Transcription

1 Basel Committee on Banking Supervision Basel III Monitoring Report December 2017 Results of the cumulative quantitative impact study

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3 Basel III Monitoring Report December 2017 Results of the cumulative quantitative impact study Highlights of the cumulative quantitative impact study... 1 Detailed results of the cumulative quantitative impact study General remarks Scope of the cumulative quantitative impact study Sample of participating banks Methodology Data quality and interpretation of results Overview of results Changes in minimum required capital Impact on capital ratios and capital shortfalls Interactions between risk-based, output floor and leverage ratio capital requirements Main drivers of the impact Impact on modelling and RWA variability for credit risk Credit risk Revised internal ratings-based approach Revised standardised approach Operational risk Leverage ratio Revisions to the Basel III leverage ratio exposure measure Additional requirements for G-SIBs Annexes Annex A: Basel III phase-in arrangements Annex B: Statistical Annex Previous monitoring reports published by the Basel Committee Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study iii

4 Conventions used in this report billion trillion thousand million thousand billion Group 1 banks are those that have Tier 1 capital of more than 3 billion and are internationally active. All other banks are considered Group 2 banks. Components may not sum to totals because of rounding. The term country as used in this publication also covers territorial entities that are not states as understood by international law and practice but for which data are separately and independently maintained. All data, including for previous reporting dates, reflect revisions received up to 8 December iv Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

5 Highlights of the cumulative quantitative impact study Finalisation of Basel III results in no significant increase in overall capital requirements The Basel III framework is a central element of the Basel Committee s response to the global financial crisis. It addresses a number of shortcomings with the pre-crisis regulatory framework, also based on the lessons learnt during the crisis, and provides a regulatory foundation for a resilient banking system that supports the real economy. The Committee s finalisation of the Basel III reforms 1 complements the improvements made to the global regulatory framework from the initial phase of the Basel III framework. The revisions seek to restore credibility in the calculation of risk-weighted assets (RWA) and capital ratios of banks. This report summarises the aggregate cumulative quantitative impact study (QIS) results using data as of 31 December The Committee believes that the information contained in the report will provide relevant stakeholders with a useful benchmark for analysis as well as provide an estimated impact of the recently agreed upon reforms. Information considered for this report was obtained by voluntary and confidential data submissions from individual banks and their national supervisors. Data were provided for a total of 248 banks, including 96 large internationally active ( Group 1 ) banks and 152 other ( Group 2 ) banks. 2 Of these banks, 71 Group 1 banks and 42 Group 2 banks provided sufficient data to be included in the overall impact analysis, while other banks were only included in the analyses for some of the policy topics. Members coverage of their banking sector is very high for Group 1 banks, reaching 100% coverage for some countries, while coverage is lower for Group 2 banks and varies by country. Note that this report does not take into account any transitional arrangements such as phase-in of deductions and grandfathering arrangements. Rather, the estimates presented generally assume full implementation of the final Basel III requirements based on data as of 31 December No assumptions have been made about banks profitability or behavioural responses, such as changes in bank capital or balance sheet composition, either since this date or in the future. Data were provided by banks on a bestefforts basis and in accordance with the instructions prepared by the Committee in January and April In some cases where precise data were unavailable in their systems banks may have made conservative assumptions. These factors may result in overstating the actual impact. Based on these data, analyses have been adjusted to estimate, to the extent possible, the effects of the final standards. 3 1 Basel Committee on Banking Supervision, High-level summary of Basel III reforms, December 2017, d424_hlsummary.pdf; Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms, December 2017, 2 Group 1 banks are those that have Tier 1 capital of more than 3 billion and are internationally active. All other banks are considered Group 2 banks. Not all banks provided data relating to all parts of the Basel III framework. 3 See Section 1.4 for further details on the assumptions and caveats of the analysis. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 1

6 Furthermore, the report does not reflect any additional capital requirements under Pillar 2 of the Basel II framework, any higher loss absorbency requirements for domestic systemically important banks, nor does it reflect any countercyclical capital buffer requirements. On average, minimum required Tier 1 capital at the target level (Tier 1 MRC) 4 decreases by 0.5% for Group 1 banks and increases by 3.8% for Group 2 banks (see also Table 1). Average risk-based capital ratios will increase by 0.2 percentage points for Group 1 banks and by 0.1 percentage points for Group 2 banks, relative to the current national implementation of the Basel III framework as agreed up to January The Group 1 and Group 2 bank samples are not directly comparable due to different business models and different regional distribution of the samples, and hence the impacts on them are not uniform. However, effects vary across banks. Some banks will face increased capital requirements. Among Group 1 banks the aggregate shortfall is 27.6 billion in CET1 capital and 90.7 billion in total capital. The predominant part of these shortfalls comes from G-SIBs. To put these shortfall numbers in perspective: profit after tax for the same sample of banks in the concerned six-month reporting period (H2 2015) amounted to billion for Group 1 banks. 6 Overall, the shortfall of the Group 2 banks in the sample will be slightly reduced compared to current levels under fully phased-in national implementation of the Basel III framework as agreed up to January The analysis also shows some evidence for a reduction in risk-weighted asset variability among the Group 1 banks in the sample. Overview of results Table 1 Number of banks Change in Tier 1 MRC at the target level (%) 1 All of which: risk-based Change in CET1 capital ratio (percentage points) Capital shortfalls combined ( billions) CET1 Tier 1 Total Group 1 banks Of which: G-SIBs Group 2 banks As a percentage of overall basis MRC at the target level, ie combining risk-based as well as leverage ratio capital requirements and including capital conservation buffers and G-SIB surcharges where respectively applicable. 4 Minimum required Tier 1 capital at the target level combines risk-based as well as leverage ratio capital requirements and includes capital conservation buffers and G-SIB surcharges where applicable. 5 In particular, changes due to the revised minimum capital requirements for market risk are already considered part of the current framework, subject to data availability. See Section for details. 6 It is important to note, though, that future profits will only reduce shortfalls to the extent they are generated by shortfall banks. 2 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

7 Detailed results of the cumulative quantitative impact study 1. General remarks The Basel III framework is a central element of the Basel Committee s response to the global financial crisis. It addresses a number of shortcomings with the pre-crisis regulatory framework and provides a regulatory foundation for a resilient banking system that supports the real economy. The Committee s finalisation of the Basel III reforms 1 complements the improvements made to the global regulatory framework from the initial phase of the Basel III framework. The revisions seek to restore credibility in the calculation of risk-weighted assets (RWA) and therefore also capital ratios by: enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will help facilitate the comparability of banks capital ratios; constraining the use of internally modelled approaches, by placing limits on certain inputs used to calculate RWA under the internal ratings-based (IRB) approach for credit risk and by removing the use of the modelled approach for operational risk; finalising the leverage ratio, which now includes a buffer to further limit the leverage of global systemically important banks (G-SIBs); and replacing the existing Basel I-based floor with a robust aggregate 72.5% output floor based on the Committee s revised standardised approaches. In order to analyse the impact of the revised standards, the Committee conducted an ad hoc Basel III monitoring exercise with the data collection starting in April 2016, in addition to its regular Basel III monitoring exercise 2 and the data collection exercise from regulatory reporting systems. This report summarises the aggregate cumulative quantitative impact study results using data jointly from all three exercises. The Committee believes that the information contained in the report will provide relevant stakeholders with a useful benchmark for analysis as well as provide an estimated impact of the recently agreed upon reforms. 1 Basel Committee on Banking Supervision, High-level summary of Basel III reforms, December 2017, d424_hlsummary.pdf; Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms, December 2017, 2 The 10th publication of results from the periodic Basel III monitoring exercise on 31 December 2015 data has been published separately in September A list of previous publications is included in the Annex. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 3

8 In general the data are reported on a consolidated 3 group basis and generally as of 31 December The data collection exercises underlying these analyses were conducted on a best-efforts basis by participating banks. 1.1 Scope of the cumulative quantitative impact study In addition to components of eligible capital, the calculation of risk-weighted assets (RWA) and the Basel III leverage ratio under the current regime, the Committee collected data to allow for an assessment of the impact on participating banks of the standards set out in the proposals: to reducing variation in credit risk-weighted assets; 5 for a new standardised approach to credit risk; 6 for the new standardised approach for operational risk; 7 and for revisions to the Basel III leverage ratio framework, including the introduction of a G-SIB buffer. 8 This report reflects the impact of the final Basel III framework as published in December However, changes due to the revised securitisation framework 10 as well as the review of the credit valuation adjustment risk framework 11 are not reflected in this report. These items together represent around 3.4% and 1.6% of total minimum required capital according to current national implementation of the Basel III framework as agreed up to January 2016 for Group 1 and Group 2 banks, respectively. The estimates presented are based on data submitted by participating banks and their national supervisors in reporting questionnaires on voluntary and best effort basis and in accordance with the instructions prepared by the Committee in January and April The final data were submitted to the 3 This refers to the consolidation for regulatory rather than accounting purposes. 4 The data for Japan are as of 30 September 2015, as banks in that country report on a biannual basis as of the end of March and the end of September to correspond to their fiscal year-end period. Further, the data for Canada reflect a reporting date of 31 October 2015, which corresponds to Canadian banks fiscal year-end. 5 Basel Committee on Banking Supervision, Reducing variation in credit risk-weighted assets constraints on the use of internal model approaches, March 2016, 6 Basel Committee on Banking Supervision, Revisions to the Standardised Approach for credit risk second consultative document, December 2015, 7 Basel Committee on Banking Supervision, Standardised Measurement Approach for operational risk consultative document, March 2016, 8 Basel Committee on Banking Supervision, Revisions to the Basel III leverage ratio framework consultative document, April 2016, 9 Basel Committee on Banking Supervision, High-level summary of Basel III reforms, December 2017, d424_hlsummary.pdf; Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms, December 2017, 10 Basel Committee on Banking Supervision, Revisions to the securitisation framework, July 2016, d374.htm. 11 Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms, December 2017, d424.htm. 12 See Basel Committee on Banking Supervision, Instructions for Basel III implementation monitoring, January 2016; Basel Committee on Banking Supervision, Instructions for Basel III monitoring ad hoc exercise, April Both documents are available at 4 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

9 Secretariat of the Committee by 8 December Based on these data, analyses have been adjusted to estimate, to the extent possible, the effects of the final standards Sample of participating banks All but four of the 27 Committee member countries participated in the Basel III monitoring exercise as of 31 December 2015 and the related ad hoc data collection exercise. Furthermore, the Philippines and Poland participated in the exercise on the revised standardised approach for credit risk. Data were provided for a total of 248 banks, including 96 large internationally active ( Group 1 ) banks (among them all 30 G-SIBs according to the list of banks published by the Financial Stability Board in November ) and 152 other ( Group 2 ) banks. 15 Of these banks, 71 Group 1 banks (among them 27 G-SIBs) and 42 Group 2 banks provided sufficient data to be included in the overall impact analysis, while other banks were only included in the analyses for some of the policy topics. 16 Members coverage of their banking sector is very high for Group 1 banks, reaching 100% coverage for some countries, while coverage is lower for Group 2 banks and varies by country. Given their heterogeneity, the impact for Group 2 banks may sometimes be dominated by large, non-internationally active banks. The Committee appreciates the significant efforts contributed by both banks and national supervisors to this data collection exercise. 1.3 Methodology Aggregation Reported average amounts in this report have been calculated by creating a composite bank at a total sample level, which effectively means that the total sample averages are weighted. For example, the average common equity Tier 1 capital ratio is the sum of all banks common equity Tier 1 (CET1) capital for the total sample divided by the sum of all banks RWA for the total sample. Similarly, the average fully phased-in Basel III Tier 1 leverage ratio is the sum of all banks fully phased-in Tier 1 capital for the total sample divided by the sum of all banks Basel III leverage ratio exposures for the total sample Impact metrics Throughout the report, the effect of the reforms is shown in terms of: (i) changes in minimum required capital (MRC); (ii) percentage point changes in CET1; and (iii) estimated capital shortfalls. MRC and shortfalls are computed on banks target requirement levels. While the minimum levels reflect a risk-based 4.5% CET1, a 6% Tier 1 and an 8% total capital requirement as well as a 3% requirement for the Basel III leverage ratio, the target level also accounts for the capital conservation buffer (ie resulting in a 7% CET1, an 8.5% Tier 1 and a 10.5% total capital requirement), as well as any applicable G-SIB surcharge (both for risk-based and Basel III leverage ratio frameworks). 13 See Section 1.4 for further details on the assumptions and caveats of the analysis. 14 See Financial Stability Board, 2015 list of global systemically important banks (G-SIBs), 3 November 2015, 15 Group 1 banks are those that have Tier 1 capital of more than 3 billion and are internationally active. All other banks are considered Group 2 banks. 16 See also Table B.1 and Table B.2 in the Statistical Annex. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 5

10 Reference point Unless noted otherwise, the impact assessment was carried out by comparing banks capital positions under fully phased-in Basel III to the Basel III framework as implemented by the national supervisor at the reporting date. Therefore, current RWA and MRC amounts as well as capital ratios are based on the countries national implementations of the Basel III framework, while revised RWA, MRC and capital ratios are based on the final Basel III framework. Current RWA and current MRC as well as all ratios are adjusted for the impact of phasing-out of transitional arrangements related to the Basel III definition of capital, the revised minimum capital requirements for market risk, 17 the final standards on equity investments in funds, 18 the final standard on capital requirements for bank exposures to central counterparties 19 and the standardised approach for measuring counterparty credit risk 20 exposures, subject to data availability. Therefore, the changes in MRC and capital ratios do not include changes due to the revised minimum capital requirements for market risk, the final standards on equity investments in funds and the standardised approach for measuring counterparty credit risk. Separate and isolated analysis on the revised minimum capital requirements for market risk was however provided as a special feature to the February and September 2017 Basel III monitoring reports, 21 following the Committee s commitment set out in the revised minimum capital requirements for market risk to continue monitoring the impact of the capital requirements for market risk on banks as they move towards implementation. Minimum required capital Because the suite of post-crisis reforms includes revisions to RWA, expected loss (EL) amounts and the Basel III leverage ratio framework, the analysis mainly focuses on MRC as a broad and integrated capital impact measure to aggregate the results. At the bank level, MRC is defined in this report as the sum of: the relevant target capital ratio level based on the Basel requirements times RWA, after consideration of all relevant floors; any capital effects from the treatment of EL amounts for credit risk and provisions at the relevant tier of capital; any capital effects from deductions which are an alternative to a 1,250% risk weighting treatment in certain national implementations of the Basel framework; and any incremental capital requirement (over and above the risk-based requirements including any floors) resulting from the Basel III leverage ratio. This calculation is conducted for both the current basis and the revised regimes. Changes in MRC are hence calculated as follows: MRC MRC revised % MRC = MRC basis basis 17 Basel Committee on Banking Supervision, Minimum capital requirements for market risk, January 2016, 18 Basel Committee on Banking Supervision, Capital requirements for banks equity investments in funds, December 2013, 19 See Basel Committee on Banking Supervision, Capital requirements for bank exposures to central counterparties final standard, April 2014, 20 Basel Committee on Banking Supervision, The standardised approach for measuring counterparty credit risk, April 2014, 21 Basel Committee on Banking Supervision, Basel III monitoring report, February 2017, p 37, Basel Committee on Banking Supervision, Basel III monitoring report, September 2017, p 57, 6 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

11 Therefore, this formula reflects, among other elements: changes to the calculation of RWA (at the portfolio or risk type level RWA before output floors); changes to capital resulting from changes in the calculation of EL amounts for credit risk and the treatment of provisions; changes resulting from the move from the national implementation of the transitional Basel I- based floor (as collected through supervisory reported systems) to the aggregate output floor under the final Basel III framework; and changes to the definition of the Basel III leverage ratio exposure measure for all banks, and to its level for G-SIBs. Capital ratios The impact of the reforms set out in Section 1.1 are also expressed in terms of percentage point changes in CET1 ratios reflecting changes due to the reforms in both the numerator (through any effects on the treatment of EL amounts and provisions) and the denominator (through changes in RWA). Combined shortfall analysis In addition, a combined shortfall analysis at the three tiers of the Basel III capital ratios is conducted at the target level. The combined net shortfall at any capital tier is calculated as the difference (where positive) between the total required capital (accounting for both the risk-based requirements and the Basel III leverage ratio) at a given capital tier and the actual capital of the same tier held, net of any shortfall stemming from higher capital tiers. The last term is included since any higher tier capital (eg CET1) raised to meet a specific higher tier capital shortfall (eg CET1 shortfall) can also be used to meet any possible specific shortfall of a lower tier capital (eg any additional Tier 1 shortfall caused by risk-based and/or Basel III leverage ratio Tier 1 capital requirements) Presentation To preserve confidentiality, some of the results shown in this report are presented using box plot graphs. The median value is represented by a horizontal line, with 50% of the values falling in the 25th to 75th percentile range shown by the box. The upper and lower end points of the thin vertical lines show the range of the entire sample, unless noted otherwise. Finally, weighted averages are represented by dots. 1.4 Data quality and interpretation of results For the cumulative quantitative impact study, participating banks were requested to submit comprehensive and detailed non-public data on a voluntary and best-efforts basis. As with the previous studies, national supervisors worked extensively with banks to validate data quality, completeness and consistency with the published reporting instructions to the maximum degree possible. Also particular attention has been paid on the reconciliation of reported data with existing data from supervisory reporting systems. Banks are included in the various analyses below only to the extent that they were able to provide data of sufficient quality to complete the analyses. The following caveats apply to the interpretation of results shown in this report: The actual impact of the new requirements will almost certainly be less than shown in this report given the phased-in implementation of the standards until 1 January 2027 and interim adjustments made by the banking sector to changing economic conditions and the regulatory environment. 22 For example, the results do not consider bank profitability, changes in capital or 22 See Basel III phase-in arrangements in the Annex. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 7

12 portfolio composition, or other management responses to the policy changes since 31 December 2015 or in the future. Furthermore, previous QIS exercises (eg the 2010 exercise on the original Basel III framework) suggest that post-implementation impact was significantly lower than the impact estimated ex ante. The Basel III capital amounts shown in this report assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out (ie it is assumed that none of these capital instruments will be replaced by eligible instruments). As such, these amounts underestimate the amount of Tier 1 and Tier 2 capital held by a bank as they do not give any recognition for non-qualifying instruments that will actually be phased out over six years. The treatment of deductions and non-qualifying capital instruments also affects figures reported in the section on the Basel III leverage ratio. The assumption that none of these capital instruments will be replaced by eligible instruments will become less of an issue as the implementation date of the Basel III leverage ratio nears. Where data on the proposed capital requirements for operational risk or on the impact of the revised minimum capital requirements for market risk were not available, the analysis assumes that operational risk and market risk capital requirements would remain unchanged. Therefore the estimated impact may differ from the final change in requirements. Changes due to the revised securitisation framework and the review of the credit valuation adjustment risk framework are not reflected in this report. The Basel III monitoring templates for the end-december 2015 reporting date were based on the data specifications for assessing the impact from the proposals in the consultation documents. In some instances these data specifications differ from the specifications needed for assessing the impact of the final Basel III framework. Therefore, in some instances approximations had to be made for the final assessment (eg loan splitting for residential real estate exposures under the standardised approach for credit risk; treatment of the internal loss multiplier under the standardised approach for operational risk), while in other instances the final standard could not be fully reflected due to data limitations (eg increase in the mid-sized corporate threshold for the use of the advanced IRB approach for credit risk from 200m to 500m; reductions in the LGD parameter values under the foundation and advanced IRB approaches). In some cases, existing Pillar 2 requirements seek to reflect some of the shortcomings which the Committee s (Pillar 1) revisions seek to address. As such, some Pillar 2 requirements could offset the impact of any increase in Pillar 1 requirements. This is not reflected in the quantitative estimates. Besides the caveats resulting from assumptions made when analysing the data, in some cases data submitted may be biased upwards by banks making conservative assumptions when precise data are unavailable in their current systems (eg use by IRB banks of exposure amounts gross of specific provisions when calculating RWAs for the standardised approach for credit risk). This may result in overstating the actual impact. 2. Overview of results 2.1 Changes in minimum required capital On average, the total change in Tier 1 MRC at the target level is -0.5% for Group 1 banks, -1.4% for G-SIBs and +3.8% for Group 2 banks. Graph 1 shows the dispersion of changes in MRC across the Group 1 banks, G-SIBs and Group 2 banks in the sample. The change in MRC for 50% of the Group 1 banks is between -7.5% and 12.9%, with a median of 1.0%. The distribution for G-SIBs is wider with a higher median 8 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

13 of 9.7%, while the median Group 2 bank shows a 1.2% increase with 50% of the banks in a rather narrow interval from almost no change (-0.3%) to a 4.7% increase in Tier 1 MRC. Total change in Tier 1 MRC at the target level 1 Graph 1 Per cent of overall base MRC 1 The median value is represented by a horizontal line, with 50% of the values falling in the 25th to 75th percentile range shown by the box. The upper and lower end points of the vertical lines generally show the range of the entire sample. The dots represent weighted averages. See also Table B.3. The results are summarised in Table 2 and Graph 2 which include the following columns to provide an additional breakdown of the total change in MRC: Total shows overall changes in Tier 1 MRC, including the risk-based requirements (ie including output floors) and the Basel III leverage ratio. Total: risk-based capital requirements shows changes to the risk-based Tier 1 MRC (ie excluding the Basel III leverage ratio). Credit risk shows the change in Tier 1 MRC due to the revisions to the standardised and IRB approaches for credit risk, including the effect from migration of approaches. 23 Operational risk shows the change in Tier 1 MRC due to the revisions to the operational risk standards. Output floor presents the change in the level of Tier 1 MRC due to the aggregate output floor when the total RWA fall below the threshold level of 72.5%. The impact is measured relative to the current national implementation of the Basel I-based transitional floor set out in the Basel II framework, as reported by member countries. Leverage ratio shows the change in Tier 1 MRC resulting from the changes to the Basel III leverage ratio framework. This captures the change in the definition of the Basel III leverage ratio exposure measure and the introduction of a G-SIB buffer on top of a 3% leverage ratio minimum which amounts to 50% of the surcharge on risk-based capital requirements. Note that increases to riskbased Tier 1 MRC and leverage ratio Tier 1 MRC do not add up, since the total MRC increases only to the extent the risk-based or leverage ratio requirement exceeds the other capital measure. Therefore, the leverage ratio column is adjusted to capture this effect (which can be positive or negative, even where the leverage ratio Tier 1 MRC remains unchanged). This results in an overall incremental leverage ratio change in MRC which can be either positive or negative. This mechanism is described in the following box. 23 Migration of approaches refers to the application of a different approach for determining risk weights than the one currently used, as a consequence of the revisions which remove certain modelling approaches for selected (sub-)asset classes. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 9

14 Box A Aggregation of changes in risk-based and leverage ratio MRC Example 1 shows an illustrative bank that is currently constrained by the Basel III leverage ratio. This additional Tier 1 MRC currently imposed by the Basel III leverage ratio requirement is instead charged by the risk-based Tier 1 MRC under the revised framework with the total change indicated by RB. This replacement effect is represented as a negative effect in leverage ratio Tier 1 MRC to avoid double-counting, as shown with the blue arrow ( LR) in the diagram. Example 2 shows an alternative case where the bank is still constrained by the Basel III leverage ratio effect after the reforms. In this case, the contribution of leverage ratio Tier 1 MRC is the net of (i) the additional leverage ratio Tier 1 MRC in the revised framework ( LR ); and (ii) the replacement effect captured by the risk-based Tier 1 MRC ( LR), which may be positive or negative A requirement is called constraining if it imposes the largest amount of MRC among the requirements under consideration (here riskbased and leverage ratio). A requirement is binding on a bank if the resulting MRC are higher than a bank s corresponding actual Basel III capital amounts. Aggregation of changes in risk-based and leverage ratio MRC Graph A Example 1 Example 2 For Group 1 banks, the overall 0.5% decrease in Tier 1 MRC is composed of a 0.2% increase for the risk-based components combined, driven by the positive contribution of credit risk and output floor components at 1.4% and 1.9%, respectively, as well as a reduction in operational risk requirements of 3.0%. This increase is offset by a 0.7% reduction in leverage ratio Tier 1 MRC. This reduction reflects the fact that the Basel III leverage ratio is becoming relatively less constraining for many banks in the sample in the presence of an output floor. The results are different for the subset of G-SIBs with the credit risk component contributing more and the output floor component contributing less to the overall change as compared to the Group 1 banks as a whole; this also results in a smaller offset (reduction) through the leverage ratio component. Also, G-SIBs experience a larger decrease from operational risk. For Group 2 banks, the overall 3.8% increase in Tier 1 MRC is driven by an increase in both the risk-based and the leverage ratio measures, the latter partially offsetting a reduction in output floor requirements. The Group 1 and Group 2 bank samples are not directly comparable due to different business models and different regional distribution of the samples. For the subset of banks from countries providing data for both Group 1 and Group 2 banks, Tier 1 MRC for 46 Group 1 banks increases by 14.4% compared to the 3.8% increase for Group 2 banks. 10 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

15 Changes in Tier 1 MRC at the target level As a percentage of overall basis MRC at the target level Table 2 Number of banks Total Total Risk-based capital requirements Credit risk 1 Of which: Operational risk 2 Output floor 3 Leverage ratio Group 1 banks Of which: G-SIBs Group 2 banks Change in MRC due to the revised standardised and IRB approaches, excluding securitisation. Change in MRC due to revised operational risk framework. Figures may not show supervisor-imposed capital add-ons. Therefore, changes in MRC may be 3 overestimated. Net of existing Basel I-based floor according to national implementation of the Basel II framework. Graph 2 displays the contributions of each MRC component relative to the current basis for Group 1 banks, G-SIBs and Group 2 banks, respectively. While the orange (red) bars highlight the positive (negative) contributions induced by the different parts of the final Basel III framework, the blue bars represent the total MRC impact for the concerned bank group. Changes in Tier 1 MRC at the target level Graph 2 Group 1 banks Of which: G-SIBs Group 2 banks Per cent of overall basis MRC Per cent of overall basis MRC Per cent of overall basis MRC Credit risk shows change in MRC due to revised standardised and IRB approaches. It excludes securitisation. Operational risk figures may not show supervisor-imposed capital add-ons. Therefore, changes in MRC may be overestimated. Output floor results are net of the existing Basel I-based floor according to national implementation of the Basel II framework. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 11

16 2.2 Impact on capital ratios and capital shortfalls Table 3 outlines the estimated impact on risk-based CET1 capital ratios, 24 Basel III Tier 1 leverage ratios and capital shortfalls for Group 1 banks, G-SIBs and Group 2 banks, respectively. The Tier 1 leverage ratio surplus shows the percentage point Tier 1 capital held in excess of the Basel III leverage ratio standalone requirement (ie in isolation from the risk-based standards) at the revised target level, including the G-SIB surcharge where applicable, as a percentage of the Basel III leverage ratio exposure. Finally, the last panel of the table shows the capital shortfalls at the target level after the revisions. The shortfalls are presented for CET1 capital (which is unaffected by the Basel III leverage ratio), for Tier 1 capital (ie reflecting both the target Basel III leverage ratio and risk-based requirements) and for Total capital. Overall, CET1 capital ratios are expected to increase by 0.2 percentage points for Group 1 banks, increase by 0.3 percentage points for the subset of G-SIBs and increase by 0.1 percentage points for Group 2 banks. As mentioned above, the two bank samples are not directly comparable due to different business models and different regional distribution of the samples, and hence the impacts on them are not uniform. Considering only the changes to the Basel III leverage ratio exposure measure, the Basel III Tier 1 leverage ratios will remain almost stable at the current levels of 5.5% for the Group 1 banks in the sample and 5.0% for the Group 2 banks in the sample, although there will be a minor increase from 5.6% to 5.7% for the G-SIBs in the sample. The surpluses above the revised target, including the G-SIB surcharges, are 2.0 percentage points for Group 1 banks and 1.9 percentage points for G-SIBs, reflecting the higher weighted average capital requirement at the target level in the latter subsample. For the Group 2 banks, the surplus is 2.0 percentage points given their target is always the same as the minimum requirement. For Group 1 banks, the revisions to the risk-based capital requirements result in CET1 capital shortfalls at the target level of 27.6 billion. Also taking additional Tier 1 risk-based capital requirements and the leverage ratio requirements into account, the shortfall increases to 56.4 billion. The revisions will also require an additional 34.3 billion of Tier 2 capital from Group 1 banks. The G-SIBs in the sample account for all of the CET1 capital shortfall and 98.2% of the combined Tier 1 capital shortfall of Group 1 banks. The shortfalls for the sample of Group 2 banks is 0.3 billion of CET1 and 0.8 billion of Tier 1 capital combined. Given the risk-based capital requirements are the main drivers of the shortfalls, total capital shortfalls show the same trends as the Tier 1 capital shortfalls. Group 2 banks will require an additional 0.6 billion of Tier 2 capital. To put these shortfall numbers in perspective: profit after tax for the same sample of banks in the concerned six-month reporting period (H2 2015) amounted to billion for Group 1 banks and 7.1 billion for Group 2 banks Note that given the changes in MRC presented above are more comprehensive than the changes in the risk-based capital ratios, the changes in these two measures do not necessarily show the opposite sign for individual banks or on aggregate. 25 It is important to note, though, that future profits will only reduce shortfalls to the extent they are generated by shortfall banks. 12 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

17 Risk-based capital ratios, leverage ratios and target level capital shortfalls In per cent Table 3 Number of banks Risk-weighted framework CET1 capital ratio Tier 1 leverage ratio Current Final Diff. Current Final Surplus rev. target Capital shortfalls combined ( billions) CET1 Tier 1 Total Group 1 banks Of which: G-SIBs Group 2 banks Graph 3 shows the distribution of CET1, Tier 1 and total capital ratios under the final Basel III framework for the Group 1 banks, G-SIBs and Group 2 banks in the sample. All banks meet the CET1 minimum capital requirements. One Group 2 bank fails to meet the Tier 1 minimum capital requirements, while one bank in each group fails to meet the total capital requirements. At the target level, some banks in both groups will have to either raise some additional capital to meet CET1, Tier 1 and total capital requirements or to revise their business plans accordingly. Capital ratios under the final Basel III framework 1 Graph 3 CET1 capital Per cent Tier 1 capital Per cent Total capital Per cent 1 The median value is represented by a horizontal line, with 50% of the values falling in the 25th to 75th percentile range shown by the box. The upper and lower end points of the vertical lines generally show the range of the entire sample. The dots represent weighted averages. The solid horizontal line represents the relevant minimum requirement, the dotted horizontal line represents the relevant target (excluding any bank-specific G-SIB surcharges). See also Table B.4. Graph 4 shows the combined shortfalls at the target levels for Group 1 banks, G-SIBs and Group 2 banks, respectively. It compares the target capital shortfall columns in Table 3 with the shortfalls under the current basis, both fully phased-in. Group 1 banks total capital shortfalls increase from 1.3 billion to 90.7 billion between the current basis and the revised framework. Conversely, the 1.4 billion total capital shortfall for the Group 2 banks in the sample is slightly lower than the already existing shortfall under the current basis. Table B.5 in the Statistical Annex also provides the results at the minimum level. Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 13

18 Target level capital shortfalls under the current standards and the final Basel III framework Graph 4 Group 1 banks Of which: G-SIBs Group 2 banks bn bn bn Group 1 banks do not have any CET1 and additional Tier 1 shortfalls under the current standards. Therefore, the related bars are not shown in the graphs. See also Table B Interactions between risk-based, output floor and leverage ratio capital requirements This section discusses the interaction between risk-based, output floor and Basel III leverage ratio capital requirements. The purpose of this analysis is to gain deeper insight into which capital requirement component of the framework is constraining for the banks in the sample. The constraining requirement in this analysis refers to the requirement that imposes the largest amount of Tier 1 MRC among the three requirements mentioned above. Accordingly, the Tier 1 MRC for a bank is determined as the highest of the requirement under the risk-based framework, the requirement using the output floors and the requirement measured using the Basel III leverage ratio. Note that in contrast to the analyses presented in Section 2.1 and Section 2.2, the risk-based capital requirements here denote the risk-based capital framework prior to the application of any output floor. Graph 5 shows which of the three parts is constraining under both the current standard and the final Basel III framework. For Group 2 banks, results are presented separately for IRB banks and banks only using the standardised approach for credit risk ( pure SA ). 26 Under the current framework 25.4% of Group 1 banks are constrained by the Basel III leverage ratio while 19.7% are constrained by the transitional Basel I-based floor. With the introduction of the somewhat stricter and more consistent output floor under the revised framework, 32.4% of Group 1 banks will be constrained by the floor while 21.1% will be constrained by the Basel III leverage ratio. The share of Group 1 banks constrained by risk-based capital requirements before application of the respective output floor will decrease from 54.9% to 46.5%. For the subset of G-SIBs, the Basel III leverage ratio is currently constraining for a smaller share of banks (14.8%) as compared to Group 1 banks as a whole while the transitional Basel I-based floor 26 Graph 5 does not distinguish between IRB and pure SA Group 1 banks as out of the 71 Group 1 banks in the sample only seven are pure SA banks. 14 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study

19 constrain a slightly larger share of banks (25.9%). The remaining 59.3% of G-SIBs are constrained by the risk-based measure before application of the output floors. Under the revised framework, 33.3% of G-SIBs will be constrained by the output floor while the Basel III leverage ratio will only be constraining for 11.1% of the G-SIB. The remaining 55.6% of G-SIBs will be constrained by the risk-based capital requirements before application of the output floor. Of the Group 2 IRB banks in the sample, 38.9% are currently constrained by the Basel III leverage ratio while 11.1% are constrained by the transitional Basel I-based floor. The share of Group 2 banks constrained by risk-based capital requirements before application of the output floors under the current regime is 50.0% and somewhat lower than the share among Group 1 banks and G-SIBs. The share of Group 2 banks constrained by the risk-based capital requirements before application of the output floor under the revised regime will be one third, which is lower than for Group 1 banks and G-SIBs. The Basel III leverage ratio will be constraining on 44.4% of Group 2 banks while the share of Group 2 banks constrained by the output floor will increase to 22.2%. For the Group 2 banks only using the standardised approach for credit risk, risk-based capital requirements before application of the respective output floors are and remain constraining for 70.8% of the banks. The Basel III leverage ratio is and remains constraining for 29.2% of these banks. The output floor will not become constraining for any of these banks, reflecting the fact that the share of RWA from market risk or counterparty credit risk is low for banks using the standardised approach for credit risk. Percentage of banks constrained by different parts of the framework Graph 5 Group 1 banks Of which: G-SIBs Group 2 banks IRB Group 2 banks pure SA Per cent Per cent Per cent Per cent See also Table B Main drivers of the impact The analysis of the main drivers of the estimated impact for affected banks shows that no single element of the reforms credit risk, operational risk, output floor or leverage ratio can be said to have a consistent effect on the banks which contribute most to the global change in MRC. For the top and bottom Group 1 banks which are individually most affected by the revisions in terms of changes in MRC, credit risk is a material contributor but operational risk and output floor contributions vary widely. For the top and bottom Group 2 banks, contributions of all three components vary widely. The Committee has also investigated whether the percentage change in MRC of each bank can be explained by business model and balance sheet metrics. For example, Graph 6 plots each bank s change in MRC versus the proportion of residential mortgage exposures in its portfolio. The results suggest no Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study 15

20 significant correlation between the two. Only 1.3% of the variability in MRC can be explained by the proportion of residential mortgage exposures in Group 1 banks portfolios. The number is virtually zero for Group 2 banks. Focusing on the most impacted banks, a similar result is observed: while the most impacted bank in the sample has a considerable proportion of residential mortgage exposures (about 40%), the proportion is small for the other most impacted banks. Change in MRC versus proportion of residential mortgage exposures 1 Graph 6 Group 1 banks Per cent Group 2 banks Per cent 1 R 2 = for Group 1 banks and for Group 2 banks. Source: Basel Committee on Banking Supervision Similar analysis has also been conducted for changes in MRC versus the ratio of current Tier 1 MRC and leverage ratio exposures. The results suggest negative correlation between the two metrics for Group 1 banks. Hence, banks which are highly leveraged tend to be the ones with the highest increase in MRC. In addition, no significant relationship was found between the change in MRC and (i) profits; (ii) the proportion of exposures to large and mid-sized corporates, specialised lending exposures, banks and financial institutions; (iii) the share of market risk exposures; and (iv) current CET1 ratios. 2.5 Impact on modelling and RWA variability for credit risk This section discusses the reforms impact on the proportion of modelled credit risk exposures and the gap in risk weights between the IRB approach and the standardised approach across asset classes. The reforms were undertaken in order to materially decrease risk weight variability in low-default portfolios (defined as portfolios with low number of observations for a reliable modelling of probability of default (PD) and loss given default (LGD)) by removing or constraining the modelling approaches available for those exposures IRB versus final standardised approach The gap between the average risk weights under the final standardised and IRB approaches for each asset class was analysed by calculating the ratio of the average IRB risk weight (for both performing and nonperforming loans) to the corresponding average standardised approach risk weight. A ratio less than 100% indicates that the average risk weight is lower under the IRB approach than under the standardised approach. For example, a ratio of 66.7% means that the average risk weights under the standardised approach are 50% higher than the average risk weights under the IRB approach. Graph 7 shows this ratio for each asset class under the current standard and the final Basel III framework. Overall the gap between risk weights under the standardised approach and those under the 16 Basel III Monitoring Report December 2017: Results of the cumulative quantitative impact study