Basel III rules in Europe will have a modest impact on bank capitalisation
The implementation of the final Basel standards is unlikely to lead to any notable increase in European banks’ capitalisation, S&P Global Ratings said in a report.
“If anything, it will likely provide more capacity for the recently renewed capital distributions by banks in the region,” said S&P Global Ratings credit analyst Nicolas Malaterre. This reflects likely delays and dilution in the implementation of the globally agreed standards in Europe, as per yesterday’s proposals by the European Commission. As a result, the implementation will have a more modest impact on regulatory metrics than European banks were initially anticipating. “We don’t expect the proposals to materially affect bank ratings,” he added.
“While the proposals support the policy objective of a banking system that underpins sustainable economic growth, EU implementation will be delayed and diluted versus the original intent of the Basel Committee On Banking Supervision in 2017,” said S&P Global Ratings credit analyst Alexandre Birry. “It illustrates the elusive nature of the original objective of heightening global consistency in regulatory metrics,” he said.
If implemented as proposed, the net effect would be a modest erosion in regulatory capital metrics for European banks, with the final implementation of Basel III spread over an even longer horizon than previously envisaged.
Given the regulatory capital buffers built by many European banks in excess of current requirements, the recent trend of renewed capital distribution may strengthen. Its pace will depend on, among other things, regulators’ stance regarding variable requirements, including pillar 2 and countercyclical buffers.
We agree that capitalization in Europe and other regions is now at least adequate for almost all large banks, even if we believe that banks’ resilience during Covid-19, including in Europe, was also underpinned by massive monetary and fiscal support (see “Top 100 Banks: Capital Ratios Show Resilience To The Pandemic,” published Sept. 28, 2021). The main impact of these proposals will likely be slower progress toward greater comparability of regulatory metrics globally than some may have hoped when the Basel standards were published four years ago.
This report does not constitute a rating action.
