Basel 3 reforms – the impact on Nordic banks

New Basel 3 reforms are being implemented from 2021 to 2028. Banks in the process of implementing these reforms, when combined with the current COVID 19 situation, face significant strategic and operational challenges

Our paper provides an insight regarding the impact of the Basel 3 reforms on Nordic banks’ capital requirements. The paper is structured to help banks anticipate and prepare for the challenges which the reforms and the current COVID 19 situation are creating.

On 15th December 2020, the European Banking Authority (EBA) published its updated assessment of the impact of Basel 3 reforms1 on European banks. The analysis simulated a significant (18.5%) increase in minimum capital requirements and provided a qualitative analysis of COVID 19 impacts. The conclusion was to continue with the full implementation of the final Basel 3 standards in the EU.

Our paper analyses the impact of the Basel 3 reforms on typical credit portfolios in Nordic banks, across both Standardised and IRB portfolios. Our analysis is structured to help key bank stakeholders understand the drivers, and the potential magnitude, of the increase in capital requirements, shedding light on areas where impacts are likely to be greatest.

Final elements of the Basel III framework that were endorsed by the Basel committee in 2017. Supported by the EBA for full implementation in the EU on 1 January 2023 (postponed due to COVID 19)

To remain competitive, Nordic banks need to manage the strategic impacts of these capital requirement changes. Stakeholders need to understand how Basel 3 reforms combined with COVID 19 could impact credit quality, pricing and the cost of capital. The new requirements are complex and with the COVID 19 impacts still playing out, detailed analysis is needed per bank to assess and manage, the systemic and idiosyncratic impacts.

Our results reinforce the expected overall increase in capital requirements in the Nordic context, with three main conclusions for management to action:

  1. Banks need to complete in-depth analysis of the composition of real estate portfolios, based on the regulatory Loan-to-Value (LTV) metric, to enable future capital allocation in Standardised and A-IRB banks to be understood, based on high quality data and documentation.
  2. A-IRB banks need to develop and maintain a deep understanding of capital requirements under the Standardised Approach, given the new capital floor pre-transition
  3. Banks need to monitor local and European regulatory discussions closely. Whilst credit portfolios across Nordic banks are broadly comparable, local Nordic regulators are taking different approaches (e.g. country specific RWA floors), reflecting prudential priorities and expectations per country. 

Lastly, banks will need to adapt agile capital management strategies as the impacts of COVID-19 play out over the medium term as its difficult to predict the economic recovery, evolution of bank’s balance sheets and the uncertainty of the effects of mitigating government support. 

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