EU implementation of the final Basel III standard

In December 2017, the Basel Committee agreed on a new regulatory framework to address identified shortcomings of the original Basel III agreement, denoted the ‘Final Basel III Standard’. The European Commission is expected to publish a proposal for implementation of the reform in the EU this autumn. How the Final Basel III Standard is implemented in the EU will determine its effect on the European banking sector and the European economy.

In light of the upcoming EU implementation of the reform and the potential impact of the COVID-19 crisis, the European Banking Federation has asked Copenhagen Economics to update a previous report from 2019 to assess the impact of the reform on the EU banking sector and real economy.

If the reform is implemented according to the European Banking Authority’s (EBA) main scenario, we find that:

• The reform could increase the capital need of European banks by between EUR 170-230 bn.
• The higher capital need means that banks need to hold a higher share of the more expensive equity, which increases costs for banks. In total, we estimate an annual increase in costs associated with lending of EUR 25-30 bn.
• We expect that large corporate customers will be most affected by this, with an estimated increase in borrowing costs of close to 0.25 percentage points. For a typical corporate with an annual revenue of EUR 500 million, this would correspond to higher borrowing costs of around EUR 0.6 million per year
• The higher borrowing costs will increase the costs of conducting an investment. This will reduce investment activity, which eventually will lead to a permanent reduction in GDP. We estimate the permanent net cost of the reform to amount to around 0.3% of GDP.

We find that an alternative implementation of the Final Basel III Standard in the EU could reduce the increase in capital requirements to below 10% and limit the net societal costs to around 0.1% of GDP. This alternative implementation would bring the impact of the package more in line with economic considerations, the G20 mandate as well as the structures of the European banking and corporate sector.

The study is commissioned by the European Banking Federation.

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