AFME has responded to the publication of the EU implementation of final Basel III standards, drawing attention to the “suboptimal outcome” that parts of the agreement will have on the European single market.

A particular area of contention is the output floor, introduced into this iteration of the regulation to prevent firms with internal model permissions from going below a certain level when calculating their risk-weighted assets (RWA). This also limits the benefit a bank may receive by using an internal model approach.

Caroline Liesegang, head of capital and risk management at the association, commented: “Improvements to the treatment of exposures to unrated corporates as the output floor is introduced are also welcome and should avoid unnecessarily restricting the funding for unrated corporates that are the backbone of the EU economy. The recognition of the floor’s impact on securitisation and the introduction of a transitional arrangement to mitigate its impact is a small, but positive development.”

However, she continued: “AFME regrets that the output floor will be applied at the solo level of consolidation, contrary to Basel’s intention. This is not in the interests of the competitiveness of the European banking sector as it adds further market fragmentation.”

In the statement, Liesegang advised decision makers to avoid increasing capital requirements over the next few years during an “important implementation phase”, adding that “while the industry pools its capacity to finance, in particular, the digital and green transition, we encourage regulators to begin thinking of targeted adjustments to the regulatory framework that would also future proof the real economy”.

As Basel III implementation looms, the political agreement not to increase capital requirements beyond what was agreed in level one must be maintained, Liesegang noted. Currently, the floor is expected to begin at 50% of the capital requirements a bank would have under the new standardised approach, with this figure rising gradually to 72.5% in 2030. This is designed to maintain a fair balance and ensure these firms’ safety.

In addition, Liesegang continued it is important “to duly consider the implementation of market risk standards to ensure global consistency and avoid harming the competitiveness of EU capital markets.”

Concluding AFME’s statement, Liesegang said: “As further integration of the EU’s banking and capital market progresses, AFME hopes the EU will focus on addressing these obstacles to the free flow of capital and liquidity to allow for more efficient capital and liquidity allocation in the EU. This will in turn support and achieve a more economically prosperous EU, able to finance individuals, companies and the green and digital transitions.”

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