UK: Basel III: The Bank Capital Marathon

Last Updated: 28 March 2018
Article by David Strachan, Rod Hardcastle, Simon Brennan and Scott Martin

The final parts of Basel III, agreed in December 2017, were widely greeted in the banking industry as having a less severe impact than initially feared. Many commentators also noted that the January 2022 implementation date set for these reforms was sufficiently far away to dampen much of their immediate effect on banks. If this assessment holds true, it could limit the need for banks to raise large amounts of fresh capital and help them focus on new business opportunities, controlling costs, and delivering greater shareholder returns.

Some industry analysts even went so far as to express relief that Basel III was 'over' – but is it?

That is the question that was asked at a conference earlier this year in Frankfurt, where speeches made by Stefan Ingves, Chairman of the Basel Committee on Banking Supervision (BCBS), and Andrea Enria, Chairman of the European Banking Authority (EBA), left the audience with the clear message: 'not quite'.

Banks have sprinted to implement the early parts of Basel III for much of the last decade since the financial crisis, but our view is that the reform of the bank capital framework is actually a marathon that looks set to run for another five years or more.

In fact, the remaining uncertainty around elements of the capital framework, their impact, and the complexity of their forthcoming implementation looks set to materialise in at least three waves of new demands that will test banks' ability to respond. But it is also becoming far harder to generalise: every bank will face a different set of challenges based on its business model and risk exposures, and determining just how far each has left to run may still take some time to establish.

The bank capital marathon

Basel III is not the only race in town, although it is the most prominent part of a much larger push to reform the regulatory capital framework for banks.  According to our view of the broader regulatory pipeline, the marathon of challenges EU-based banks now face includes many near- and longer-term demands that can best be described as forming three distinct waves:

  • Ongoing work by EU authorities: which includes an EBA-led EU-wide model benchmarking exercise, and new guidelines and technical standards on the parameters used for internal ratings-based (IRB) models for credit risk. The EBA intends these to be implemented by banks by the end of December 2020. In addition, several supervisory authorities are in the midst of carrying out related initiatives to assess the robustness of bank models, most notably the European Central Bank (ECB) with its Targeted Review of Internal Models exercise. These will all give rise to more granular, but potentially very important capital and operational challenges for banks, depending on their business model, location, and risk exposures.  On top of this, the monitoring of the implementation of IFRS9's expected credit losses approach and a forceful push by the EBA and ECB to address exposures to non-performing loans create a supervisory environment where banks will feel a great deal of pressure to show that they are appropriately identifying the risks that they are exposed to and holding the right amount of capital against them.
  • The EU's current CRD V/CRR II package: a large legislative proposal on bank capital and risk, presently being negotiated by the European Parliament and European Council in Brussels. This includes new rules for counterparty credit risk, large exposures, market risk, leverage, and the holding of bail-inable debt, to name just a handful of its components. These are complex negotiations that will take time to finalise and whose shape is currently in almost constant flux. But, if an agreement is reached by the EU institutions involved in 2019, banks will likely have to start applying these measures after a two to three year implementation period ending in 2021 or 2022.
  • Implementing the Basel III agreement of December 2017: which will require brand new legislation to be proposed and agreed by the EU before most parts of it can be applied to banks operating in Europe. This new legislation will give effect to the new standardised approach for credit risk, restrictions on the use of IRB models, the new approach to operational risk, and the introduction of standardised output floors. As we explained in our earlier blog, it is unlikely that we will see this proposal made before early 2020, and as a result of the long legislative process it will produce, we do not expect the EU to be in a position to require banks to implement these new rules until 2023 or 2024.

What does this mean for banks?

These three sets of demands will individually give rise to significant changes in how banks assess their risks, and consequently, the capital-intensity, pricing, and profitability of the products they offer.  The whole 'marathon' of demands in aggregate, however, points to a much more challenging period of five or more years during which banks will have to modify their regulatory capital calculations on an ongoing basis, invest in new IT and data management capabilities and constantly reassess how each change affects the sustainability of their commercial practices.

The legislation required from the European Commission to implement the Basel III agreement – presumably to be named 'CRR III' – is expected to go through political negotiations in the European Parliament and European Council between 2020 and 2022 or 2023. During this time, the details and timing of any of the Basel III requirements could be modified by European legislators, who have recently demonstrated an interest in deciding for themselves how banks should best be regulated, particularly when US regulators show a similar inclination to adopt home-grown approaches. With Brexit, this will also be the first time the EU will move to implement Basel rules without the UK as a Member State, whose absence from the negotiating table could have an effect on the dynamic of negotiations between the EU's remaining members.

In short, assessing the impact of upcoming changes to the bank capital framework solely by reading the Basel III standards may be misleading.

This severely complicates the assessment of a strategic response to Basel III. The economics of many management decisions made in response to it could be turned around by changes subsequently made by the EU in the implementation of crucial parts of the framework – for example, in the calibration of standardised output floors, implementation of the operational risk approach, or restrictions on the use of IRB models for credit risk.

Where's the finishing line?

In a low interest rate, low-return environment where banks continue to be squeezed on costs and revenues, there is considerable scope for shifts in the intensity of capital requirements for exposures to pose a fundamental challenge to the viability of some product lines and business models.

Early anticipation of the full range of regulatory initiatives – seeing them as a broader process of capital reform rather than as individual initiatives in isolation – will be critical to any strategic response, ensuring that new products and business lines that banks might invest in will be resilient to changing requirements, even at a late stage.  Understanding and assessing what is coming next and the potential impact of a range of different policy scenarios on products and clients, will pay dividends in future. That said, some uncertainty will unavoidably remain as the policy process continues at various levels.

It is then too early to say that "Basel III" is over. The hope is that the work that we have described above should spell its finalisation, and that the finishing line is coming into sight. Fully ten years after the height of the financial crisis, banks can therefore begin to think about moving on.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions