Highlights of the Basel III monitoring exercise as of 31 December 2021

Highlights of the Basel III monitoring exercise as of 31 December 2021

  • Initial Basel III capital ratios increase to the highest level since the beginning of the exercise
  • Impact of final Basel III standards lower compared to previous exercises

The full report can be found here

To assess the impact of the Basel III framework on banks, the Basel Committee on Banking Supervision monitors the effects and dynamics of the reforms. For this purpose, a semiannual monitoring framework has been set up on the risk-based capital ratio, the leverage ratio and the liquidity metrics using data collected by national supervisors on a representative sample of institutions in each country. Since the end-2017 reporting date, the report also captures the effects of the Committee's finalisation of the Basel III reforms.1 This report summarises the aggregate results using data as of 31 December 2021.2 It includes special features on Banks' exposures to cryptoassets – a novel dataset and Capital buffers and total CET1 requirements including Pillar 2 . The Committee believes that the information contained in the report will provide relevant stakeholders with a useful benchmark for analysis.

Information considered for this report was obtained by voluntary and confidential data submissions from individual banks and their national supervisors. On jurisdictional level, there may be mandatory data collections ongoing which also feed into this report. Data were included for 182 banks, including 117 large internationally active ("Group 1") banks, among them all 30 G-SIBs, and 65 other ("Group 2") banks.3 Members' coverage of their banking sector is very high for Group 1 banks, reaching 100% coverage for some countries, while coverage is lower for Group 2 banks and varies by country.

In general, this report does not take into account any transitional arrangements such as grandfathering arrangements. Rather, the estimates presented generally assume full implementation of the Basel III requirements based on data as of 31 December 2021. No assumptions have been made about banks' profitability or behavioural responses, such as changes in bank capital or balance sheet composition, either since this date or in the future. Furthermore, the report does not reflect any additional capital requirements under Pillar 2 of the Basel III framework, any higher loss absorbency requirements for domestic systemically important banks, nor does it reflect any countercyclical capital buffer requirements.

  • Compared with the end-June 2021 reporting period, the average Common Equity Tier 1 (CET1) capital ratio under the initial Basel III framework increased slightly to 13.3% for Group 1 banks. The increase to 17.2% for Group 2 banks is driven by sample changes.
  • The average impact of the final Basel III framework on the Tier 1 Minimum Required Capital (MRC) of Group 1 banks is lower (+2.4%) when compared to the 3.3% increase at end-June 2021.
  • The total capital shortfalls under the fully phased-in final Basel III framework as of the end-December 2021 reporting date for Group 1 banks further decreased to €0.1 billion in comparison to end-June 2021 at €2.3 billion.
  • Applying the 2022 minimum TLAC requirements and the initial Basel III framework, one of the 25 G-SIBs reporting total loss-absorbing capacity (TLAC) data reported an aggregate incremental shortfall of €7.5 billion.
  • Group 1 banks' average Liquidity Coverage Ratio (LCR) decreased from 143.8% to 141.3% while the average Net Stable Funding Ratio (NSFR) increased from 124.5% to 125.1%. For Group 2 banks, there was also a decrease for the LCR and a significant increase by more than four percentage points for the NSFR. The latter is driven by sample changes.
  • The balanced data set for Group 1 banks showed a slight increase in initial Basel III capital ratios in H2 2021, driven by an increase in Tier 1 capital that was higher than the increase in RWA. Capital ratios are at the highest level since the beginning of the exercise. The overall CET1 capital ratios for Group 1 banks in the balanced data set were 13.3% in June 2021.
  • Currently, the Tier 1 capital ratios are higher in Europe than in the Americas and the rest of the world region. However, when compared with data starting from 2011, this relationship used to be reversed before 2014.
  • For Group 1 banks, the Tier 1 minimum required capital (MRC) would increase by 2.4%, following full phasing-in of the final Basel III standards. This increase is composed of a 2.1% rise in the combined risk-based components. Those are driven by positive contributions of the output floor (+2.0%), market risk (+2.0%), CVA (+0.6%) on the one hand and a reduction in credit risk (-2.6%) on the other hand. The rise of the combined risk-based components is accompanied by a positive effect of the leverage ratio requirements (+0.3%).
  • The impact on MRC across regions is very heterogeneous for Group 1 banks with a moderate decrease in the rest of the world (-6.9%), a small increase shown in the Americas (+3.9%) and in contrast to this a strong increase in MRC for European banks (+17.5%).
  • For Group 2 banks, the overall 5.7% increase in Tier 1 MRC is driven by an increase in the risk-based measure of 14.6%, mainly stemming from credit risk (+6.8%) and the output floor (+4.5%), while the leverage ratio measure partially offsets this increase at -9.0%.
  • The average impact of the final Basel III framework on Group 1 banks at +2.4% is 50 basis points lower than at the end-2020 reporting date (+2.9%). It has also decreased during 2021 for Group 2 banks.
  • For the full sample at the end-December 2021 reporting date, the average fully phased-in final Basel III Tier 1 leverage ratios are 6.4% for Group 1 banks, 6.3% for G-SIBs and 6.2% for Group 2 banks.
  • For the balanced data set of Group 1 banks, the leverage ratio increased from the prior period, driven by banks in Europe and the rest of the world regions.
  • Leverage ratios are still lower in Europe (5.4%) as compared to the Americas (5.9%) and the rest of the world (7.6%).
  • For this reporting date, Group 1 banks registered total regulatory capital shortfalls amounting to €0.1 billion, compared to €2.3 billion at end-June 2020.
  • For the second reporting date in a row, capital shortfalls are at a historically low level for Group 1 banks and there is again no shortfall of CET1 and additional Tier 1 capital. Dividend distribution constraints during the Covid-19 period in several jurisdictions may have contributed to the decrease of the shortfall as well as temporary capital buffer relief measures.
  • For Group 2 banks, the aggregate total capital shortfall decreased to €1.2 billion.
  • From end-June 2011 to end-December 2021, the level of Group 1 banks' CET1 capital has increased by 128% from €1,874 billion to €4,428 billion. Since end-June 2021, Group 1 CET1 capital has increased by €147 billion (or 3.4%).
  • At a regional level, while CET1 capital in the rest of the world is now almost three times of its value in 2011, the increase in Europe and in the Americas was more limited at 78% and 86%, respectively.
  • Overall, Group 1 banks' profits after tax only decreased marginally from the record-high level in June 2021 for the banks in the sample and stand at €274 billion in H2 2021.
  • Annual after-tax profits for the Group 1 banks in the sample saw a particularly strong increase in Europe and the Americas (143% and 113%, respectively) compared to the full year 2020.
  • Since the previous reporting date, the annual dividend payout ratios for Europe and the rest of the world continued to increase while those in the Americas slightly decreased.
  • As of end-June 2021 and for a balanced data set of Group 1 banks, credit risk4 continues to compose the dominant portion of overall minimum required capital (MRC), on average comprising 64.9% of total MRC. However, the share of credit risk has declined significantly from 74.3% at the end of June 2011.
  • Conversely, the share of operational risk MRC increased sharply from 7.9% at end-June 2011 to 16.1% at end-2015 and decreased slightly since. The increase in the early 2010s was attributed in large part to the surge in the number and severity of operational risk events during and after the financial crisis, which are factored into the calculation of MRC for operational risk under the advanced measurement approach. More recently, we observe some "fading out" of the financial crisis losses so that in 2020, the lowest loss level of the past 10 years is observed. This explains the latest decrease in capital requirements especially for the banks heavily affected in the financial crisis. On the other hand, losses triggered by the Covid-19 pandemic do not yet have a significant impact on the loss severity level but this may change given that the pandemic is still ongoing.
  • Among the credit risk asset classes, the share of MRC for corporate exposures increased from 30.6% to 39.0% between June 2011 and June 2021 before decreasing again to 38.1% at end-2021. The share of MRC for securitisation exposures declined from 7.2% to 1.8% between June 2011 and December 2021.
  • The weighted average LCR at end-December 2021 is 141.3% for Group 1 banks and 231.1% for Group 2 banks. The increase for Group 2 banks compared to the previous report is driven by sample changes.
  • In the current reporting period there are six Group 1 banks with an LCR below 100% and hence a shortfall (ie the difference between high quality liquid assets and net cash outflows) which amounts to €21.0 billion.
  • The weighted average NSFR was 125.1% for Group 1 banks and 134.0% for Group 2 banks at end-December 2021.
  • All banks reported an NSFR that met or exceeded 100%.
  • For a balanced data set of Group 1 banks, not all banks meet a 100% LCR at end-December 2021, resulting in an aggregate shortfall of €5.6 billion.5 While the shortfall has almost halved since end-June 2021, the average LCR for this sample decreased to 144.0% from 145.8% at end-June 2021.
  • There was again no aggregate NSFR shortfall for the balanced data set of Group 1 banks. The average NSFR for the same sample of banks has increased to 124.1% from 123.8% at end-June 2021.
  • For a balanced data set of Group 2 banks, the LCR shortfall remains at zero since June 2019. The average LCR for the same sample of banks decreased by 5.6 percentage points to 222.8%.
  • The aggregate NSFR shortfall remained at zero for the balanced data set of Group 2 banks. The average NSFR for the same sample of banks increased by 0.7 percentage points to 131.6%.
  • Since 2019, the weighted average LCR for each of Europe and the rest of the world was above 140%, while the average LCR of the Americas is around 120%. While Europe and the Americas had initially lower average LCRs compared with the rest of the world, the average LCRs of Europe and the rest of the world tended to converge gradually before the onset of the pandemic. The regions with lower end-2012 average ratios saw important increases in particular between end-2012 and June 2014, and Europe again since the start of the pandemic.
  • The weighted average NSFR at end-June 2021 for Group 1 banks in each of the three regions was well in excess of 100%. The average NSFRs in Europe and the Americas have increased from 119.7% and 125.0% at end-December 2019, respectively, to 121.5% and 131.2% at end-December 2021. While Europe is at a level in line with the rest of the world which on average reports an NSFR of 123.5%, the Americas are now the region with the highest NSFR, in spite of the notable drop in H2 2021.

1 Basel Committee on Banking Supervision, High-level summary of Basel III reforms , December 2017, www.bis.org/bcbs/publ/‌d424_hlsummary.pdf; Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms, December 2017, www.bis.org/bcbs/publ/d424.htm.

2 A list of previous publications is included in the Annex.

3 Group 1 banks are those that have Tier 1 capital of more than €3 billion and are internationally active. All other banks are considered Group 2 banks. Not all banks provided data relating to all parts of the Basel III framework.

4 Here overall credit risk is defined as the sum of corporate, bank, retail, sovereign, partial-use, securitisations and related entities as illustrated in the graph.

5 Note that the LCR shortfall in the entire sample at end-December 2021 is €21.0 billion.