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.



David Strachan – Partner, Head of EMEA Centre for Regulatory Strategy

David is Head of Deloitte’s EMEA Centre for Regulatory Strategy. He focuses on the impact of regulatory changes - both individual and in aggregate - on the strategies and business/ operating models of financial services firms. David joined Deloitte after 12 years at the FSA, where in his last role, Director of Financial Stability, he worked on the division of the FSA into the PRA and the FCA.

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Rod Hardcastle - Director, Centre for Regulatory Strategy, Deloitte

Rod is a Director in the EMEA Centre for Regulatory Strategy and has over 25 years of experience in Financial Services, both as a practitioner - including roles at major full service banks in the UK - and in advisory roles. Rod is a subject matter expert in bank regulation, particularly prudential regulatory capital, credit risk management and the Internal Ratings Based approaches.

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Simon Brennan – Director, Centre for Regulatory Strategy, Deloitte

Simon specialises in prudential regulation for banks. Simon joined Deloitte after 11 years at the Bank of England, where he worked in a number of areas covering macro and micro prudential policy, and financial institution risk assessment.

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Scott martin

Scott Martin - Senior Manager, Centre for Regulatory Strategy, Deloitte

Scott is a Senior Manager in the Centre for Regulatory Strategy advising on international banking regulation, with a particular focus on bank capital, strategy, cyber risk and public policy-making processes. Before joining Deloitte in 2015, he worked in Brussels as an EU regulatory strategist advising a number of global systemically important banks and other financial institutions. He is a graduate of the London School of Economics and previously spent a number of years working as a political advisor to Canada’s Minister of Finance and Minister of Foreign Affairs.

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