CRR III implementation: Impact on capital requirements, performance and business models of European banks

Martin Neisen and Hermann Schulte-Mattler
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Martin Neisen: PricewaterhouseCoopers, Germany
Hermann Schulte-Mattler: Professor of Finance, Dortmund University of Applied Sciences, Germany

Journal of Risk Management in Financial Institutions, 2022, vol. 15, issue 4, 338-361

Abstract: The European Banking Package II finalises the implementation of the final Basel III standards, which the industry refers to as ‘Basel IV’. It entails many changes to the methods used to determine capital requirements and represents a significant challenge for the European banking sector. Based on the Capital Requirements Regulation (CRR) III draft, this paper provides an overview of the main implementation issues in the European Union, discusses the potential impact on banks' capital requirements and makes policy recommendations. This paper uses primary sources such as the Basel Committee on Banking Supervision, the European Banking Authority and the European Commission. Secondary sources, academic articles or analyses from various stakeholders are also included in the analysis. This paper also provides an analysis of the impact of the new prudential regulations on banks based on 30 detailed Basel IV impact studies conducted over the past two years in consulting projects with banks from almost all EU countries. The impact analysis covers a wide range of different business models, bank sizes and countries. We believe the anonymised data we use is far more representative of the EU banking system and other jurisdictions than the impact studies performed by the European Commission or the BCBS. The new CRR III regulations will pose strategic, operational and regulatory challenges for the banks concerned. The paper concludes that the European implementation of the reforms will not burden a specific group of banks, but banks with different business models and of different size will be impacted differently but still significantly. This makes Basel IV and CRR III unique compared to previous reforms of the Basel framework. The EU Commission's goal of proportionality of regulations will not provide much relief in this regard. The paper provides an up-to-date and comprehensive overview of the planned changes in CRR III, ie in capital adequacy requirements. It analyses the implementation of the standards and compares them with the Basel IV requirements. Recommendations for supervisors, risk management practitioners and other interested parties conclude the paper.

Keywords: Basel III finalisation; Basel IV; credit risk standardised approach (SA-CR); internal ratings-based approach (IRBA); operational risk (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2022
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