57. This section assesses the impact of two transitional arrangements over the transitional period 2023 to 2028 (Table 13):
Output floor: under both Basel III and EU-specific scenarios, the calibration of the output floor will be phased in starting from 50% of the total floored RWA in 2023 and progressively increasing every year to reach the 72.5% steady-state level in 2028. Operational risk: an alternative EU-specific scenario is considered where the discretion
of setting ILM=1 for bucket 2 and 3 banks will be phased out, starting from an ILM=1 in 2023 and progressively increasing every year to reach the bank-specific ILM steady- state level in 2028. For institutions with bank-specific ILM lower than 1 (i.e. with losses that are low relative to their Business Indicator Component), the phase-out arrangements are not applied. For these banks, the bank-specific ILM is used from 2023 and throughout the transitional period, i.e. it is assumed that these banks can frontload any capital relief stemming from their relatively benign operational loss history. For the Basel III and (default) EU-specific scenario, no transitional arrangements for operational risk are considered, i.e. ILM bank-specific and ILM=1 is used, respectively, throughout the transitional period.
Table 13 Transitional arrangements for output floor calibration and operational risk ILM
Scenario Reform 1 Jan 2023 1 Jan 2024 1 Jan 2025 1 Jan 2026 1 Jan 2027 1 Jan 2028
Basel III scenario Output floor calibration 50% 55% 60% 65% 70% 72.5% EU-specific scenario Output floor calibration 50% 55% 60% 65% 70% 72.5% Alternative EU-specific scenario Output floor calibration 50% 55% 60% 65% 70% 72.5% Operational risk ILM for bucket 2 and 3 banks(*) 1 1+20%* bank- specific ILM -1 1+40%* bank- specific ILM -1 1+60%* bank- specific ILM -1 1+80%* bank- specific ILM -1 bank-specific ILM
(*) Only relevant for EU-specific scenario. For bucket 2 and bucket 3 banks with ILM bank -specific lower than 1, the phase-out arrangement is not applied, i.e. a constant ILM bank-specific is used from 2023 and throughout the transitional period.
3.3.1
Basel III scenario
58. During the phase-in period, the contribution of the output floor to the total MRC impact steadily accelerates under the Basel III scenario:
The contribution of the output floor under the main approach adds less than 1 p.p. to the total MRC change for calibration levels below 60% until the end of year three of the six-year transition period in 2025;
Beyond the 60% calibration level, the contribution of the output floor to the total MRC change more than doubles every year until the end of year five in 2027, reaching +5.0% when the output floor calibration is at 70%;
In 2028, when the output floor reaches its steady-state 72.5% calibration, the contribution of the output floor to the EU average MRC is +6.7%.
Figure 5 Contribution of the output floor to the total T1 MRC impact (relative to current T1 MRC) during the transitional period, Basel III scenario, December 2019 data
Sources: EBA 2019-Q4 QIS data and EBA calculations.
Note: Based on a sample of 99 banks. ∆ Total based on ‘reduced bias estimation’ for market risk impact and July 2020 CVA framework for CVA risk impact. ∆ OF impact is based on the main approach to implement the output floor.
59. Similarly to the contribution to MRC, the capital shortfall also increases progressively during the transitional period. In 2023, the impact determines a shortfall in total capital of EUR 27.6 billion (of which EUR 10.8 billion in CET1), which is almost half the amount of the total capital shortfall incurred at the steady state in 2028 (Table 14).
Table 14 Capital shortfall (EUR billion) during the transitional period, Basel III scenario, December 2019 data
Year (floor) CET 1 shortfall (EUR bn) T1 shortfall (EUR bn) TC shortfall (EUR bn)
2023 (50%) 10.8 18.9 27.6 2024 (55%) 10.8 18.9 27.6 2025 (60%) 14.6 23.3 32.6 2026 (65%) 19.5 28.7 38.7 2027 (70%) 26.6 36.4 47.4 2028 (72.5%) 30.2 41.0 52.2
Sources: EBA 2019-Q4 QIS data and EBA calculations.
Notes: Based on a sample of 99 banks. ∆ MKT based on ‘reduced bias estimation’. ∆ CVA based on July 2020 CVA framework. ∆ OF impact is based on the main approach to implement the output floor.
3.3.2
EU-specific scenario
60. Figure 6 shows the contribution of the output floor to the total MRC impact during the transitional period under the EU-specific scenario:
the contribution of the output floor remains low (less than 1 p.p.) for calibration levels below 55%, then almost doubles every year until the calibration level 70% in 2027 and reaches 6.9% at the end of the transition period in 2028;
as a result of the above, the total MRC impact increases progressively during the six- year transition period, starting from +6.2% in 2023 and reaching +13.1% in 2028.
Figure 6 Contribution of the output floor risk to the total T1 MRC impact (relative to current T1 MRC) during the transitional period, EU-specific scenario, December 2019 data
Sources: EBA 2019-Q4 QIS data and EBA calculations.
Notes: Based on a sample of 99 banks. ∆ MKT based on ‘reduced bias estimation’. ∆ CVA based on July 2020 CVA framework. ∆ OF impact is based on the main approach to implement the output floor.
61. In terms of shortfall, the impact determines an initial shortfall in total capital of EUR 7.6 billion (of which EUR 2.4 billion in CET1) in 2023, which grows to EUR 33.0 billion (of which EUR 17.4 billion in CET1) in 2028.
Table 15 Capital shortfall (EUR billion) during the transitional period, EU-specific scenario, December 2019 data
Year CET 1 shortfall (EUR bn) T1 shortfall (EUR bn) TC shortfall (EUR bn)
2023 (50%) 2.4 3.0 7.6 2024 (55%) 2.4 5.0 10.5 2025 (60%) 4.8 9.4 15.9 2026 (65%) 8.7 13.9 21.3 2027 (70%) 14.1 19.6 28.5 2028 (72.5%) 17.4 23.6 33.0
Sources: EBA 2019-Q4 QIS data and EBA calculations.
Notes: Based on a sample of 99 banks. ∆ MKT based on ‘reduced bias estimation’. ∆ CVA based on July 2020 CVA framework. ∆ OF impact is based on the main approach to implement the output floor.
3.3.3
Alternative EU-specific scenario
62. Figure 7 shows the contribution of the output floor and the operational risk to the total MRC impact during the transitional period for the alternative EU-specific scenario (i.e. differently from the EU-specific scenario where ILM=1 during the transitional period, under this scenario under the discretion of setting ILM=1 for bucket 2 and 3 banks will be phased out until it reaches the bank-specific ILM level at the end of the transitional period in 2028):
the contribution of the output floor remains low (less than 1 p.p.) for calibration levels below 55%, then almost doubles every year until the calibration level 70% in 2027 and reaches 6.5p.p. at the steady state in 2028;
the contribution of the operational risk starts from 1.1 p.p. in 2023 and increases linearly every year (by around 0.5 p.p.) to reach 3.8 p.p. in 2028 (i.e. the same level observed under the Basel III scenario);
as a result of the above, the total MRC impact increases progressively during the transitional period, starting from +5.7% in 2023 and reaching +14.9% in 2028.
Figure 7 Contribution of the output floor and operational risk to the total T1 MRC impact (relative to current T1 MRC) along the transitional period, alternative EU-specific scenario, December 2019 data
Sources: EBA 2019-Q4 QIS data and EBA calculations.
Notes: Based on a sample of 99 banks. ∆ MKT based on ‘reduced bias estimation’. ∆ CVA based on July 2020 CVA framework. ∆ OF impact is based on the main approach to implement the output floor.
63. In terms of shortfall, the impact determines an initial shortfall in total capital of EUR 7.3 billion (of which EUR 2.0 billion in CET1) in 2023, which reaches EUR 39.7 billion (of which
EUR 19.9 billion in CET1) in 2028.42 The transitional arrangements for the output floor
contribute the most to the reduction in shortfall during the transitional period relative to the steady-state level. This reflects the fact that in the steady state, the output floor will determine a large share of the total capital shortfall incurred by the EU banks in the sample.
Table 16 Capital shortfall (EUR billion) during the transitional period, alternative EU-specific scenario, December 2019 data
Year CET 1 shortfall (EUR bn) T1 shortfall (EUR bn) TC shortfall (EUR bn)
2023 (50%) 2.0 2.9 7.3 2024 (55%) 2.0 5.4 11.0 2025 (60%) 5.5 10.6 17.3 2026 (65%) 10.0 15.9 23.7 2027 (70%) 15.9 21.8 32.1 2028 (72.5%) 19.9 26.6 39.7
Sources: EBA 2019-Q4 QIS data and EBA calculations.
Notes: Based on a sample of 99 banks. ∆ MKT based on ‘reduced bias estimation’. ∆ CVA based on July 2020 CVA framework. ∆ OF impact is based on the main approach to implement the output floor.