2018/2019 Edition of the Global Regulatory Update

Global Regulatory Update  | Corporates Edition 11 For E.U. banks the reforms mean an average increase in minimum capital of 12.9% according to estimates by the European Banking Authority (EBA) based on 2015 balance sheets. The E.U.’s 12 largest banks will see a spike of 15.2% as per the EBA’s forecast. The EBA explained that the limit on models is the biggest factor in the increase. France and Germany opposed the Basel reform package until last minute as they believe it will disproportionality hit their banks. The EBA’s impact assessment can be found here: https://www.eba.europa.eu/documents/10180/1720738/Ad+Hoc+Cumul ative+Impact+Assessment+of+the+Basel+reform+package.pdf U.S. banks would arguably be less impacted in comparison to European banks. They already have a 100% standardised floor under Section 171 of the Dodd-Frank Act. U.S. banks would also have a smaller impact from changes in selected asset classes. They have lower corporate exposures since large corporates fund themselves more often directly through capital markets. They are also likely to face less significant increases in operational risk capital given their current high capitalisation levels for operational risk. Smaller corporates and small to medium size enterprises could feel the knock on impact of these proposals as a one size fits all model of measuring risk (standardised approach) will make it more difficult for banks’ lending to SMEs and non-rated companies as banks will need to take on 100% risk. Larger corporates working with the major banks are less impacted due to their own more stable capital and liquidity positions. Citi continues to be closely involved in working with regulators and market bodies at global, European, UK and U.S. levels as the implications of all these proposals continue to be debated, refined and understood. We are also investing considerable time in keeping our clients informed about these forthcoming changes and the potential implications they may have. b) Basel III in Europe A summary of the issue and current status Basel III is considerably advanced in Europe. The Capital Requirements Directive (CRDIV) and Regulation (CRR) were adopted in 2013 and apply since the beginning of 2014. The European Banking Authority (EBA), the pan-European prudential supervisor, has played a critical role in defining technical standards that support the implementation of the European Basel regime. We also provided details on CRDIV along with a comparative analysis on how the E.U. rules differ from Basel III and how this leads to a fragmented regulatory landscape in our last guide.