Highlights of the Basel III monitoring exercise as of 30 June 2022

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 30 June 2022.² It includes a special feature on Regional distributions of Group 1 and Group 2 banks and their impact on results in the Basel III monitoring reports. 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 the jurisdictional level, there may be mandatory data collections ongoing, which also feed into this report. Data were included for 181 banks, including 114 large internationally active ("Group 1") banks, among them all 30 G-SIBs and 66 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 consider 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 30 June 2022. 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 or any higher loss absorbency requirements for domestic systemically important banks, nor does it reflect any countercyclical capital buffer requirements.

• Compared with the end-December 2021 reporting period, the average Common Equity Tier 1 (CET1) capital ratio under the initial Basel III framework fell to 12.7% for Group 1 banks.
• The average impact of the final Basel III framework on the Tier 1 Minimum Required Capital (MRC) of Group 1 banks is slightly higher (+2.8%) when compared with the 2.4% increase at end-December 2021. The average increase for G-SIBs is 3.2%.
• After reporting an all-time low for capital shortfalls in December 2021, June 2022 shows an increase in capital shortfalls once again, marking the highest value since H1 2020 for Group 1 banks and G-SIBs due to an improvement in data reporting quality.
• Applying the 2022 minimum TLAC requirements and the initial Basel III framework, three of the 25 G-SIBs reporting total loss-absorbing capacity (TLAC) data reported an aggregate incremental shortfall of €35.1 billion when adding back temporary leverage ratio exemptions.
• Group 1 banks' average Liquidity Coverage Ratio (LCR) fell from 140.9% to 138.4% while the average Net Stable Funding Ratio (NSFR) fell from 125.1% to 123.5%.
• Group 2 banks' results based on the unbalanced sample should not be compared with the previous period due to significant changes in the sample.

• The balanced data set for Group 1 banks showed a decrease in initial Basel III capital ratios in H1 2022, driven by an increase in RWA and a decrease in Tier 1 capital. Capital ratios are back to their pre-pandemic levels. The overall CET1 capital ratios for Group 1 banks in the balanced data set were 12.7% in June 2022.
• 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. Also, the decrease over H1 2022 has been particularly strong in Europe.

• For Group 1 banks, the Tier 1 minimum required capital (MRC) would increase by 2.8%, following the full phase-in of the final Basel III standards. This increase comprises a 2.7% rise in the combined risk-based components. Those are driven by positive contributions of the output floor (+1.7%), market risk (+1.6%), CVA (+0.4%) on the one hand and a reduction in credit risk (-1.0%) on the other hand. The rise of the combined risk-based components is accompanied by the positive effect of the leverage ratio requirements (+0.1%).
• The impact on MRC across regions varies considerably for Group 1 banks with a moderate decrease in the rest of the world (–3.9%), a small increase shown in the Americas (+1.9%) and, in contrast, a strong increase in MRC for European banks (+15.9%).
• For Group 2 banks, the overall 2.0% decrease in Tier 1 MRC is driven by an increase in the risk-based measure of 7.9%, stemming mainly from the output floor (+5.0%) and credit risk (+2.3%), while the leverage ratio measure partially offsets this increase at –9.9%.
• The average impact of the final Basel III framework on Group 1 banks at +2.8% is 40 basis points higher than at end-2021 (+2.5%), driven by a smaller decrease in the rest of the world region.
• For Group 2 banks, we notice two important changes in the recent period. One being a noticeable spike in the upper bound and in dispersion in June 2021 reflecting improvements in data reporting quality and leverage ratio exemptions accounting approach. The other being a significant drop in Group 2 overall impact and dispersion towards the negative reflecting a change in the Group 2 banks sample⁴ for the June 2022 exercise.

• For the full sample at the end-June 2022 reporting date, the average fully phased-in final Basel III Tier 1 leverage ratios are 6.0% for Group 1 banks and G-SIBs and 5.9% for Group 2 banks.
• For the balanced data set of Group 1 banks, the leverage ratio decreased from the prior period, driven by banks in Europe and the Americas. Leverage ratios in the Americas are at their lowest level since end-June 2014.
• Leverage ratios are still lower in Europe (5.0%) as compared with the Americas (5.8%) and the rest of the world (7.2%).

• For this reporting date, Group 1 banks registered total regulatory capital shortfalls amounting to €7.8 billion, compared with €0.1 billion at end-June 2020. This marks the highest value since H1 2020 for Group 1 banks and G-SIBs due to an improvement in data reporting quality.
• For Group 2 banks, H1 2022 is the first reporting date that shows no CET1, additional Tier 1 or total regulatory capital shortfall at the target level. This is in line with the aggregate total capital shortfall steadily decreasing since 2018. The total absence of capital shortfalls of Group 2 banks is due to a change in the sample.

• From end-June 2011 to end-June 2022, the level of Group 1 banks' CET1 capital has increased by 128% from €1,860 billion to €4,227 billion. Since end-December 2021, Group 1 CET1 capital has decreased by €47 billion (or 1.1%).
• At a regional level, while CET1 capital in the rest of the world is now more than three times its value in 2011, the increase in Europe and in the Americas was more limited at 71% and 84%, respectively. The decrease over H1 2022 was particularly strong in Europe.
• Overall, Group 1 banks' profits after tax decreased only marginally for the banks in the sample and stand at €263 billion in H1 2022. The dividend payout ratio stands at 33.5%, its highest value since end-2018. This can be explained by banks no longer facing the dividend payout restrictions that were introduced at the beginning of the Covid-19 pandemic.

• Annual after-tax profits for the Group 1 banks in the sample saw a particularly strong increase in Europe and the rest of the world compared with the 12-month period ending June 2021.
• Since the previous reporting date, the annual dividend payout ratios have increased in all regions, reaching pre-pandemic levels. In the Americas, they are still significantly below the record-high ratios observed in 2019 and 2020.

• As of end-June 2022 and for a balanced data set of Group 1 banks, credit risk⁵ continues to compose the dominant portion of overall minimum required capital (MRC), on average comprising 65.4% of total MRC. However, the share of credit risk has declined significantly from 75.6% at the end of June 2011.
• Conversely, the share of operational risk MRC increased sharply from 7.7% at end-June 2011 to 14.5% 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 have observed some "fading out" of the financial crisis losses so that, in 2020, the lowest loss level of the past 10 years was 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 have not yet had 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 31.9% to 38.0% between June 2011 and June 2021 before decreasing again to 37.0% at end-June 2022. The share of MRC for securitisation exposures declined from 5.8% to 2.1% between June 2011 and June 2022.

• The weighted average LCR at end-June 2022 is 138.4% for Group 1 banks and 220.1% for Group 2 banks.
• In the current reporting period there are three 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 €14.8 billion.
• The weighted average NSFR was 123.5% for Group 1 banks and 132.5% for Group 2 banks at end-June 2022.
• 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 €6.6 billion.⁶ The shortfall has increased by €0.6 billion since end-2021. The average LCR for this sample decreased to 138.7% from 143.0% at end-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 decreased to 122.8% from 124.3% at end-2021.
• Both ratios are still above pre-pandemic levels.

• For a balanced data set of Group 2 banks, the LCR shortfall has remained at zero since June 2019. The average LCR for the same sample of banks decreased by 15.1 percentage points to 208.3%.
• 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 decreased by 1.5 percentage points to 128.2%.
• Both liquidity ratios remain significantly above pre-pandemic levels. At end-2019, the LCR of the same sample of Group 2 banks stood at 163.0%, the NSFR at 117.3%.

• 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 increase in Europe is now reversing, although the LCR of European banks is still above end-2019 levels.
• 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 111.5% and 111.2% at end-December 2019, respectively, to 120.2% and 123.2% at end-June 2022. The increase in the Americas to an all-time high of 135.2% at end-June 2021 has been reversed. Both Europe and the Americas are now roughly in line with the rest of the world, which on average reports an NSFR of 123.8%.

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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  Please refer to the special feature on Regional distributions of Group 1 and Group 2 banks and their impact on results in the Basel III monitoring reports on page 107 at the end of this report.

⁵  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.

⁶  Note that the LCR shortfall in the entire sample at end-June 2022 is €14.8 billion.