Highlights of the Basel III monitoring exercise as of 31 December 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 31 December 2022.² 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. At the jurisdictional level, there may be mandatory data collections ongoing, which also feed into this report. Data were included for 178 banks, including 111 large internationally active ("Group 1") banks, among them 29 G-SIBs, and 67 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 31 December 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-June 2022 reporting period, the average Common Equity Tier 1 (CET1) capital ratio under the initial Basel III framework increased from 12.7% to 13.1% for Group 1 banks in H2 2022.
• The average impact of the Basel III framework on the Tier 1 minimum required capital (MRC) of Group 1 banks is slightly higher (+3.0%) when compared with the 2.8% increase at end-June 2022. The average increase for G-SIBs is 2.9%.
• After the increase in capital shortfalls in June 2022, capital shortfalls under the final Basel III framework decreased again in H2 2022 but still remain above the end-2021 level for Group 1 banks and G-SIBs.
• Applying the 2022 minimum total loss-absorbing capacity (TLAC) requirements and the initial Basel III framework, four of the 24 G-SIBs reporting TLAC data reported an aggregate incremental shortfall of €37.4 billion.
• Group 1 banks' average Liquidity Coverage Ratio (LCR) fell from 138.2% to 132.0% while the average Net Stable Funding Ratio (NSFR) increased from 123.5% to 124.4%.
• Group 2 banks' results based on the unbalanced data set should not be compared with the previous period due to significant changes in the sample.

• The balanced data set for Group 1 banks showed an increase in initial Basel III capital ratios in H2 2022, driven by an increase in Tier 1 capital of larger magnitude than the increase in RWA. The overall CET1 capital ratios for Group 1 banks in the balanced data set were 13.1% in December 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 was reversed before 2014.

• For Group 1 banks, the Tier 1 minimum required capital (MRC) would increase by 3.0%, following the full phase-in of the final Basel III standards. The incremental impact of leverage ratio requirements being 0.2% in December 2022, the increase in MRC is mainly attributable to risk-based components. This dynamic is positively driven by CVA (+0.5%), market risk (+0.9%), operational risk (–0.2%) and the output floor (+2.7%), whereas credit risk (–1.0%) and other Pillar 1 requirements (–0.1%) have a negative impact on the overall increase in MRC.
• The impact on MRC across regions varies considerably for Group 1 banks with a moderate decrease in the rest of the world region (–2.6%), a small increase in the Americas (+0.9%) and, in contrast, a strong increase in MRC for European banks (+14.6%).
• For Group 2 banks, the overall 6.6% increase in Tier 1 MRC is driven by an increase in the risk-based measure of 12.3%, stemming mainly from credit risk (+6.8%) and the output floor (+4.1%) while the leverage ratio partially offsets this increase at –5.7%.
• The average impact of the final Basel III framework on Group 1 banks, at +3.0%, is 20 basis points higher than at mid-2022 (+2.8%).

• For the unbalanced data set at the end-December 2022 reporting date, the average fully phased-in final Basel III Tier 1 leverage ratios are 6.1% for Group 1 banks, 6.0% for G-SIBs and 6.3% for Group 2 banks.
• For the balanced data set of Group 1 banks, the leverage ratio increased from the prior period, driven by banks in Europe and the Americas. This increase in leverage ratios in the Americas contrasts with the sharp decrease that started at end-June 2020.
• Leverage ratios are still lower in Europe (5.1%) as compared with the Americas (6.1%) and the rest of the world (6.9%).

• For this reporting date, Group 1 banks registered total regulatory capital shortfalls amounting to €3.2 billion, compared with €7.8 billion at end-June 2022.
• For Group 2 banks, the aggregate total capital shortfall is further decreasing from its high in 2018. The total amount of capital shortfalls of Group 2 banks was €1.1 billion in December 2022. While the shortfall was zero at the June 2022 reporting date, this was due to a significantly smaller sample.

• From end-December 2011 to end-December 2022, the level of Group 1 banks' CET1 capital increased by 130% from €1,717 billion to €3,943 billion. Since end-June 2022, Group 1 CET1 capital has increased by €100 billion (or 2.6%).
• Over H2 2022, CET1 capital remained unchanged in Europe and increased slightly in the Americas and in the rest of the world region. While CET1 capital in the rest of the world is now more than three times its 2011 value, the increase in Europe and in the Americas has been more limited, at 72% and 89% respectively.
• Overall, Group 1 banks' profits after tax increased for the banks in the sample and stood at €248.4 billion in H2 2022, above pre-pandemic levels. The dividend payout ratio stood at 34.9%, 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 significant decrease in Europe and the Americas (–19.8% and –20.3% respectively) while they strongly increased in the rest of the world region (+14.7%) compared with the 12-month period ending December 2021.
• Since the previous reporting date, the annual dividend payout ratios have increased in Europe and the Americas. They are still significantly below the record-high ratios observed in 2019 and 2020 in the Americas, while they are at pre-pandemic levels in Europe and the rest of the world.

• As of December 2022 and for a balanced data set of Group 1 banks, credit risk⁴ continues to be the dominant portion of overall MRC, on average covering 65.9% of total MRC. However, the share of credit risk has declined significantly from 75.6% at end-June 2011.
• The share of operational risk MRC increased sharply from 7.7% at the end of June 2011 to 14.9% at the end of 2018 and then decreased slightly to reach 13.9% at the current reporting date. 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 crises, which are factored into the calculation of MRC for operational risk under the advanced measurement approach. More recently, there is some "fading out" of the financial crisis losses so that in 2020, the lowest loss level of the past 10 years is 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 are not yet having 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 over the observed period from 32.5% at end-June 2011 to 38.0% at the current reporting date. The share of MRC for securitisation exposures declined from 5.8% to 1.3% between June 2011 and December 2022.

• The weighted average LCR at end-December 2022 is 132.0% for Group 1 banks and 188.4% 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 €15.1 billion.
• The weighted average NSFR was 124.4% for Group 1 banks and 132.2% for Group 2 banks at end-December 2022.
• All banks reported an NSFR that exceeded 100%.

• For a balanced data set of Group 1 banks, all but three banks meet a 100% LCR at end-2022, resulting in an aggregate shortfall of €11.3 billion.⁵ The shortfall has increased by €4.8 billion since June 2022. The average LCR for this sample decreased to 135.3% from 138.4% at end-June 2021.
• There was again no agreggate NSFR shortfall for the balanced data set of Group 1 banks. The average NSFR for the same sample of banks has increased from 123.2% to 125.1% in December 2022.
• While the NSFR ratio remains above pre-pandemic levels, the LCR is below its end-2019 level.

• For a balanced data set of Group 2 banks, the LCR shortfall has remained at zero since June 2017. The average LCR for the same sample of banks decreased by 30.7 percentage points to 180.4% in December 2022.
• 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 increased by 2 percentage points to reach 129.7% in December 2022.
• The LCR remains above pre-pandemic levels while the NSFR continues to increase beyond pre-pandemic levels. At end-2019, the LCR of the same sample of Group 2 banks stood at 163.3%, the NSFR at 117.1%.

• Since 2019, the weighted average LCR for each of Europe and the rest of the world has been above 140%, while the average LCR of the Americas is around 121%. 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 had tended to converge gradually before the onset of the pandemic. The regions with lower end-2012 average ratios saw significant increases, in particular between end-2012 and June 2014, and Europe has seen such increases 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 111.4% and 114.2% at end-December 2019, respectively, to 119.8% and 131.7% at end-December 2022. After a significant drop during the previous exercise, the NSFR of banks in the Americas is again approaching its all-time high value (134.9%) of end-December 2021

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¹    See 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    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.

⁵    Note that the LCR shortfall in the entire sample at end-December 2022 is €15.1 billion.