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Man on top of a mountain photographing volcanoes in Sao Miguel, Azores

As the Basel deadline nears, are banks up for the challenge?

The EY survey shows wide disparities in readiness and approach to Basel 3 Reforms as regulators increase scrutiny following bank failures.

In brief

  • Implementation of the capital reforms is growing more complex and expensive, with data and technology cited as the top two challenges.
  • Approaches to implementation vary widely, with differing views on how these changes contribute to broader business transformation.  

With less than two years until the 1 January 2025 go-live in key jurisdictions, the question of how to balance banks’ capital levels has become even more difficult. While the overall health of the global banking sector seems robust, recent bank failures, volatile energy prices, inflation and higher interest rates have led to increased regulatory scrutiny of the Basel 3 Reforms. Will they still be effective enough to ensure stability of the global financial system?
 

These tensions are reflected in regulators’ differing approaches to the finalization of the Basel updates. Proposals from the EU (in 2021) and the UK (in 2022) differ somewhat from the original global template, and those from the US – likely to be released shortly – may add to the inconsistency.
 

It is against this background that we conducted our fourth Global Basel 3 Reforms survey, which assesses banks’ readiness for the changes and the key challenges they face.

Download the full survey

PDF (13 MB)

Our survey revealed three key themes:
 

1. Basel 3 Reforms don’t mean the same thing for everyone

The banks we spoke with have diverse views on scope and delivery. Some are adopting a minimum compliance mindset, while others, particularly global systemically important banks (G-SIBs), see wider business benefits.

The spend of the reforms for G-SIBs is more than
3X
higher than that for non-G-SIBs

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Readiness also varies considerably. Some banks are still at mobilization while others are nearly ready to go live.
 

2. Delivering the changes is complex, expensive and becoming more so
 

One quarter of banks are spending over US$100m to deliver the Fundamental Review of the Trading Book (FRTB), a set of reforms to the Basel regulatory framework that aims to improve the way banks calculate their capital requirements for market risk. Three-quarters of respondents say FRTB costs have increased or stayed the same.
 

Data and technology, especially automation and cloud computing, account for the biggest spending. This includes implementation of, or changes to both vendor and in-house solutions.

Delivering change
50%
of banks identify data as their number 1 or number 2 challenge
Delivering change
48%
of current average spending is on data and technology

3. Capital impacts are not evenly distributed, and mitigation is complicated

Banks report very different capital impacts – there are examples of both capital increases and decreases in every category of risk. More concerning is the comprehensiveness of banks’ understanding of, and ability to mitigate, capital impacts.

only
18%
of banks know how they are going to allocate capital impacts of the standardized floor

This article is co-authored by Adam Girling, EY Americas Financial Performance and Risk Leader; Sonja Koerner, EY EMEIA Finance Services Prudential Leader; David Scott, EY Asia-Pacific Financial Services Risk Management Leader; and Stuart Thomson, UK Financial Services Risk Leader, Ernst & Young LLP.
 

(Read the related press release)

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Summary

Increased scrutiny surrounding the Basel 3 Reforms has intensified in recent months, following failures and distress in some banks. However, the implementation of the reforms, scheduled to take effect in key jurisdictions from 1 January 2025, remains a significant challenge for banks worldwide. Our latest survey reveals notable disparities in banks’ approach and readiness, resulting in varying costs and potential capital impacts. As banks move forward, they will need to balance a focus on operational implementation with astute commercial decision-making, while remaining agile in their response to regulatory and environmental changes.

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