Impact on the banking sector

As a general rule, the Basel Committee intends to maintain the current capital level in the banking sector, but some banks will undoubtedly enjoy a capital relief under the CRD. Four structural factors are likely to lead to a capital reduction when the CRD is implemented:

• Banks with a relatively high exposure to retail customers and a relatively large mortgage loan portfolio
  
• Banks with many highly rated customers in their portfolio
  
• Banks with many different types of customers in their portfolio – diversification at customer level
  
• Banks with exposure to a number of different countries – geographical diversification
  

The Basel Committee has conducted a number of Quantitative Impact Studies (QIS), focusing on the banking industry's future capital level under Pillar I. The results of the fifth QIS were published in June 2006.

The results, which are presented in the tables below, show that the minimum required capital (total and Tier 1) needed to cover credit risk is expected to fall. The fall is most significant for banks choosing the most advanced approaches to estimating credit risk.

Average change in total minimum required capital relative to Basel I (%)

	Standard	IRB F	IRB A	Most likely*
G10 Group 1	1.7	-1.3	-7.1	-6.8
G10 Group 2	-1.3	-12.3	-26.7	-11.3
CEBS Group 1	-0.9	-3.2	-8.3	-7.7
CEBS Group 2	-3.0	-16.6	-26.6	-15.4

*The participating institutions submit calculations for more than one method. "Most likely" includes the results under the method the institutions are most likely to use.

Source: BIS

The retail mortgage portfolio is the single most important factor for the reduction in the minimum required capital under all three approaches. Operational risk, which was not included in Basel I, is the single most important factor pulling in the other direction. For Group 1 banks, the IRB approaches give capital reductions for the corporate and SME portfolios, and capital increases for the equity portfolios.

Average change in minimum required Tier 1 capital relative to Basel I (%)

	Standard	IRB F	IRB A	Most likely*
G10 Group 1	1.8	-4.0	-11.0	-10.6
G10 Group 2	-1.2	-14.0	-26.2	-12.9
CEBS Group 1	-0.5	-4.7	-9.5	-8.9
CEBS Group 2	-2.6	-16.4	-26.1	-15.1

*The participating institutions submit calculations for more than one method. "Most likely" includes the results under the method the institutions are most likely to use.

Source: BIS

Group 2 banks show a larger reduction than Group 1 banks, mainly since Group 2 banks have a larger share of retail exposure.

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Last updated/revised on January 31, 2008