In response to the financial and economic crisis of 2008, a revision of the Basel standards was carried out to make the financial sector healthier and more risk-resistant. The first phase of the reform focused on strengthening capital and liquidity buffers. The final elements of the reform package mainly focus on banks' risk management. The European Commission will publish a legislative proposal in autumn 2021 to implement the final Basel III rules. It is important to strike a balance between capital requirements and the financing of the economy.

The tightened rules are not without impact on the financial sector and the real economy. Research commissioned by the European Banking Federation shows that the final Basel III standard is causing the capital needs of European banks to soar: according to the report, this would involve 170 to 230 billion euros in additional capital needs.

It is essential to emphasize that Belgian banks have already made great efforts to achieve a resilient banking system. Not only by building robust capital buffers, but also by the realization of reliable internal models for risk calculation. The structural improvement in risk management was also confirmed by the European Banking Authority in its annual benchmarking.

Higher capital requirements for banks translate into higher costs, as equity is a more expensive source of funding than debt. When banks are already highly capitalized, these higher costs can have negative implications for the real economy. In practice, this can lead to a higher credit cost, possibly resulting in falling credit demand and fewer investments.

It is important to investigate and implement the most suitable option for implementation of the final Basel III rules. That is why the Belgian banking sector is making a number of concrete proposals to better align the reforms with the Belgian economy. The proposals, which are fairly technical in nature, are designed to reduce the increase in banks' capital buffers and to mitigate the negative impact on public sector financing and unrated companies. Maintaining optimal bank financing for SMEs is of course particularly important in these post-covid times.

In other words: how to implement the final Basel III package without significantly increasing the capital requirements for banks, and thus limiting the impact on the economy and customers?

Because even though the Belgian banks are well prepared and have made the necessary efforts in recent years to increase their resilience, the reforms cannot be blindly transposed into European legislation. The implementation must take into account the economic consequences of increased capital requirements and the characteristics of the Belgian market. Moreover, the banking sector must still be able to deal with the consequences of the corona crisis as a priority, so an additional negative shock is anything but desirable.

To ensure both economic and financial stability, the impact on capital requirements should be as limited as possible. This keeps the credit cost for the consumer within limits. In line with Basel's objective, banks remain alert at all times to potential risks and maintain sufficient reserves so that they can absorb shocks and continue to guarantee lending.