The Impact of the Output Floor in the Final Basel III Package

In December 2017, the Basel Committee agreed on a new regulatory framework to address identified shortcomings of the original Basel III agreement, denoted the ‘Final Basel III Standard’. The reform introduces the concept of an output floor, with the motivation to create a backstop for excessively low modelled capital requirements compared to a realistic assessment of risks, and to enhance comparability of capital ratios between banks. How exactly this output floor and the Final Basel III Standard in general are implemented will determine its effect on the Danish banking sector and the Danish economy.

In light of the upcoming implementation of the package and our previous research, Finance Denmark has asked Copenhagen Economics to analyse the impact of the different options on the Danish banking sector and the real economy.

If the reform is implemented according to the European Banking Authority’s (EBA) main scenario, we find that:

We find that an alternative implementation of the output floor, the so-called parallel stacks approach to be more consistent with economic considerations as well as the original spirit behind the Final Basel III Standard. This way of implementing the reform would:

The study is commissioned by the Finance Denmark.