Earlier in May, risk.net reported an increase in BNP Paribas’ operational risk-weighted assets (RWAs) following the introduction of Capital Requirements Regulation III (CRR3) in the EU effective January 1st 2025. CRR3 is an implementation of elements of the Basel III reforms in the EU. BNP Paribas’ operational RWAs were reported to increase by 60.3% in the first quarter of 2025 as a result of the new rules coming into force.
This jump in RWAs may indicate a sign of things to come in the EU for other firms, as Basel III comes into force in this jurisdiction. More firms will be required to move away from their internal models to determine Pillar 1 requirements in favour of relying on the new Standardised Approach (also known as new SA or SMA) prescribed as part of Basel III.
There is some uncertainty around the exact impact of these new requirements, however. The rollout of Basel III across the globe has been delayed, and its impact on firms varied as the Basel Committee for Banking Supervision (BCBS) offered national regulators discretion on some aspects of the implementation. In the years following the BCBS confirmation of the standard in 2017, ORX has continued to monitor how the rollout has progressed and its potential impact on firms.
The new Standardised Approach and its implementation across the globe
The implementation of Basel III assumed a divergent path over the past several years. As of May 2025, several jurisdictions including Australia, Canada, Switzerland and the EU have implemented the new SA. The situation remains less clear in the US, with an uncertain political landscape resulting in little information around concrete timeframes when the new regime will be implemented. Some jurisdictions such as the UK delayed the implementation of Basel III until 2027 partly as a result of the lack of clarity in the US.
Where Basel III has come into play, banks are now required to move away from Advanced Measurement Approach (AMA) models to calculate operational risk Pillar 1 capital. Instead, the new SA considers each firm’s size and economic activity. A financial statement-based proxy for operational risk known as the Business Indicator (BI) is calculated, with a multiplier applied to the figure based on firm size.
In some jurisdictions, a scaling factor based on banks’ average operational losses (known as the internal loss multiplier or ILM) is applied to the BIC.
The impact of national discretion on operational risk capital under the new regime
An analysis of the new SA was carried by ORX in 2023. Calculating the ILM using historical ORX global banking loss data, and using an approximation of the BIC, the ILM was observed to be typically greater than 1 within the industry. Using the original new SA calculation, this would result in a jump in Pillar 1 capital charges as this would act as a multiplier to the BIC. Where national regulators would opt to exercise their discretion to set the ILM to 1, in most cases firms would benefit from lower Pillar 1 capital requirements.
The European regulator opted to set the ILM to 1 for all EU banks, therefore basing Pillar 1 capital entirely on the BIC. As described above, this move may have been intended to mitigate the potential increase in Pillar 1 charges that came into play from January 1st, in particular for larger banks. However, as the recent increase in BNP Paribas’ operational RWAs suggests, the ILM being set to 1 may not fully shield firms from a large jump in capital charges caused by the move to the new SA. In some cases, it may even result in increased capital requirements. With the ILM being included in calculations, more conservative or risk-averse firms may have benefitted from lower capital charges, due to the ILM scaling down their overall number due to more a more favourable loss history. With the ILM being set to 1, this would no longer be possible.
Clearly, the effects of regulatory discretion on the ILM can have wide-ranging consequences for firms’ capital levels. ORX explored these consequences as part of its 2024 Capital Benchmark. Participants submitted data as part of a template mirroring the Quantitative Impact Study exercise carried out by the BCBS. ORX subsequently benchmarked a number of data points. This included producing a view of region-specific standardised capital to reflect the differences in regulatory guidance around implementation of the new SA.
Figure 1: Region specific standardised capital as a percentage of current capital
Figure 1 highlights these differences. When comparing capital determined via region-specific implementations of the new SA versus capital determined by existing capital approaches, median capital levels increase considerably for European and UK firms. The 2024 data suggests that the typical expected increase in Pillar 1 capital for European firms will be 21% (as compared to a 30% decrease in the US). A wide range of values may be observed within some jurisdictions such as the Western Europe, indicating a range of possible capital impacts resulting from the new SA coming into force across different firms. This typically ranges between a 9% increase and a 36% increase.
The increase seen by BNP Paribas looks to be on the more extreme end of the spectrum – raising the question of whether such significant changes are primarily due to the calculation of the Business Indicator (BI), or due to the methodology applied under the previous framework. The Capital Benchmark study enables a detailed analysis on the components of the BI broken down by region and bank size, thus allowing participants to compare their own BI calculations against their peers’:
- For example, within the EU, there is a wide range in the contribution of the Interest Leases and Dividend Component (ILDC) to firms’ BI. On average, the ILDC drives more than half of the total BI calculation among EU firms
- The Services Component (SC) plays on average a lesser contribution to the BI, with a wide range of values nevertheless observed in terms of its contribution to firms’ BI.
- The Financial Component (FC) plays a comparatively small role in relation to the BI.
The range of values observed for the ILDC and SC will contribute to variations in EU firms’ Pillar 1 capital numbers under the CRR3 regime.
Note the above view was based on the latest known assumptions around the region-specific implementation of the new SA as of mid-2024. These were collected based on the latest available regulatory guidance at the time, shown in Figure 2.
Figure 2: Underlying assumptions around the implementation of the new SA
These assumptions are subject to change in some jurisdictions. For example, the September 2024 recommendations from the Federal Reserve (‘The Next Steps on Capital’) suggest that US firms may no longer be expected to consider loss history as part of their operational risk charge calculations, though final rules are yet to be determined. ORX will continue to reflect the latest-known guidance in future Capital Benchmark studies.
Future outlook
As can be observed above, the varied way in which the new SA was implemented across the globe resulted in differences to capital charges and contributes to a complex capital picture in 2025. To help our membership better understand the latest state of play and keep up with developments, ORX will continue its work in the space. This will include:
- Continuing to produce Annual Banking Capital Benchmarks, where participating firms can benchmark a wide range of metrics relating to the new SA, including its specific components. The next Capital Benchmark study is underway and results will be published in Q3 2025.
- Based on member feedback and demand, in the future revisiting our Pillar III disclosure collation exercise. This aims to aggregate financial information including total assets and income and risk weighted assets from publicly available annual reports and Pillar III disclosures. These values can be used for high level capital benchmarking and complement the data produced as part of our Annual Banking Capital Benchmarks.
- Following the latest state of play with regards to the Basel III roll-out across the globe via the ORX Basel III implementation tracker.
If you like to learn more or have any suggestions for further work that ORX may undertake to support in this space, then please get in touch.
