RWA increase puts ABN’s core ratio closer to Basel III estimate

Higher RWAs shrink gap between actual and pro forma ratios

ABN Amro saw its Common Equity Tier 1 (CET1) ratio converge sharply towards its expected level under the final Basel III reforms in the fourth quarter, mainly the result of regulatory add-ons that increased risk-weighted assets (RWAs).

The bank reported a CET1 ratio of 16.3% at end-December, just 30 basis points higher than what it estimates the ratio will be in 2025. In the third quarter, the gap was 180bp, based on a reported ratio of 17.8%.

 

 

ABN Amro attributed the drop in its reported ratio to updated retail credit scenarios inflating operational RWAs, the introduction of a risk-weight floor on Dutch mortgages and other unspecified model migrations and add-ons.

In a call with analysts on February 9, chief financial officer Lars Kramer also mentioned a drop in non-core corporate and investment banking (CIB) RWAs, as well as a softer-than-expected Basel III implementation proposal by the European Commission, as two other factors that helped shrink the gap between actual and pro forma ratios.

What is it?

The final batch of Basel III reforms – dubbed Basel IV by some in the industry – revises parameters for the regulator-set standardised approaches, constrains internal model usage for credit risk and removes banks’ use of internal models for credit valuation adjustments and operational risk.

The reform package also introduces an output floor to limit RWAs calculated using internal models to 72.5% of RWAs using the standardised methodology, and puts forward a leverage buffer for global systemically important banks.

The current proposals for the reforms’ implementation in the European Union envision transitional arrangements to soften the impact of the original reforms on several fronts. They also push back implementation to 2025 – despite the Basel Committee for Banking Supervision having already granted a reprieve from 2022 to 2023 due to the Covid-19 pandemic.

Why it matters

ABN Amro has been preparing for the final Basel III framework for a long time. Restructuring its CIB, it jettisoned assets most liable to higher risk-weights from the reforms. And when pricing some mortgages, the bank made sure to consider the implications of the future output floor, chief risk officer Tanja Cuppen told investors. In other words, executives were never under the illusion the 17–18% CET1 ratio range the bank has been operating under over the past five years was here to stay.

This doesn’t mean there won’t be any more revisions. One major point of uncertainty is whether the Basel III output floor will be additive to the Dutch residential mortgage floor, which became binding on January 1. Plus, the European Commission’s implementation plan is still in the draft phase and ABN Amro’s CET1 ratio may diverge further.

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