Output floor cliff edge effects threaten EU banks

The phase-in of the output floor on modelled capital requirements set by the Basel Committee may cause a sudden jump to top banks’ minimum charges in 2027, the last year of the transition.

The Basel III reform package mandates a five-year transitional period for implementing the output floor. The floor will be set at 50% of standardised capital requirements in 2023 and gradually move up to the fully phased-in level of 72.5% in 2028.

Data from the European Banking Authority (EBA) suggests that

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