This report collates information on European GSIBs’ prudential capital, leverage and liquidity ratios with updated statistics as at 31 December 2022.

It also illustrates the recent performance of the debt and contingent convertibles (CoCo) markets and the funding structure for banks in Europe as at March 2023.

Among the main findings of this report:

• European GSIBs end-point CET1 ratio declined to 13.9% in 2022 from a record high of 14.5% in 2021 but continued above pre-pandemic levels.

The factors behind the decline include higher RWAs, higher distributions and buybacks after a year of record profits for some institutions, regulatory headwinds, and a partial negative contribution from portfolio losses reflected in lower other comprehensive income. Retained earnings partially contributed to CET1 capital.

It is estimated that Minimum Distributable Amounts (MDA) buffers finalized 2022 with a large buffer of 420bps on a weighted average basis.

• CoCo risk premia rises following AT1 writedown of a large institution.

AT1 option-adjusted spreads (OAS) have rapidly increased during March 2023 following a volatile period for the banking sector and the write-off of the total balance of AT1 notes of a large Swiss GSIB.

AT1 OAS have increased the most for bonds rated below investment grade credit ratings reaching 20bps below pandemic highs, representing an increase of 340bps in March. Investment grade AT1s have also increased in March 2023 by 190bps but continues 120bps below pandemic highs. Risk premia for T2 notes have not increased at the same proportion as that of AT1s.

• Unratedness of corporates: The box on pages 22-27 discusses the issue of unratedness of European corporates and its repercussions for Basel 3 implementation in Europe.

Basel 3 maintains the current 100% risk weight (RW) for lending to unrated corporates (except SMEs) when calculating a bank's risk-weighted assets, regardless of the real credit quality of the corporate. This will be particularly impactful due to the implementation of the Output Floor which limits the benefits banks can derive from using internal models to calculate minimum capital requirements (RWAs generated by internal models cannot, in aggregate, fall below 72.5% of the risk-weighted assets computed by the standardised approaches).

It’s estimated around 75% of corporates in the EU are unrated. Market data also suggests that in Sweden and Norway, unrated bond issuers are significantly more prevalent than rated issuers.

The implementation of stringent risk weights for corporate lending will have asymmetric repercussions between the US and the EU, with a higher cost for EU corporates considering their higher reliance on bank lending.

For a more detailed analysis please refer to the AFME ISDA position paper on the Output Floor under the CRR3, available here.