The European Central Bank has warned against a possible delay to the implementation of the last major component of Basel III for lenders in the EU, in line with similar postponements in the US and UK, insisting that the framework provides “a good basis for sound risk management”.

The bloc’s central bank argued this week that while a delay may seem like a “simple solution”, it would fail to resolve uncertainty around how the implementation of new capital requirements for market risk, known as the Fundamental Review of the Trading Book, will ultimately be applied and could disrupt progress already made by banks.

“Supervisors and banks have already done considerable work on FRTB implementation ahead of the framework’s planned entry into force in 2026,” the bank said in a statement. “A delay would unfairly penalise banks that have duly prepared and are ready to move to a more risk-sensitive approach.”

The ECB’s intervention comes following the recent conclusion of a consultation launched in March by the European Commission on whether to proceed with the current timeline of introducing the new requirements in January 2026, delaying implementation by a year, or introducing temporary adjustments to the framework for up to three years. The commission is expected to announce its decision next month. 

Level playing field

While the bulk of the Basel III reforms, a global framework of banking regulations designed to strengthen banks’ resilience to shocks, took effect in the EU at the start of 2025, the implementation of the FRTB framework was postponed last year to January 2026. At the time, the commission cited the need to maintain a level playing field, especially as key jurisdictions such as the US had yet to finalise their own Basel III rules.

The Federal Reserve in September bowed to pressure from the US banking industry and reduced capital requirements for banks under Basel III, known locally as Basel Endgame, with widespread speculation that the Trump administration will further loosen the rules or scrap them entirely. 

With no clear timeline yet specified by US regulators, and the UK delaying its own FRTB rollout to 2027, Brussels is under pressure to grant a further extension. 

While the ECB insists that the impact of the FRTB is broadly “manageable”, the European Banking Federation has expressed concerns about the regime’s capital impact and competitive implications for the bloc’s lenders. 

“If you can’t offer to corporate clients the same products and conditions [as banks elsewhere can] from day one, you will lose competitiveness in the trading business,” said Gonzalo Gasos, Head of Banking Supervision at the EBF, in a June 2024 interview. 

Material impact

An executive at a large European bank told The Banker that the March 2025 Basel III Monitoring Report from the BIS showed that under FRTB, market risk capital charges rise by 54 per cent for typical large banks, while smaller banks see only a 2 per cent increase.

“That’s material impact on European investment banks,” they said, arguing that further changes to the FRTB are required due to fundamental flaws in how the rules are drafted and calibrated. 

“There’s broad consensus across the industry that some level of adjustment is necessary.”

One concern is that the FRTB tends to assume that asset prices within a portfolio will move in the same direction during stress events. 

“But as we know from reality, that’s not always the case. For example, if a bank holds a portfolio with Apple and Microsoft shares, it’s reasonable to expect both equities to respond similarly to broad tech sector movements or macroeconomic shocks. But if that same portfolio holds Apple shares and German government bonds, the dynamics change,” the executive said. 

This assumption oversimplifies real-world market dynamics and fails to capture diversification effects across different asset classes, they said, the result being that genuinely well-diversified portfolios can face disproportionately high capital charges.

‘Very manageable’

However, some civil society voices are backing the ECB’s stance. 

“Their message is clear: the financial system must be ready for stress,” said Julia Symon, head of research and advocacy at Finance Watch, a Brussels-based non-profit. “Banks have had ample time to prepare, and the impact of the new rules is very manageable.”

She added that in times of rising geopolitical risk and market volatility, EU banks must maintain a robust approach to market risk, a message emphasised by the ECB.

The ECB warned against relaxing risk regulations in the midst of a volatile economic climate.

“Geopolitical risks, including trade tensions and military conflicts, are already affecting markets,” it said, noting that shocks can escalate quickly through fire-sales and contagion effects. It argued that the FRTB offers a more risk-sensitive approach to capital requirements and provides “a good basis for sound risk management” in the current environment.