The Bank of England has published a staff working paper assessing the macroeconomic effects of the Basel III output floor, which prevents banks’ internally modelled risk weighted assets from falling below a proportion of those calculated under the standardised approach. Using a model estimated for the UK economy, the authors find that the floor limits declines in risk weighted assets during economic expansions, reducing the cyclicality of capital requirements and moderating increases in the credit-to-GDP ratio. The analysis identifies differing effects across lending categories. When the floor binds, mortgages become relatively more costly in capital terms and corporate loans relatively less costly because of differences between internal model and standardised risk weights. The model therefore shows weaker mortgage growth but stronger lending to firms during expansions, with the mortgage effect more than offsetting the corporate lending effect at the aggregate credit level. Under simulated technology shocks, the floor reduces volatility in the credit-to-GDP ratio by 12% and in risk weighted assets by 20% compared with an internal models regime. The paper assesses the floor at its final calibration of 72.5% and does not model the transition. In the UK, the requirement is scheduled to take effect in January 2027 and reach 72.5% in January 2030.
2026-09-04Bank of England
Bank of England research finds Basel III output floor reduces capital requirement and lending cyclicality
Bank of England staff research finds that the Basel III output floor reduces the cyclicality of risk weighted assets, capital requirements and lending. During expansions, it dampens mortgage growth but strengthens lending to firms, while moderating aggregate credit growth. The UK floor is scheduled to take effect in January 2027 and reach 72.5% in January 2030.