ABN Amro offloaded €4.5 billion ($5.2 billion) of non-core risk-weighted assets (RWAs) in the second quarter, as the bank sought headroom to absorb incoming Basel IV capital reforms.

RWAs tagged for wind-down at the corporate and investment bank (CIB) totalled €5.7 billion at end-June, down 44.1% from three months prior and 59% compared to the second quarter of 2020, when the restructuring plan was first announced.

The non-core divestitures – which mainly comprise North American oil and gas assets – were offset by a €2.4 billion, or €8.1 billion, quarterly increase in CIB’s core RWAs, which hit €32.1 billion.

The bank’s RWAs totalled €107.2 billion at end-June, down 4.3%, or €4.8 billion, quarter on quarter. Common Equity Tier 1 (CET1) capital was equal to 18.3% of total RWAs, up a full percentage point from three months prior.

What is it?

The final batch of Basel III reforms – sometimes dubbed Basel IV by 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 (CVAs) and operational risk. 

The reform package also introduces a leverage buffer for global systemically important banks. A risk-weighted asset output floor also limits RWAs calculated using internal models to 72.5% of RWAs using the standardised methodology. 

Initially scheduled for January 2022, the deadline for implementing the reforms was pushed back by a year due to the Covid-19 pandemic.

Why it matters

Since the Basel IV package was agreed, ABN Amro has been preparing to take the capital hit in its stride. At end-2019, the bank’s CET1 ratio pro forma for the reforms was 410 basis points lower than reported. As of June, that gap had shrunk to 230bp, and executives expect it to close altogether by the end of the year.

The CIB clean-up has been a linchpin of that effort, with the bank getting rid of RWAs most liable to bloating under the reforms. The bank said Basel IV would have inflated non-core RWAs by just 10% at end-June, compared with 33% a year earlier.

The divestitures arguably also helped improve ABN Amro’s standing in the eyes of investors.

Disposed assets included trade and commodity finance and North American oil and gas lending – portfolios that produced huge losses at the outbreak of Covid-19 last year and are likely incompatible with the bank’s climate-friendly ambitions.

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