by basel iii. second, the european banking authority estimates that, for eu banks, the final basel iii package will lead to an aggregate tier 1 capital shortfall of €34. 4 billion. is that a lot? in 2016, the largest banks in the euro area earned €50 billion – net, after taxes, and in a difficult environment. also, the capital shortfall refers to the end of the transition period, which is nine years away. most banks should be able to earn their way out of potential shortfalls. to sum up, basel iii preserves risk sensitivity in a sensible way. at the same time, banks will be able to handle its impact and, in the long run, they too will benefit from a more stable banking system. thank you for your attention. 3 / 3 bis central bankers'speeches

sensitive capital requirements if risks cannot be measured and modelled. basel iii therefore aligns the degree of risk sensitivity with the extent to which it is possible to measure and model risks. second, there are some more conservative haircuts on collateral and some input floors. these input floors lie beneath the parameters for “ probability of default ” and “ loss given default ”. and there will be floors beneath the “ exposure at default ” calculation as well. these floors work bottom - up ; they will keep banks from feeding their internal models with excessively low inputs. this serves as a safeguard as it prevents capital requirements from being set too low. and, yes, these input floors make the rules a bit less risk - sensitive. but we need to look at this in absolute terms – for residential mortgages, the input floor increases from three basis points to five basis points. five basis points correspond to a once - in - 2, 000 years default rate! is such a floor really too conservative? at global level, the bottom - up reforms see small increases in capital for exposures to other banks, large corporates and equity investments. this is somewhat offset 1 / 3 bis central bankers'speeches by a reduction in risk weights for loans to small and medium - sized enterprises. third, there is the hotly debated output floor. it ensures that risk - weighted assets calculated with internal models do not fall too far below those calculated with standardised approaches. “ too far below ” means they must reach at least 72. 5 %. does that kill risk sensitivity? no, it does not. obviously, there is still room for banks to apply individual risk weights and to benefit from lower capital requirements for classic, low - risk banking business. and more than that : the effective floor might even be lower than 72. 5 %. this is due to the fact that many banks apply the standardised approaches to at least some exposures. this implies that, depending on the share of assets still under the standardised approach, the effective floor for them could be lower than 72. 5 %. at the same time, basel iii makes the standardised approaches themselves more risk - sensitive. let me give you just one example : residential mortgages. under basel ii, the standardised approach assigned the same risk weight to almost all such mortgages. but in basel iii, the risk weights of residential mortgages depend on the loan - to - value ratios. the output floor is thus set in relation to a benchmark,