The European Commission (EC) adopted a legislative package on banking rules under the Capital Requirements Regulation and the Capital Requirements Directive (CRR and CRD). The adopted package consists of a legislative proposal to amend CRD (Directive 2013/36/EU), a legislative proposal to amend CRR (Regulation 2013/575/EU), and a legislative proposal to amend CRR in the area of resolution. In addition to addressing several shortcomings identified in the prudential framework for banks, this package finalizes the implementation of the Basel III agreement in the European Union. The package will now be discussed by the European Parliament and Council. The proposed application date for the rules in this package is January 01, 2025.
The following are the key highlights of this package:
This package implements the international Basel III agreement, while taking into account the specific features of the banking sector in European Union, for example, when it comes to low-risk mortgages. The adopted proposal aims to ensure that “internal models” used by banks to calculate their capital requirements do not underestimate risks, thus ensuring that the capital required to cover those risks is sufficient. In turn, this will make it easier to compare risk-based capital ratios across banks, restoring confidence in those ratios and the soundness of the sector overall. The proposal aims to strengthen resilience, without resulting in significant increases in capital requirements. It limits the overall impact on capital requirements to what is necessary, which will maintain the competitiveness of the banking sector. The package also further reduces compliance costs, in particular for smaller banks, without loosening prudential standards.
This package will require banks to systematically identify, disclose, and manage environmental, social and governance (ESG) risks as part of their risk management. This includes regular climate stress testing by both supervisors and banks. Supervisors will need to assess ESG risks as part of regular supervisory reviews. All banks will also have to disclose the degree to which they are exposed to ESG risks. To avoid undue administrative burdens for smaller banks, disclosure rules will be proportionate. The proposed measures will not only make the banking sector more resilient, but also ensure that banks take into account sustainability considerations.
This package provides stronger tools for supervisors overseeing banks in European Union. It establishes a clear, robust, and balanced “fit-and-proper” set of rules, where supervisors assess whether senior staff have the requisite skills and knowledge for managing a bank. Moreover, as a response to the WireCard scandal, supervisors will now be equipped with better tools to oversee fintech groups, including bank subsidiaries. This enhanced toolkit will ensure the sound and prudent management of banks in European Union. It also addresses the issue of the establishment of branches of third-country banks in the European Union. At present, these branches are mainly subject to national legislation, harmonized only to a very limited extent. The package harmonizes European Union rules in this area, which will allow supervisors to better manage risks related to these entities, which have significantly increased their activity in the European Union over recent years.
The proposed measures implementing the outstanding elements of the Basel III reform are expected to lead to an increase in banks' capital requirements of less than 9% on average at the end of the envisaged transitional period in 2030 (compared to 18.5% if European specificities were not taken into account). The capital increase would be below 3% at the beginning of the transitional period in 2025. In response to the COVID-19 crisis, the Basel Committee decided in March 2020 to postpone the implementation deadline by one year to January 01, 2023, followed by a five-year phasing-in period of certain elements of the reform. However, EC proposes to give banks and supervisors additional time to properly implement the reform in their processes, systems, and practices, and start applying the new rules from January 01, 2025. The extended implementation period will allow banks to focus on managing financial risks stemming from the COVID-19 crisis and on financing the recovery and give them enough time to adjust before the reform reaches its full effect.
Keywords: Europe, EU, Banking, Basel, Regulatory Capital, Internal Models, Market Risk, ESG, Disclosures, Resolution Framework, Output Floor, Third-Country Branches, EC
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