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    EBA Proposes Operational Risk Standards Under Final Basel III Package

    February 26, 2024

    The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023. The EU authorities expect to publish the final Banking Package in the form of amendments to the Capital Requirements Directive (CRD: 2013/36/EU) and Regulation (CRR: 2013/575) in the Official Journal of the European Union in 2024. As per its roadmap, EBA expects to finalize the most significant components of its mandates ahead of the application date of January 01, 2025. Earlier this month, EBA had proposed standards for residual risk add-on hedges under market risk rules as well as a technical package under reporting framework 3.4. Now, very recently, EBA has proposed operational risk requirements under Pillar 3 and the business indicator (BI) framework for operational risk as further steps toward implementing the final Basel III reforms.

    EBA launched, on February 20, 2024, a consultation on two sets of draft regulatory technical standards (RTS) and one set of implementing technical standard (ITS) aiming to clarify the composition of the new BI at the heart of the operational risk capital requirements calculation. The consultation period ends on May 21, 2024. The draft RTS on the specification of the BI items provides a list of typical items developed for each component of the BI, in line with the work provided in the EBA Policy Advice on the Basel III Reform; they also include subsequent amendments to accounting standards and clarify the elements that are to be excluded from the BI. The draft ITS map, where possible, the typical items of the BI to their corresponding reporting cells in FINREP. Finally, the draft RTS on BI adjustments require institutions to use the actual three-year historical data or a limited number of alternative methodologies following an operation. In the context of disposals, the draft RTS specify the conditions under which a permission may be granted to exclude BI items related to disposed entities or activities. In parallel with this consultation, EBA will conduct a quantitative analysis based on data requested as part of the Basel III monitoring quantitative impact study (QIS) to assess the impact of the proposed amendments as well as to inform the calibration of certain aspects of the new framework. EBA will consider the feedback received and the QIS results in the finalization of the draft technical standards.

    In parallel, EBA is also consulting, until April 30, 2024, on two draft ITS on Pillar 3 disclosures and supervisory reporting, to allow supervisors to monitor institutions’ compliance with the Basel III framework for operational risk. These amending ITS implement the new Capital Requirements Regulation (CRR3) reporting and disclosure requirements linked to the introduction of the revised framework for the calculation of own funds requirements for operational risk. The consultations are part of phase 1 in the implementation of the EU Banking Package, which also includes the two consultations published in December 2023 that cover the disclosure and reporting requirements for output floor, credit risk (also IP Losses), credit valuation adjustment (CVA), market risk, and leverage ratio. EBA submission of the final updated ITS to the European Commission, for the adoption process, is expected to take place at the beginning of the third quarter of 2024. The EBA will also develop the data-point model (DPM), XBRL taxonomy, and validation rules based on the final draft ITS. The application date of these ITS will be January 01, 2025 and the first reference date will be March 31, 2025, in line with the date of application of the CRR3.

     

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    Keywords: Europe, EU, Banking, Basel, Final Basel III Reforms, Reporting, Operational Risk, Pillar 3, Regulatory Capital, CRR, CRD, EC, EBA

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