Featured Product

    ECB Issues Opinion on Proposed Amendments to CRR

    The European Central Bank (ECB) published an opinion on a proposal for amendments to the Capital Requirements Regulation (CRR: 575/2013) with respect to requirements for credit risk, credit valuation adjustment (CVA) risk, operational risk, market risk, and the output floor (proposed amendments to CRR). The opinion was issued in response to a request from the European Parliament and the Council of the European Union to provide an opinion on the proposed amendments to CRR.

    ECB welcomes the European Commission (EC) proposal to implement Basel III reforms in European Union, reinforce the Single Rulebook, and enhance the prudential framework for credit institutions in various areas. As part of its assessment, ECB observed that during periods of economic and financial distress, credit institutions might not be willing to use their capital buffers. Looking forward, ECB is of the view that further consideration should be given to removing disincentives to using capital buffers. In its opinion, ECB sets out certain observations on the following topics:

    • Introduction of output floor. ECB notes that the proposal includes significant transitional arrangements leading to lower risk-weights than those envisaged in the Basel standards in certain areas—namely, residential real estate exposures with low historical losses, exposures to unrated corporates, and the calibration of counterparty credit risk related to derivative exposures. ECB considers that these deviations from the Basel III standards are not justified from a prudential and financial stability perspective and may leave pockets of risks unaddressed.
    • Standardized approach under credit risk framework. ECB notes that the proposal contains several new deviations from Basel III standards, especially regarding specialized lending exposures, equity exposures, retail exposures, and the methodology for collateral valuation for exposures secured by immovable property. ECB considers that these deviations may reduce the consistency and safety of the new standardized approach and leave certain risks uncovered.
    • Operational risk. While ECB acknowledges that the Basel III framework offers the possibility to disregard historical losses for the calculation of capital requirements for operational risks, it regrets that EC did not opt for a recognition of these losses. ECB considers that taking into account the loss history of an institution would entail more risk-sensitivity and loss coverage of capital requirements, addressing the divergence of risk profiles of institutions; it would also provide greater incentives for institutions to improve their operational risk management. ECB would, therefore, favor an implementation where the internal loss multiplier is determined by historical losses incurred by the institution and is gradually introduced.
    • Market risk. ECB notes that the proposal enables EC to change the calibration of capital requirements under the new market risk framework as well as to postpone, by two additional years, the implementation of this framework. This could allow the reduction of capital requirements, thus diverging from the Basel III standards. ECB favors limiting these powers under the current proposal. ECB considers it important that these standards are applied consistently at international level and calls for a faithful implementation of these internationally agreed standards by 2025.
    • CVA risk. ECB notes that the proposal does not reconsider existing exemptions adopted by the European Union and recalls that these exemptions were assessed as a material non-compliance in the previous regulatory consistency assessment program of the Basel Committee in 2014. ECB considers that these deviations are not justified from a prudential perspective and leave institutions exposed to uncovered risks from their derivatives transactions with exempted counterparties
    • Internal ratings based approach. ECB highlighted inconsistencies in the proposal that may hinder the overall correct implementation of the requirements. To reduce the risk of misinterpretation, ECB recommends to further align, across different articles of the amended CRR, the terms used to identify the size of corporate obligors, such as turnover, revenue, and sales. Furthermore, consistency needs to be ensured between default definition and the estimation and implementation of risk parameters. For the new requirements on probability of default (PD) estimates, ECB considers that further specification of the time horizon for rating assignments would ensure adequate risk differentiation, despite adverse economic conditions, and increase the risk-weighted asset comparability across institutions.
    • Pillar 3 disclosures and reporting. ECB notes that the proposal applies different approaches in relation to the quantitative public disclosure of small and non-complex institutions (SNCIs) and larger institutions. ECB considers that SNCIs approach for quantitative disclosures could be applied to all institutions, regardless of their size and complexity, with a view to reducing the reporting burden of all institutions. ECB notes that to ensure consistency, the policy on resubmissions to the European Banking Authority (EBA) envisaged in the amended Article 434a of CRR should not be limited to public disclosures but should also cover supervisory reporting. 
    • Environmental, social, and governance (ESG) risks. A better integration of ESG risks into the prudential framework is crucial to increase the resilience of the banking sector. ECB welcomes the proposal to introduce harmonized definitions of ESG risks and values the stated intention to align the definitions with those proposed by EBA in its report on management and supervision of ESG risks for credit institutions and investment firms. However, ECB observes divergence in the wording of the proposed definitions vis-à-vis the wording used by EBA. ECB proposes refinements to the wording of the definitions to ensure closer alignment with the definitions proposed by EBA.


    Related Link: Opinion (PDF)


    Keywords: Europe, EU, Banking, CRR, Basel, Regulatory Capital, Credit Risk, Market Risk, Operational Risk, CVA Risk, IRB Approach, ESG, Disclosures, Reporting, Pillar 3, Opinion, ECB, Subheadline

    Featured Experts
    Related Articles

    CFPB Finalizes Rule on Small Business Lending Data Collection

    The Consumer Financial Protection Bureau (CFPB) published a final rule that sets out data collection requirements on small business lending, under section 1071 of the Dodd-Frank Act.

    March 30, 2023 WebPage Regulatory News

    BCBS to Consult on Pillar 3 Climate Risk Disclosures by End of 2023

    The Bank for International Settlements (BIS) published a summary of the recent Basel Committee (BCBS) meetings.

    March 23, 2023 WebPage Regulatory News

    FINMA Approves Merger of Credit Suisse and UBS

    The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.

    March 21, 2023 WebPage Regulatory News

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    US Congress Report Examines Data Privacy and Cybersecurity Regulations

    The U.S. Congressional Research Service published a report on banking, data privacy, and cybersecurity regulation.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    EU to Conduct One-Off Scenario Analysis to Assess Transition Risk

    The European authorities recently made multiple announcements that impact the banking sector.

    March 10, 2023 WebPage Regulatory News

    APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.

    March 07, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8810