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

    BIS and Central Banks Experiment with GenAI to Assess Climate Risks

    A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe

    March 20, 2024 WebPage Regulatory News

    Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures

    Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.

    March 18, 2024 WebPage Regulatory News

    Singapore to Mandate Climate Disclosures from FY2025

    Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies

    March 18, 2024 WebPage Regulatory News

    SEC Finalizes Climate-Related Disclosures Rule

    The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.

    March 07, 2024 WebPage Regulatory News

    EBA Proposes Standards Related to Standardized Credit Risk Approach

    The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU

    March 05, 2024 WebPage Regulatory News

    US Regulators Release Stress Test Scenarios for Banks

    The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

    February 28, 2024 WebPage Regulatory News

    Asian Governments Aim for Interoperability in AI Governance Frameworks

    The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.

    February 28, 2024 WebPage Regulatory News

    EBA Proposes Operational Risk Standards Under Final Basel III Package

    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.

    February 26, 2024 WebPage Regulatory News

    EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS

    The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.

    February 23, 2024 WebPage Regulatory News

    ECB to Expand Climate Change Work in 2024-2025

    Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.

    February 23, 2024 WebPage Regulatory News
    RESULTS 1 - 10 OF 8957