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
Previous ArticleAPRA Updates Timelines for Revision of Market Risk Standards
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards
The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.
The Basel Committee on Banking Supervision (BCBS) launched consultation on a Pillar 3 disclosure framework for climate-related financial risks, with the comment period ending on February 29, 2024.
The U.S. President Joe Biden signed an Executive Order, dated October 30, 2023, to ensure safe, secure, and trustworthy development and use of artificial intelligence (AI).
The Monetary Authority of Singapore (MAS) launched an integrated digital platform, Gprnt, also known as “Greenprint.”
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The Network for Greening the Financial System (NGFS) published its latest set of long-term climate macro-financial scenarios (Phase IV) for assessing forward-looking climate risks.