European Commission issues banking legislative package, finalising Basel III implementation in EU
27 October 2021 EU
Image: AdobeStock/Sergey Novikov
The European Commission today published a review of EU banking legislation designed to improve the resilience of EU banks to future economic shocks.
These reforms are also intended to facilitate the EU’s transition to climate neutrality and to accelerate recovery from the COVID-19 pandemic.
The Commission indicates that while the overall level of capitalisation of EU banks is now “on average satisfactory”, some of the concerns highlighted by the financial crisis have not yet been resolved.
The review consists of three legislative elements: a legislative proposal to amend the Capital Requirements Directive (CRD); a proposal to amend the Capital Requirements Regulation (CRR); and a separate legislative proposal to amend the CRR with regard to resolution — the “daisy chain” proposal.
The Commission says that today’s package fully implements the Basel III agreement in the EU, while integrating specific features of the EU banking sector. This package is designed to ensure that internal risk models employed by banks to calculate their capital requirements do not underestimate the prevailing risks. This will ensure that banks are effectively capitalised and will make it easier to compare risk-based capital ratios between institutions.
The proposal aims to improve banking resilience, without requiring significant increases in capital requirements. It also sets out to reduce compliance costs, for smaller banks in particular, without weakening prudential requirements.
Focusing on sustainability and green transition, the proposal is designed to strengthen the resilience of banks to environmental, social and governance (ESG) risks in line with the Commission’s Sustainable Finance Strategy.
This will require banks to systematically identify, disclose and manage ESG risks as part of their risk management frameworks, including regular climate stress testing conducted by financial supervisors and banks themselves. Financial supervisors will have an obligation to evaluate ESG risks within their regular regulatory reviews.
Additionally, the package aims to strengthen tools held by financial supervisors. Following the Wirecard insolvency, financial supervisors will have better tools to monitor fintech companies, including bank subsidiaries tools. It will also strengthen the ability of financial regulators to assess whether senior staff at a bank have the skills and knowledge to manage the organisation.
The review also harmonises EU rules relating to third-country banks, enabling supervisors to better manage risks associated with branches of third-country banks established within the EU.
The legislative package will now advance for consideration by the European Parliament and Council of Ministers.
Mairead McGuinness, EU commissioner responsible for financial services, financial stability and capital markets union, explained that banks have a vital role to play in economic recovery and that it is essential that EU banks are resilient in times ahead.
“Today’s package makes sure that the EU banking sector is fit for the future and can continue to be a reliable and sustainable source of finance for the EU economy," says McGuiness. "By incorporating ESG risk assessments, banks will be better prepared and protected to weather future challenges such as climate risks”.
EU commissioner for justice Didier Reynders says: “Harmonised rules were necessary to assess whether board members and key function holders are suitable for their duties. Today’s adopted rules will clarify the respective obligations of credit institutions and competent authorities. They will then ensure consistency at EU level and will ultimately contribute to the increased robustness of banks”.
Commentators have indicated today’s move is an important step towards enactment of Basel IV. However this raises questions about consistency of application globally. Banking organisations will be watching closely on how these rules are implemented in other major jurisdictions to provide a clearer picture of how banking rules, and associated capital requirements, fit together globally.
These reforms are also intended to facilitate the EU’s transition to climate neutrality and to accelerate recovery from the COVID-19 pandemic.
The Commission indicates that while the overall level of capitalisation of EU banks is now “on average satisfactory”, some of the concerns highlighted by the financial crisis have not yet been resolved.
The review consists of three legislative elements: a legislative proposal to amend the Capital Requirements Directive (CRD); a proposal to amend the Capital Requirements Regulation (CRR); and a separate legislative proposal to amend the CRR with regard to resolution — the “daisy chain” proposal.
The Commission says that today’s package fully implements the Basel III agreement in the EU, while integrating specific features of the EU banking sector. This package is designed to ensure that internal risk models employed by banks to calculate their capital requirements do not underestimate the prevailing risks. This will ensure that banks are effectively capitalised and will make it easier to compare risk-based capital ratios between institutions.
The proposal aims to improve banking resilience, without requiring significant increases in capital requirements. It also sets out to reduce compliance costs, for smaller banks in particular, without weakening prudential requirements.
Focusing on sustainability and green transition, the proposal is designed to strengthen the resilience of banks to environmental, social and governance (ESG) risks in line with the Commission’s Sustainable Finance Strategy.
This will require banks to systematically identify, disclose and manage ESG risks as part of their risk management frameworks, including regular climate stress testing conducted by financial supervisors and banks themselves. Financial supervisors will have an obligation to evaluate ESG risks within their regular regulatory reviews.
Additionally, the package aims to strengthen tools held by financial supervisors. Following the Wirecard insolvency, financial supervisors will have better tools to monitor fintech companies, including bank subsidiaries tools. It will also strengthen the ability of financial regulators to assess whether senior staff at a bank have the skills and knowledge to manage the organisation.
The review also harmonises EU rules relating to third-country banks, enabling supervisors to better manage risks associated with branches of third-country banks established within the EU.
The legislative package will now advance for consideration by the European Parliament and Council of Ministers.
Mairead McGuinness, EU commissioner responsible for financial services, financial stability and capital markets union, explained that banks have a vital role to play in economic recovery and that it is essential that EU banks are resilient in times ahead.
“Today’s package makes sure that the EU banking sector is fit for the future and can continue to be a reliable and sustainable source of finance for the EU economy," says McGuiness. "By incorporating ESG risk assessments, banks will be better prepared and protected to weather future challenges such as climate risks”.
EU commissioner for justice Didier Reynders says: “Harmonised rules were necessary to assess whether board members and key function holders are suitable for their duties. Today’s adopted rules will clarify the respective obligations of credit institutions and competent authorities. They will then ensure consistency at EU level and will ultimately contribute to the increased robustness of banks”.
Commentators have indicated today’s move is an important step towards enactment of Basel IV. However this raises questions about consistency of application globally. Banking organisations will be watching closely on how these rules are implemented in other major jurisdictions to provide a clearer picture of how banking rules, and associated capital requirements, fit together globally.
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