Latest updates on the banking package

The European Commission has published information on the latest progress of the review of the regulatory framework on the capital requirements for credit institutions – the so called „banking package“. The proposed amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV) were endorsed by the Council and Parliament preparatory bodies. The new CRR rules are set to take effect on 1 January 2025, requiring Member States to transpose CRD provisions before implementation. Although subject to legal revision and a final Plenary vote, the legal texts are now publicly available, offering transparency on the agreed new rules. This allows credit institutions to prepare for the implementation of the Basel III agreement in the Union.
The key points of the Basel III implementation are the following:
1. Introduction of the output floor to reduce excessive variability of banks’ capital requirements calculated with internal models: The co-legislators have agreed to introduce the ‚output floor‘ into Union law, setting a minimum limit on banks‘ capital requirements calculated using internal models. This mechanism establishes a baseline (‚floor‘) for the capital requirements (‚output‘) that banks compute using their internal models and aims to reduce variability in capital requirements and enhance confidence in risk-based measures. The output floor applies at both group and subsidiary levels, with Member States having the option to deviate for entities within their jurisdictions. Transitional arrangements are in place, phasing in the output floor by 2032.
2. Implementation of the Basel III agreement to strengthen Union banks’ resilience in the main risk areas (credit risk, market risk, operational risk): The banking package includes revisions to credit risk, aligning the standardised approach with Basel standards and, in particular, introducing preferential treatment for real estate exposures. Transitional arrangements are in place to ensure a smooth implementation, taking into account EU-specific factors. For market risk, the package completes the Fundamental Review of the Trading Book (FRTB) and empowers the Commission to specify elements of the framework and defer implementation through a delegated act in order to address potential distortions. For operational risk, the package adopts new Basel standards that simplify the calculation of capital requirements by relying on banks‘ financial statements and removing the internal loss multiplier (ILM) to avoid undue increases in capital requirements.
3. Environmental, Social, and Governance risks (“ESG risks’): In line with the Commission’s proposals, the co-legislators have strengthened the provisions on ESG risks. In particular, banks will be required to develop transition plans within the supervisory framework, ensuring consistency with sustainability commitments made under other Union legislation such as the Corporate Sustainability Reporting Directive (CSRD). Furthermore, supervisors will monitor how banks manage ESG risks and include ESG considerations in the annual supervisory review process (SREP).
ESG reporting and disclosure requirements will be extended to all EU banks, subject to proportionality considerations for smaller banks. In addition, the co-legislators have agreed to grant favourable risk weight treatment to banks financing infrastructure projects only if they have a positive or neutral environmental impact assessment.
4. Clear rules for third country banks operating in the Union: The package sets out the minimum requirements for third-country bank branches operating in the EU. It maintains national supervision while enhancing supervisory powers. The rules aim to manage the increased activity of these banks, foster cooperation among national supervisors, and elevate the role of the EBA. Co-legislators have also agreed on minimum standards, outlining when such branches must be established, and clarified their relationship with MiFID investment service regulations.
5. Strengthened supervision: Supervisors will get enhanced prudential powers, enabling them to scrutinise transactions such as large acquisitions for soundness and risk. The package also strengthens and standardises sanctioning powers, providing better oversight of complex banking groups, including fintechs, to ensure prudential soundness and regulatory control in the financial sector.
6. Governance – fit and proper assessment for bank managers: Significant efforts to harmonise the supervision of bank managers have been made. The co-legislators have strengthened ‚fit and proper‘ assessments. Banks will now be required to conduct fit and proper checks before managers take up their positions, and these checks will be extended to influential ‚key function holders‘. The implementation of a standardised set of procedural rules and information requirements for managers of large banks promotes consistency in assessments. Specific regimes for key positions are established in cases where post-appointment assessments are conducted, ensuring timely information provision for effective cooperation between banks and supervisors. In addition, the AML compliance requirements for both managers and key function holders have been substantially tightened. The emphasis on diversity in the management body is reiterated, underlining its key role in promoting sound governance within banks.