Capital requirements : Basel III and more

ABBL Published 03.11.2021

It was finalised in December 2017, but when the Basel agreement took its first milestone in the transposition into EU law last week (27 October 2021), it was already a year behind the original schedule. Indeed, COVID is the culprit as many readers would have guessed.

Beyond the timeline, the content is very much what would have been expected with several adaptations to European specificities. The famous output floor of 72.5% of the standardised approach is very much in there, and its implementation very close to the literal interpretation despite prolonged efforts of the banking industry to convince the Commission of the merits of a parallel stack rather than a single stack. The floor will be gradually implemented between 2025 and 2030 according to the Commission proposal. There are also some specific provisions that would spread out the impact of the output floor for up to 8 years in areas like exposures to unrated companies, low-risk mortgages and derivatives.

The EU executive has also proposed a market risk framework that is consistent with the original international agreement, although committed to watching very closely what other major jurisdictions do and adapting the EU framework should this result in an uneven playing field.

Last week’s banking package of two proposals for a regulation (CRR) and a proposal for a directive (CRD) was nevertheless not only about transposing the Basel agreement into EU law. It also contained specific EU parts on integrating ESG risks into banks’ risk management systems and supervision. In the ESG context the question of adjusting capital requirements with regard to green or brown assets has been raised but not answered yet. The Commission is awaiting a specific assessment from the European Banking Authority (EBA) expected for 2023.

The package also contains further elements harmonising supervisors’ enforcement tools as well as provisions regarding the supervision of third country branches from non-EU international banking groups. On the latter the Commission is proposing a common framework for branches which has been lacking up till now with the possibility to convert systemically important branches (i.e. assets equal or above 30 bn euros) into subsidiaries.

The three legislative proposals are now on the table of the Council and the European Parliament. In  the months to come the co-legislators will discuss and most likely amend the texts before their final adoption probably in late 2022 or in 2023.

By Antoine Kremer

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