New EU banking regulation: A triple wave of challenges for banks

The European Union’s new Capital Requirements Regulation (CRR3), set to come into effect on 1 January 2025, aims to enhance financial stability through stricter capital requirements. However, the ABBL has warned that the regulation, aligned with the Basel IV framework, could significantly disrupt banks’ ability to lend, thereby impacting critical sectors like real estate development and innovation financing.

This article has been written based on insights from a detailed piece published by Paperjam on 18 December 2024, authored by Guillaume Meyer. For the original article, please visit Paperjam’s website. Below, we provide an overview of the ABBL’s concerns regarding the upcoming CRR3 regulation and its potential implications for the financial and real estate sectors.

According to Gilles Pierre, Head of Banking Regulation and Financial Markets at ABBL, the CRR3 regulation brings a “triple shockwave” to the banking sector. He elaborates:

1. Increased risk sensitivity: The standardised approach to risk assessment is becoming more granular, which will raise costs for certain types of credit.
2. Stricter rules for internal models: Banks using internal risk models will need to increase their capital reserves, creating additional strain.
3. The introduction of the output floor: A mechanism designed to limit differences between calculations based on internal models and standard approaches, further complicating compliance.

Gilles Pierre noted that these changes will impose not only financial but also significant organisational challenges for banks.

Implications for the economy and key sectors

One of the ABBL’s key concerns is the knock-on effect on housing and construction—a critical sector for addressing Luxembourg’s housing shortages. Under the CRR3, banks will need to allocate more capital for financing real estate development projects, even when the actual risks are relatively low.

Gilles Pierre highlighted: “The combination of stricter requirements and the output floor makes financing certain projects, previously viable, far more challenging. This could dampen housing construction efforts, exacerbating the housing crisis.”

Start-ups and innovation are also at risk. The CRR3 introduces a fourfold increase in risk weighting for equity investments in start-ups. “Supporting innovation will cost banks significantly more, which is likely to deter funding in this area. This risks stifling innovation—a critical driver of Europe’s competitiveness,” Gilles Pierre added.

A call for a regulatory pause

With the CRR3 taking effect in January 2025, banks are under pressure to comply despite incomplete technical standards from the European Banking Authority (EBA). Gilles Pierre described the regulatory environment as “overloaded,” calling for a moratorium on new measures:

“It’s not about reversing Basel IV but about taking the time to absorb these changes. Rushing implementation without evaluating the broader impact risks limiting the banking sector’s ability to fund the real economy.”

The ABBL remains committed to engaging with regulators and its members to navigate these challenges while ensuring the financial system continues to support economic growth effectively.

For a comprehensive analysis of the CRR3 and its implications, visit the original article on Paperjam’s website.