knowledge | 12 November 2021 |

European Commission Adopts Review of EU Banking Rules

On 27 October 2021, the European Commission (the “Commission”) adopted its review of EU banking rules (the “Banking Package”) here. The proposals set out in the Banking Package are intended to finalise implementation of the Basel III Framework1 here, assist the financing of the European economy in the context of the post-COVID-19 crisis recovery and contribute to a “green transition”.

The Banking Package consists of:

  • a legislative proposal to amend the Capital Requirements Directive2 (“CRD”) (here);
  • a legislative proposal to amend the Capital Requirements Regulation(“CRR”) (here); and
  • a separate legislative proposal to amend the Capital Requirements Regulation in the area of resolution (here).

The Banking Package focuses on three key areas: Basel III reforms, enhanced supervision and sustainability.

Basel III reforms

The Banking Package finalises implementation of the Basel III Framework. The Basel III Framework is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision intended to strengthen the regulation, supervision and risk management of banks. A key component of the Basel III Framework - the ‘Output Floor’ - is included in the Banking Package proposals.

The Output Floor aims to address the risk that a bank’s internal model may incorrectly estimate capital requirements, i.e., underestimate the amount of capital needed by a bank. The Output Floor is a measure that sets a lower limit (‘floor’) on the capital requirements (‘output’) that banks calculate when using their internal models. The Commission notes that capital requirements calculated by internal models can vary significantly and the introduction of the Output Floor aims to reduce unwarranted variability and increase the comparability of capital ratios of banks which use internal models.

It should be noted that a transition period applies to the introduction of the Output Floor – the Output Floor will be gradually introduced over a period of 5 years from 1 January 2025. In addition, the Banking Package proposes targeted transitional provisions relating to the treatment of exposures to unrated companies, low-risk mortgages, derivatives, equity exposures and unconditionally cancellable commitments.

Enhanced Supervision

The second element of the Banking Package provides for enhanced supervision to address a lack of harmonisation of supervisory powers at EU level identified by the Commission.  The most significant features of this element are highlighted in the box below.

Enhanced Supervision

Expansion of powers to review bank operations

The list of supervisory powers available to competent authorities in the CRD is expanded to include powers in respect of operations such as:

  • acquisitions by a credit institution of a material holding in a financial or non-financial entity;
  • the material transfer of assets or liabilities; and
  • mergers or divisions.

Fit and proper regime

New Articles in the CRD include provisions in respect of minimum requirements for key function holders and to clarify the role of banks and competent authorities for checking compliance of board members against fit and proper requirements.

Accountability

Given the focus on the Senior Executive Accountability Regime (“SEAR”) in this jurisdiction, it is interesting to see the addition of a new paragraph 3 in Article 88 of the CRD which provides that Member States shall ensure institutions maintain and update statements of duties/mapping of duties for members of the management body, senior management and key function holders. The EBA will be required to issue guidelines ensuring implementation of these requirements.

See our briefing here for further detail on SEAR.

Sanctioning powers

Proposals are included to require Member States to provide for administrative penalties, periodic penalty payments and other administrative measures in relation to breaches of national provisions transposing the CRD and the CRR.

Fintechs

Amendments are proposed to the CRD to enhance supervision of fintech groups which include a banking component.

Third Country Branches (“TCBs”)

A new framework of harmonised provisions in respect of TCBs’ authorisation, capital, liquidity, governance, reporting and supervision is also included in the Banking Package. See our further comment in respect of TCBs below.

Sustainability

The third focus of the Banking Package is management of environmental, social and governance (“ESG”) risks by banks. New provisions are introduced and adjustments made to several Articles in the CRR and the CRD to ensure that banks will be in a position to measure and monitor their exposure to ESG risks and to enable supervisors and market participants to assess the ESG risks of banks.

Proposals include:

  • a requirement for all banks to systematically identify, disclose and manage ESG risks as part of their risk management framework (in a proportionate way);
  • requirements for supervisors to assess ESG risks as part of regular supervisory reviews;
  • requirements for short, medium and long-term horizons of ESG risks to be included in credit institutions’ strategies and processes for evaluating internal capital needs as well as adequate internal governance;
  • requiring the management body to specifically consider current and forward-looking impacts of ESG risks and develop concrete plans to address these risks; and
  • introducing a ‘sustainability dimension’ in the prudential framework to ensure a better management of ESG risks and incentivise a better allocation of bank funding across sustainable projects.

Comment

Some points of particular interest regarding the Banking Package are noted in the box below.

Comment

TCBs/MiFID Safe Harbour

A new Article 21c is proposed for the CRD which will require third country undertakings to establish a branch and apply for an authorisation to provide ‘banking services’ in a Member State (with an exception for the reverse solicitation of services). Unfortunately, the drafting of Article 21c is unclear and, in particular, may be interpreted as capturing activities typically considered outside the scope of ‘traditional’ banking services4. The scope of this Article will need to be clarified to ensure other areas of financial services law, including MiFID safe harbour exemptions, are not adversely affected.

Increase in capital requirements

The Commission states that the proposals in the Banking Package will limit the overall impact on capital requirements to what is necessary. The Commission expects the proposals in the Banking Package to lead to a weighted average increase in institutions’ minimum capital requirements of 6.4% to 8.4% in the long term (by 2030) and an increase of between 0.7% and 2.7% in the medium term (by 2025).

Crypto assets

A dedicated capital treatment of crypto assets is not included in the Banking Package. The CRR does, however, include a new Article 461b which requires the Commission, by 31 December 2025, to review whether a dedicated prudential treatment should be developed for exposures to crypto assets and submit a report, together with a legislative proposal if appropriate, to the European Parliament and to the Council (after consulting the EBA and taking into account international developments).

Sustainability

There has been some criticism of the Banking Package for a perceived failure to adjust capital requirements for fossil fuel investments held by banks. The Commission notes that it has asked the EBA to assess if and how capital requirements might vary depending on the environmental and social impact of the assets held by institutions. The EBA’s report on this matter is due in 2023.


Next Steps

The next step is for the European Parliament and the Member States in the Council to discuss the final legislative texts on the basis of the Banking Package. Timing is uncertain, however discussions may take up to 2 years. The Commission has stated it proposes to give banks and supervisors time to properly implement reforms in their processes, systems and practices and to start applying the new rules from 1 January 2025 (subject to specific transitional arrangements in respect of Basel III reforms referenced above).

Institutions within scope will need to track the progress of the Banking Package, assess the possible impacts on their business models and plan accordingly. In addition, clarification on certain elements of the Banking Package may be required, as it progresses through the legislative process, to ensure other areas of financial services law are not adversely affected (for example, MiFID safe harbour exemptions).


  1. The outstanding Basel III reforms were agreed in 2017 between the EU and its G20 partners in the Basel Committee on Banking Supervision.
  2. Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC
  3. Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012
  4. Proposed Article 21(c) of the CRD cross-references Article 47(1) which in turn refers to “any of the activities listed in Annex I of this Directive”. The activities listed in Annex I of the CRD include, amongst other activities, financial leasing, portfolio management and advice, payment services, trading for own account or for account of customers in certain instruments and safe custody services.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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