Sun. Dec 4th, 2022

Brussels, 27 October 2021

Introduction

Why is the Commission proposing this package?

Following the financial crisis, the EU embarked on wide-ranging reforms of its banking rules to increase the resilience of the EU banking sector. One of the main elements of the reforms consisted of implementing the international standards the EU and its G20 partners agreed in the Basel Committee for Banking Supervision (BCBS), specifically the so-called “Basel III reform”. Thanks to these post-crisis reforms, the EU banking sector entered the COVID-19 crisis on a much more resilient footing. However, while the overall level of capital in EU banks is now on average satisfactory, some of the problems that were identified in the wake of the financial crisis have not yet been addressed.

The main outstanding elements of the reform, included in today’s package, aim to constrain the ability of banks to excessively reduce capital requirements when using internal models. This will increase the comparability of risk-based capital ratios across banks and will restore confidence in those ratios and the soundness of the sector overall. At the same time, the reform is intended to simplify the risk-based framework thanks to better standardisation in the calculation of capital requirements.

Beyond the need to complete the Basel III reforms agreed at international level, several other shortcomings have also been identified in the current banking prudential framework, which today’s package also tackles.

What are the key elements of the package?

The package contains a number of significant improvements to existing EU rules for banks:

  • First, it faithfully implements the outstanding elements of the Basel III reform in the EU, while taking into account EU specificities and avoiding significant increases in capital requirements. It also increases proportionality, notably by reducing compliance costs, in particular for smaller banks, without loosening prudential standards.
  • Second, it introduces explicit rules on the management and supervision of environmental, social and governance (ESG) risks, in line with the objectives set out in the EU Sustainable Finance Strategy, and gives supervisors the necessary powers to assess ESG risks as part of regular supervisory reviews. This includes regular climate stress testing by both supervisors and banks.
  • Third, it increases harmonisation of certain supervisory powers and tools. Supervisors will be given more powers to check if transactions are sound and bank managers are fit and proper. They will have enhanced sanctioning powers to enforce rules, while also having better oversight of complex banking groups, including fintechs. Today’s proposals also introduce minimum standards for the regulation and supervision of branches of third-country banks in the EU.
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