The New EU Capital Requirements Regime
14 March 2024
The EU capital requirements framework is to be revamped as a result of legislative amendments. These changes were introduced in an October 2021 legislative package published by the European Commission and consist of: a proposed Directive amending the Capital Requirements Directive (CRD VI); and a proposed Regulation amending the Capital Requirements Regulation (CRR III) (see our briefing here). The package has been proceeding along the EU legislative process, with EU co-legislators reaching a provisional agreement in 2023 in respect of the CRR III and CRD VI.
The changes to the EU capital requirements framework are designed to ensure that the framework remains fit for purpose, reflects international standards set by the Basel Committee on Banking Supervision (BCBS), and addresses shortcomings identified in various reviews. The final aspects of Basel III (a set of reforms developed in response to the global financial crisis) introduce a number of changes to the capital requirements framework. Elements of this include: the revision of the standardised approach in relation to credit risk; a new operational risk framework; and a reduction in the high variability of banks’ capital requirements calculated with internal models (chief of this being the output floor, a measure setting a lower limit (floor) on the risk weighted assets (output) calculated by banks using their internal models). The 2019 revisions made by the BCBS to its revised market risk standards, known as the Fundamental Review of the Trading Book (FRTB), were published too late for the EU to incorporate into EU CRR II proposals and it was agreed that the EU would implement the FRTB standards in the CRR II only for reporting purposes. CRR III aims to complete the implementation of the FRTB. The EU has indicated that implementation of the final aspects of Basel III in the EU will involve some deviation from the Basel framework to accommodate EU specificities.
The update to the EU capital requirements framework will also address other areas of concern, such as the regulation of third country branches. In June 2021, the EBA published a report on third country branches setting out a number of recommendations. The European Commission noted the increasing use of third country branches to access Member States’ banking markets. It argued that these entities are, in some cases, subject to only high-level information requirements and not to consistent EU-level prudential standards or supervisory cooperation arrangements, thus offering opportunities for regulatory and supervisory arbitrage.
Sustainable Finance has assumed greater importance over the years, with credit institutions viewed as having a key role in financing the transition finance to a more sustainable economy. Initiatives such as the European Green Deal, Sustainable Finance Strategy and Corporate Sustainability Reporting Directive outline possible changes to bank regulation to aid transition to sustainable economy and the importance of integrating ESG risks. The cryptoassets market has grown significantly in recent years, with the EU introducing a regulatory regime in the form of MiCA (see our briefing here for more information). The BCBS has also developed a standard for the prudential treatment of cryptoasset exposures containing a risk management framework for firms (see our briefing here for more information). The EU Capital Requirements Regime therefore contains disclosure and governance measures in relation to cryptoasset exposures.
The Capital Requirements Package was published in the EU Official Journal in June 2024. Both the CRD VI and CRR III enter into force on 9 July 2024. CRR III applies, for the most part, from 1 January 2025. Most of CRD VI applies from 11 January 2026. The rules banning the provision of core banking services without a branch and other rules for third country branches are applicable from 11 January 2027.
Our series looks at the key EU capital requirements framework changes.
Please see downloadable PDFs on this page covering the following topics:
We will be reviewing the new UK capital requirements framework in a forthcoming publication.
