The finalisation of CRR and CRD with EC proposed amendments based on Basel III

The finalisation of CRR and CRD with EC proposed amendments based on Basel III

Four weeks ago, we published a blog covering the impact of the Finalisation of Basel III, as communicated by the BCBS. This was based on the September 30th report by the European Banking Authority. On October 27th, the European Commission published its new banking package, containing the CRR 3 and the CRD 6, introducing more changes.

Overall, while many BCBS suggestions have been adopted, others have been changed. Most notably, there are shifts to timelines as well as updates for specific European markets.

A Further Delay

The new banking package has introduced new timelines, in which everything has been pushed back by 2 years. Rather than implementation in 2023, we are now looking at implementation beginning January 2025. This also means that banks won’t likely experience capital impacts until 2028.

Timelines might change as a result of lengthy political negotiation, with blocking points including ESG assets, home-host issues relative to the application level of the output floor, and changes from the Basel III proposal.

Taking ESG Risks into Account

One of the most notable changes for the new banking package is the introduction of ESG factors. These include uniform definitions for ESG risks, as introduced in the June EBA report.

Organisations will be required to identify and report on ESG risks as part of internal governance arrangements. The CRR package will impose disclosure requirements as well as supervisory requirements. This includes adjustments to capital requirements for ESG-related assets, with potential increases based on ESG-related risks.

Here, the largest impact is on Pillar 2. Supervisors can now apply the systemic risk buffer based on ESG risks, resulting in increased need for capital for banks with those assets. Currently, there is no guidance for Pillar 1 capital requirements, however, the EBA will provide guidance on this matter in the coming years. We expect the same sort of process that we have seen with Operational Risks: best practices are formalised in new guidance as banks build and improve their ESG Risks framework.

Changes for Local Markets

The imposition of Basel III on some European banks has been much contested. For example, the Dutch real estate market is reliable and low-risk – and this is backed up by years of data. The Basel III output floor would introduce a higher capital requirement for the real estate market, which would not be a good measure for the Dutch market. The CRR 3 reduces those impacts by introducing a temporary preferential treatment for these exposures, overall making the gradual change positive for local markets.

Eventually, the new banking package introduces many changes from the BCBS proposal. However, as many of them are very specific, it’s a good call to go over those yourself, or to contact us if you’d like guidance or information.

If you want to talk or have further questions, feel free to get in touch.

Thanks for reading,

Team ACE

Back to The finalisation of CRR and CRD with EC proposed amendments based on Basel III