EU Banks Finalize Implementation of International Basel III Agreement

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The European Union has completed the implementation of the international Basel III agreement, aimed at strengthening financial stability and ensuring the resilience of credit institutions. This major milestone for European banking regulation is a significant step towards promoting financial stability and protecting consumers.

Key Reforms Introduced by the EU Banking Package 2019

The EU Banking Package 2019 introduced several key reforms to strengthen financial stability and ensure the resilience of credit institutions. These reforms include:

A binding leverage ratio requirement of 3% of Tier 1 capital for all credit institutions.
An additional leverage ratio requirement of 50% of their risk-based G-SII capital buffer ratio for global systemically important institutions (G-SIIs).
A reporting requirement concerning the Basel Committee on Banking Supervision’s (BCBS) Fundamental Review of the Trading Book standards.
A binding net stable funding ratio (NSFR) of at least 100%.
A more risk-sensitive approach to trading in securities and derivatives.

Simplification for Small and Non-Complex Institutions

The package also introduced simplifications for small and non-complex institutions, including:

Less stringent reporting obligations.
A simplified, less granular version of the NSFR.

Supervisory Review and Evaluation Process (SREP) Revisions

The package revised the supervisory review and evaluation process (SREP), allowing for additional own funds requirements imposed by national competent authorities (NCAs) to be met with alternative capital instruments.

Total Loss-Absorbing Capacity (TLAC) Reforms

The package also introduced new standards on total loss-absorbing capacity (TLAC) aligned with the minimum requirement for own funds and eligible liabilities (MREL).

EU Banking Package 2021: Further Proposals

The EU Banking Package 2021 includes further legislative proposals to amend CRR and CRD, as well as a separate proposal concerning amendments to CRR in the field of risk-based capital requirements.

Investment Firms Package

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In related news, the regulatory regime for investment firms introduced by the Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR), which was implemented into German law by the Wertpapierhandelsgesetz (WpIG) on June 26, 2021, revised the regulatory framework in CRD, CRR, MiFID II, and MiFIR.

The package differentiates the prudential regime according to the size, nature, and complexity of investment firms. Larger, systemic investment firms are now subject to the same prudential regime as CRR credit institutions, while non-systemic investment firms have been split into two groups, with simpler capital requirements for smaller, less complex firms.

Digitalization and Digital Operational Resilience

The financial sector is undergoing rapid digital transformation, driven by advances in technology and changing consumer behavior. In response, the EU has introduced a range of regulatory initiatives aimed at promoting digital operational resilience and mitigating the risks associated with digitalization.

Key Initiatives

The Digital Operational Resilience Act (DORA), which will come into force on January 1, 2025, introduces requirements for financial entities to prevent and mitigate cyber threats, enhance digital operational resilience, and ensure the sound management of ICT third-party risk.
The Markets in Crypto-Assets Regulation (MiCAR), which entered into force on June 25, 2023, provides for a harmonized regime on transparency, authorization, and disclosure requirements for crypto-asset services.

These regulatory initiatives are designed to promote financial stability, protect consumers, and facilitate the growth of the digital financial sector.