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EU Implements Basel III Agreement, Enhances Financial Stability

The European Union has taken a significant step towards implementing the international Basel III agreement, aiming to strengthen financial stability by introducing new regulations for credit institutions.

Strengthening Financial Stability

The revised regulations introduce a binding leverage ratio requirement of 3% of Tier 1 capital, as well as an additional leverage ratio requirement for global systemically important institutions (G-SIIs). The reporting requirements have also been enhanced, with credit institutions required to provide more detailed information on their trading activities and risk exposure.

Simplified Rules for Small Institutions

Smaller, non-complex institutions will benefit from simplified rules, including a less granular version of the net stable funding ratio (NSFR) and reduced reporting obligations. This aims to reduce regulatory burden and allow these institutions to focus on their core business.

Group Supervision and Resolution

To ensure that prudential requirements are met at the group level, the revised regulations introduce written approval for EU parent financial holding companies. BaFin, Germany’s financial regulator, is responsible for ongoing supervision of groups on a consolidated basis.

Additionally, large financial groups conducting significant activities in Germany will be required to set up an intermediate EU parent undertaking if they have two or more CRR credit institutions or investment firms established in the EU with the same ultimate parent undertaking in a third country.

Banking Resolution

The EU banking package 2019 also introduces new standards on total loss-absorbing capacity (TLAC) aligned with the minimum requirement for own funds and eligible liabilities (MREL). G-SIIs will be required to have more loss-absorbing and recapitalization capacity, while top-tier banks will also be subject to these requirements.

Investment Firms Package

The regulatory regime for investment firms has been revised, introducing a new prudential framework that differentiates 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.

Digitalisation and Crypto-Assets

The financial sector is undergoing significant changes due to digitalization, with regulatory frameworks evolving to address new risks. The Digital Operational Resilience Act (DORA) will start applying in January 2025, introducing requirements for financial entities to prevent and mitigate cyber threats and enhance digital operational resilience.

Additionally, the EU has introduced a regulation on Markets in Crypto-Assets (MiCAR), which provides for a full harmonization of crypto-asset services and will apply in full from December 2024.

The implementation of these regulations aims to strengthen financial stability, reduce systemic risk, and promote a level playing field across the European Union.