Member States’ ambassadors to the European Union (Coreper) are expected to reach a political agreement in principle (‘general approach’) on the legislative package (one directive, one regulation) to finalise the integration into the EU of the 2017 ‘Basel III’ agreement strengthening the prudential banking rules, which will then be confirmed by the Ecofin Council on Tuesday 8 November.
“A priori, the text is ready”, a European source confirmed to EUROPE on Wednesday 2 November. She said that the text that will be agreed by the Member States and that will still have to be negotiated with the European Parliament in trilogue is the result of work in the EU Council to incorporate elements specific to the European banking sector into the ‘Basel III’ agreement without calling into question the overall balance of the international agreement.
In particular, the proposal progressively introduces an ‘output floor’ for banks using an internal model to calculate capital requirements according to the nature of the risks they incur. According to the ‘Basel III’ agreement, from 2023 onwards, the result obtained by the internal model may not be less than 72.5% of the calculation of capital requirements obtained via the standard model, a model where banks use a regulatory formula often based on financial ratings.
According to the text of the regulation agreed by the national experts on 26 October and to be submitted to Coreper on Friday, the Council is not changing the trajectory recommended by the European Commission to reach the 72.5% threshold 7 years later: 50% in 2025, 55% in 2026, 60% in 2027, 65% in 2028, 70% in 2029.
With reference to the ongoing debate in the European Parliament (see EUROPE 13011/18), a Member State could decide to apply these prudential requirements at the highest level of consolidation.
To take account of the specificity of the European banking sector, transitional provisions will be introduced to cushion the impact of the ‘output floor’. This includes exposures to unrated companies, low-risk mortgages and derivatives.
For exposures to unrated companies, Member States should retain the transitional period - until the end of 2032 - as initially suggested by the Commission.
Third-country branches. The legislative package introduces minimum requirements for the supervision of ‘third-country branches’ of banking groups operating in the EU.
As proposed by the Commission, the rules on capital requirements will apply to branches managing more than €5 billion of assets in the EU or managing retail deposits. However, Member States specify that these deposits must represent at least 10% of the assets managed by the branch or exceed €100 million.
In its initial proposal, the Commission wants branches of third-country banks with more than €30 billion in assets to be assessed to determine whether they pose a systemic risk.
This €30 billion threshold is no longer in the Council text. However, it does put forward certain criteria such as the size of the branch and its market share in the host country, the type of activities carried out, the level of interconnection with the banking sector of the host Member State, the ease of replacing the infrastructure operations provided by the branch or the impact that a closure of the branch would have in the host country.
By the end of 2025, the European Supervisory Authorities EBA and ESMA will be asked to report on whether and how to harmonise the requirements for a third-country banking group to apply for a licence to operate a branch in the EU.
It should be noted that Member States retain the possibility for a national competent authority to require a third-country banking group to convert a branch considered to be systemically important into a subsidiary and/or to impose additional capital or liquidity requirements on it.
ESG risks. There are also provisions for the better integration of environmental, social and governance risks by the banking sector. Financial institutions will have to prepare plans to demonstrate how these risks are being addressed and how their activities fit in with the EU’s objective of achieving climate neutrality by 2050. National supervisors will have to monitor the implementation of these plans.
See the proposal for a directive submitted to Coreper: https://aeur.eu/f/3vu
See the proposal for a regulation submitted to Coreper: https://aeur.eu/f/3vv (Original version in French by Mathieu Bion)