The Czech Presidency noted on Tuesday 8 November that there is political agreement in principle (‘general approach’) in the Council of the European Union on the legislative package - a regulation (CRR III) and a directive (CRD VI) - which finalise the integration into the European Union of the 2017 ‘Basel III’ Accord strengthening banking prudential rules (see EUROPE 13055/6).
“I know how much this complex and important legislative package has required compromise from all of you. I am pleased to announce that the EU Council has reached an agreement on the ‘Basel III’ proposals”, said Czech Finance Minister Zbyněk Stanjura after the public debate.
‘Output floor’. In line with Basel III, the proposed regulation introduces a tiered ‘output floor’ for European banks using an internal model to calculate their risk-based capital requirements. The result obtained by the internal model may not be less than 72.5% of the capital requirement calculation obtained via the standard model (model based on a regulatory formula).
The EU Council endorsed the sequence initially proposed by the European Commission to reach the 72.5% level by 2030: 50% in 2025, 55% in 2026, 60% in 2027, 65% in 2028, 70% in 2029.
In the discussions between Member States, the division between home and host countries of large banking groups (‘home/host issue’) reappeared in the setting of the capital adequacy floor.
The Commission had proposed calculating the additional capital charge at the consolidated level and then allocating the charge proportionally to each of the subsidiaries.
In the end, according to a compromise reached under the previous French Presidency of the Council, it was decided that this floor could be set at the level of each financial institution. However, a Member State retains the possibility of applying an output floor at the consolidated level of all entities of the same group located on its territory.
A solution of this kind, which moderately increases the capital surcharge for a cross-border group, allows a group to benefit from the offsetting effect in the home country of a group. Mutual banks operating in one country also called for such a regime. At the same time, in order to satisfy the host country of the groups, capital requirements resulting from the ‘Basel III’ Accord are applied at the level of subsidiaries of a group active in other Member States.
Among the countries that spoke, Romania, Luxembourg, Belgium and Lithuania welcomed the fact that the agreement sets a capital floor at all levels of a financial institution. Such a provision is “the backbone of a stable banking sector”, said the Luxembourg minister.
Transitional provisions. To take account of the specificity of the European banking sector, transitional provisions will be introduced, sometimes until 2032, to cushion the impact of the output floor. This includes bank exposures to unrated companies, low-risk mortgages and financial derivatives.
Belgium and the Netherlands would have liked these provisions to be genuinely transitional, whereas the rendez-vous clauses provide that the Commission may propose to extend them, or even make them permanent, depending on the opinion of the European Banking Authority.
Other countries, such as Denmark, want permanent exemptions. Its minister felt that the capital floor could jeopardise the business model of Danish mortgage lenders. Stressing the sensitivity of the issue in the national parliament, he in fact wanted a permanent rule that exempts those institutions with very low exposures to real estate and unlisted companies.
During the debate, the ECB and, to a lesser extent, the European Commission expressed concern that the ambition of the legislative package would be weakened. Commission Vice-President Valdis Dombrovskis mentioned, among other things, the independence of supervisors, the supervision of branches in the EU of banking groups established in third countries and a framework for assessing the ‘fit-and-proper’ framework of bank managers.
The many deviations introduced in the text from the ‘Basel III’ Accord erode stability measures, said Luis de Guindos, on behalf of the ECB, warning against a further negative assessment by the Basel Committee of the transposition of international standards in the EU. Its only positive consideration was the provisions for dealing with environmental, social and governance (ESG) risks.
It should be noted that the reporting rules have been adapted to provide more proportionality for smaller and less complex banks.
Inter-institutional negotiations with the European Parliament will start once MEPs have decided on their negotiating position. The EU is the first jurisdiction to move ahead with the legislative work to implement Basel III, with the US and UK yet to communicate their intentions.
See the text of the regulation agreed by the Ecofin Council: https://aeur.eu/f/3y3
See the text of the agreed directive: https://aeur.eu/f/3y5 (Original version in French by Mathieu Bion)