MEPs want to include European banks’ exposures to crypto-assets in the future negotiations with the Council of the European Union aiming to finalise the introduction in the EU of the ‘Basel III’ agreement introducing new banking requirements.
On Tuesday 24 January, the European Parliament’s Committee on Economic and Monetary Affairs is expected to ask the European Commission to quickly present a legislative proposal for the EU implementation of the standards on banks’ exposure to crypto-assets that the Basel Committee on Banking Supervision unveiled in mid-December.
The Commission’s legislative proposal would then become part of the legislative process for the ‘Basel III’ package, on which MEPs will decide on Tuesday. Before the new rules apply, MEPs will ask European banks to pursue a prudential policy on the matter and comply with detailed transparency standards on their crypto-asset exposures.
See the Basel Committee’s standards on banks’ exposure to crypto-assets: https://aeur.eu/f/50f
Output floor. The legislative package on the table (one directive, one regulation) introduces an ‘output floor’ for banks using an internal model to calculate capital requirements according to the nature of the risks incurred (see EUROPE 12821/2). The result obtained by the internal model may not be less than 72.5% of the capital requirement calculation obtained via the standard model, which is based on a regulatory formula.
On Tuesday, MEPs will not change the trajectory to reach the 72.5% threshold by 2030.
According to our information, the major change MEPs will make is to apply the minimum capital threshold at the consolidated group level (see EUROPE 13011/18). A compromise amendment supported by a majority of political groups introduces a mechanism through which the supervisory authority (‘host’) of a subsidiary of a banking group can request a review of the application of the output floor in order to apply it at the level of the subsidiary. If the home and host authorities could not reach an agreement, the European Banking Authority would step in to resolve the dispute.
It is also expected that a link will be made with the work on completing the banking union. MEPs will call for an evaluation in 2027 of this currently stalled project. Furthermore, if insufficient progress is made, the Commission could make a proposal to revert to applying the minimum capital threshold at the level of the entities of a group.
In the EU Council, Member States advocate that the capital floor should be set at the level of each financial institution, with a Member State retaining the option of applying the output floor at the consolidated level of all entities of the same group located on its territory (see EUROPE 13059/1).
In order to take into account the specificity of the European banking sector, transitional provisions will be introduced to limit capital requirements for exposure to, for example, unrated companies, low-risk mortgages and financial derivatives. MEPs are expected to retain these transitional periods extending until 2032, while giving the Commission the possibility to propose an extension of this period for a maximum of 4 years, until 2036.
This is a compromise: the Greens/EFA group wanted to delete the transitional provisions, while the EPP group wanted to make them permanent.
ESG. On the consideration of environmental, social and governance (ESG) risks, there is no majority in the parliamentary committee to introduce capital requirements for banks’ exposure to fossil industries. Again, the EPP group made this a red line, while the Renew Europe group apparently showed a degree of openness to the demands of the Greens/EFA and S&D groups.
Following a suggestion by rapporteur Jónas Fernández (S&D, Spanish), MEPs are nevertheless expected to ask banks to increase the value of their provisioning for potential losses in line with ESG risks, for example to take account of the end of production of combustion engine cars by 2035.
Fit-and-proper. On the ‘fit-and-proper’ framework for assessing bank managers, MEPs want to maintain the provisions suggested by the Commission. This includes an ex-ante assessment by a national competent authority of a candidate’s suitability for a position on the board of a group or for a key banking role.
In the EU Council, the Member States, led by Germany, rejected such provisions.
Third country branches. Finally, MEPs are expected to more or less retain the provisions of the original proposal relating to the supervision of EU branches of banking groups based in third countries, whereas the EU Council has deleted these provisions.
In particular, a national supervisor would be able to oblige a third-country bank managing over €40 billion in assets within the single market and posing a systemic risk to convert its EU branches into subsidiaries.
Once the MEPs’ position has been voted on and confirmed at the Strasbourg plenary session in mid-February, trilogue negotiations with the Swedish Presidency of the Council of the European Union could officially begin. (Original version in French by Mathieu Bion)