Adopting all the compromise amendments negotiated by the main political groups, the European Parliament’s Committee on Economic and Monetary Affairs adopted its position on Tuesday 24 January on the legislative package - a Directive and a Regulation - aimed at finalising the introduction in the European Union of the international prudential standards known as ‘Basel III’.
As anticipated by EUROPE (see EUROPE 13104/9), MEPs believe that the output floor for banks using an internal model to calculate capital requirements according to the nature of the risks incurred should apply at the consolidated level of a banking group (see EUROPE 13011/18).
The supervisory authority (‘host’) of a banking subsidiary may request a review of the application of the output floor in order to apply it at the level of that subsidiary. The European Banking Authority will be able to issue a binding opinion in the event of a dispute between home and host supervisors, say MEPs.
In order to take into account the specificity of the European banking sector, transitional provisions until 2032 will be introduced to limit capital requirements for exposure to, for example, unrated companies, low-risk mortgages and financial derivatives. MEPs retain these transitional periods, albeit with a slightly stricter application of the transitional provisions for exposures to unrated companies. However, they limit the possibility for the Commission to propose an extension of the derogations for a maximum of 4 years, until 2036.
“Attempts by some members to permanently carve out certain asset classes from [the output floor] in deviation from the Basel agreement only works in service of large banks and jeopardises (...) the EU’s credibility as a reliable negotiating partner in international fora. Including a clear limitation of four years, at the most, to any potential extension of the transitional arrangement, is a key element in the text (...) green-lit today”, said Parliament rapporteur Jónas Fernández (S&D, Spanish) in a statement.
Crypto-assets. With regard to crypto-assets, European banks will have to disclose information about their individual exposures to these assets. Furthermore, pending a legislative proposal to transpose the Basel Committee’s December 2022 recommendations on the prudential treatment of crypto-assets, they will have to apply a 1.250% risk weight to these exposures. By requesting this legislative proposal from the Commission by June 2023, MEPs want to introduce it into the trilogue negotiations with the Council of the EU.
It should also be noted that the rapporteur has included in the agreed compromise a definition of the shadow banking sector and reporting requirements on bank exposures to entities in this opaque and poorly regulated financial sector. The Commission is invited to publish a report by the end of June on the appropriateness of limiting exposures to these entities in view to a possible dedicated legislative proposal.
ESG. According to MEPs, the management bodies of banking groups will be required to adopt transition plans to address environmental, social and governance (ESG) risks, in line with the EU’s 2050 climate neutrality target. Supervisors will need to check the robustness of these plans as part of the Supervisory Review and Evaluation Process (SREP). The remuneration policies of bank executives should be aligned with these objectives, say MEPs.
Finally, on the framework for the ‘fit-and-proper’ assessments of bank managers, MEPs endorse the Commission’s suggestion to give a national competent authority the power to assess ex ante the suitability of a candidate for a position on a group board or in a key banking function, but without prejudice to existing practices and rules in Member States. (Original version in French by Mathieu Bion)