After 12 hours of negotiations, representatives of the European Parliament and the Swedish Presidency of the EU Council reached, on the morning of Tuesday 27 June, a provisional political agreement on the finalisation of the introduction in the EU of the so-called ‘Basel III’ banking prudential standards.
The European Union is “a forerunner” and will apply the regulatory framework “faithfully”, Parliament’s rapporteur Jónas Fernández (S&D, Spanish) told EUROPE. In the approved legislative text, “there are a few European specificities, but most of them are transitional”, he said. The swift implementation of the Basel Committee’s standards is “an important signal to our international partners”, said the Swedish Minister for Finance, Elisabeth Svantesson, in a press release.
The EU is the first jurisdiction to fully incorporate the Basel III agreement into its internal rules for all its banks. The United States, which imposes the Basel standards only on its large systemic banks, has not yet begun its work, while the United Kingdom has just embarked on an internal consultation phase.
As anticipated (see EUROPE 13206/4), discussions focused on the three political issues still outstanding: - the level of application of the so-called ‘output floor’ for banks using an internal model to calculate their capital requirements; - the ‘fit-and-proper' framework for assessing the suitability of members of the institutions’ management bodies and key function holders; - the supervision of branches of third country banks operating in the EU.
Output floor. On the output floor, the European Parliament/EU Council agreement is clearly in favour of the Member States, since it validates the approach advocated by the EU Council (see EUROPE 13059/1).
The legislative proposal introduces this output floor in stages for European banks using an internal model to calculate their capital requirements based on the risks they take. The result obtained using the internal model may not be less than 72.5% of the capital requirement calculation obtained using the standard model (based on a regulatory formula). A timeframe has been granted to gradually increase the level from 50 to 72.5% between 2025 and 2030.
Whereas Parliament wanted to apply the minimum threshold at the consolidated level of a group, this threshold will be set at the level of each entity of a banking group. This was a red line for Member States hosting subsidiaries of major financial institutions. 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.
MEPs have nonetheless ensured that the European Commission, in cooperation with the European Banking Authority (EBA) and the ECB, will carry out an assessment of the state of the banking sector by the end of 2028 to analyse the appropriateness of presenting a legislative proposal on the calculation of the output floor at the consolidated level of a credit institution. In a declaration to be annexed to the final agreement, the Commission will indicate that it will assess the functioning of the internal banking market and how to deepen its integration.
“We’ll see how things develop. We are waiting for a proposal from the Commission”, said Mr Fernández.
For the Parliament, it was also essential to include “a clear end date”, i.e. 2032, which would put an end to the transitional provisions designed to cushion the impact of the output floor, taking into account the specific nature of European industry in terms of exposure to unrated companies, low-risk mortgages and financial derivatives. The Commission may make a proposal to extend these transitional arrangements for a further 4 years.
“The important thing was to show the Basel Committee that these provisions were transitional” in order to prove that the EU was complying with international standards, commented a parliamentary source.
Shadow banking. Mr Fernández went on to say that the European legislator had drawn up an initial definition of the ‘shadow banking’ sector, introduced transparency requirements on the exposure of the traditional banking sector to shadow banking and requested a specific proposal from the European Commission.
Fit-and-proper. The longest discussions during the trilogue were on the provisions relating to the ‘fit-and-proper’ assessment of a person who wants to take up a senior position in a major bank.
Parliament wanted a competent national authority to be empowered to carry out ex ante evaluations, i.e. prior to the appointment of a manager. Finally, a notification and information exchange process will be put in place so that a bank provides the national supervisor with information at least 30 days before a person is appointed. The competent national authority will be able to request more information and will have to engage in a serious dialogue with the bank concerned to resolve any doubts.
“If it considers that it does not have enough information, it may delay the candidate’s assumption of office”, noted this parliamentary source. The rapporteur goes even further: “In extreme cases and in accordance with national rules, the national authority will be able to delay the entry into service, or even refute it”, he said.
It should be noted that a minimum ‘cooling-off’ period has been introduced before members of a national authority (3 months for individuals, 6 to 12 months for managers) are authorised to take up senior positions in a financial institution supervised by the same authority. And members of the board of directors of a national competent authority will not be able to remain in office for more than 14 years.
Branches of third country banks. The co-legislators maintained the provisions governing the supervision of banks in third countries, whereas the EU Council had weakened the text. A third country bank will have to set up a branch in the EU.
At the EU Council’s request, exemptions have been introduced, notably in the case of inter-bank relations or when the customer goes directly to the bank from a third country. For contracts in force up to the date of publication of the legislative text in the Official Journal, the new requirement will not apply.
Above a certain threshold of assets (10 billion for a single entity and 40 billion at European level), a national competent authority will also be able to require a large third country bank to transform its branch into a subsidiary, if the branch is of systemic importance. The EBA will be consulted on this point.
Already settled, two other important issues - the prudential treatment of exposure to crypto-assets and environmental, social and governance (ESG) risks - were not addressed at the last trilogue.
Crypto-assets. Until 2025, prudential treatment will apply to investments in the categories of crypto-assets identified in the ‘MiCA’ regulation on the basis of risk.
For example, for each euro invested in a Bitcoin, a bank will have to hold one euro of equity capital (i.e. a risk weight of 1,250%). For electronic money tokens, the weight will be set at 250%.
ESG. Future banking prudential rules do not introduce capital requirements for bank exposures to fossil fuel industries, although increased transparency in this area will be required.
We now have a “definition of exposure to fossil fuels”, said Mr Fernández, estimating that “99%” of the European Parliament’s ESG risk requests had been accepted.
The EBA will be given a mandate to assess, by the end of 2025, the appropriateness of imposing such requirements on all ESG risks.
Other approved provisions concern the valuation of collateral used to guarantee a bank’s exposure, a valuation that will have to take into account the risk linked to climate change. On the other hand, the risk weight for exposure to the CO2 ETS will be reduced. (Original version in French by Mathieu Bion)