On 29 January 2020 the European Commission's new work programme was published. Under the third priority - 'an Economy that Works for People', the Commission announced its intention to review the regulatory framework on bank capital requirements, set out in the capital requirements directive (CRD) and and regulation (CRR), to complete the implementation of the international  regulatory standards  agreed within the Basel Committee on Banking Supervision (BCBS) in December 2017. These standards are known as 'Basel III finalisation'.

According to the January 2020 work programme, the reviewing proposals should be adopted in the second quarter of 2020. However, in reaction to the economic shock stemming from the COVID-19 pandemic, the BCBS agreed a one-year delay in the deadline for implementing the final elements of the Basel III framework, as well as a greater flexibility to the phase-in of the impact of the international financial reporting standard (IFRS) 9 on capital.

To reflect these changes into the EU rules, in its adjusted work programme presented on 27 May 2020, the Commission postponed the deadline for the adoption of the proposals implementing the Basel III finalisation until the fourth quarter of 2020. At the same time, a targeted proposal for a banking package increasing flexibility in prudential and accounting rules was adopted in the context of the Commission's economic response to the COVID-19 crisis (see specific fiche).

The Joint Declaration adopted by the three EU institutions in December 2020 identified the announced CRD / CRR review as a legislative priority for 2021.

On 27 October 2021, the European Commission adopted the review of EU banking rules. The package implements the international Basel III standards, while taking into account the specificities of the EU's banking sector, for example when it comes to low-risk mortgages. The proposed rules would require banks to systematically identify, disclose and manage sustainability risks (environmental, social and governance or ESG-risks) as part of their risk management. They also provide stronger enforcement tools for supervisors overseeing EU banks. The legislative package includes:

• a proposal for a directive amending the CRD (Directive 2013/36/EU);
• a proposal for a regulation amending the CRR (Regulation 2013/575/EU);
• a separate proposal for a regulation to amend the CRR in the area of resolution (the so-called “daisy chain” proposal).

The purpose of the daisy chain proposal is to amend the CRR and Banking recovery and resolution Directive (BRRD) in order to effectively manage the resolution framework, already envisaged by the 2019 banking package:

• incorporation of a dedicated treatment for internal internal minimum requirement for own funds and eligible liabilities (iMREL), with the harmonisation of the 
  prudential treatment;
• further alignment of the treatment of global systemically important institutions (G-SIIs) with an multi-point entry (MPE) resolution strategy with the treatment outlined in the total loss-absorbing capacity (TLAC) standard set out by the Financial Stability Board  (FSB);
• clarification of the eligibility of instruments in the context of the internal TLAC

In October 2021, Parliament's Committee on Economic and Monetary Affairs (ECON) appointed Jonás Fernández (S&D, Spain) as a rapporteur for the three legislative proposals. He tabled his draft report on 16 December 2021, and ECON adopted its final report on 4 February 2022.

The Council Working Party started examining the proposals in in October 2021 as well. Ministers reached agreement on a negotiating mandate on 21 December 2021.

The European Central Bank issued an opinion on this proposal on 13 January 2022.

On 13 June 2022, an agreement was found in trilogue. The final text resulting from the interinstitutional negotiations further ensures that the loss absorption and recapitalisation of financial institutions occurs through private means when they are placed in resolution. It incorporates a dedicated treatment for iMREL and further aligns the treatment of G-SIIs with an MPE resolution strategy with the treatment outlined in the FSB 'TLAC standard'. It also clarifies the eligibility of instruments in the context of internal TLAC.

An agreement was reached on divergences, namely the deduction regime for iMREL and the treatment of G-SIIs with an MPE resolution strategy. The deduction regime is expected to avoid double-counting of iMREL and maintain effective TLAC in line with disclosed MREL.

In addition, a review clause is added to take into account the impact on different types of banking group structures. This will be assessed by the Commission. The treatment of G-SIIs with an MPE resolution strategy is better aligned with the regime defined by TLAC international standards and takes into account third-country entities within such groups.

The text resulting from the interinstitutional negotiations was approved in Committee on 19 June 2022, and in plenary on 13 September 2022. The final act was signed on 19 October 2022, published in the Official Journal on 25 October 2022, and took effect on 14 November 2022.

References:

• Regulation (EU) 2022/2036 of the European Parliament and of the Council of 19 October 2022 amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institutions with a multiple-point-of-entry resolution strategy and methods for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities
• EP Legislative Observatory, Capital Requirements Regulation: prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities, 2021/0343(COD)
• European commission,  Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities, COM(2021) 665
• European Parliament, Legislative resolution of 13 September 2022 on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities
• European Central Bank, Opinion of the European Central Bank Of 13 January 2022 on a proposal to amend Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms with respect to resolution (CON/2022/3) 2022/C 122/10, January 2022

Further reading:

• European Parliament, EPRS, Amendments to the Capital Requirements Regulation in the area of resolution ('daisy chain' proposal), December 2022

Author: Issam Hallak, Members' Research Service, legislative-train@europarl.europa.eu