- Comparable risk weights and avoiding variations in capital levels
- Adressing environmental and third country risks
- Suitable board members in financial institutions
Parliament negotiators struck a deal to make EU banks resilient to economic shocks and implement the international Basel standards while taking into account specificities of the EU economy.
On Tuesday morning, negotiators from the European Parliament, the Council and the Commission struck a provisional deal on changes to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). Negotiators aimed at implementing the Basel III standards, as close as possible into EU legislation. At the same time, the texts agreed take into account the concrete conditions of the EU banking sector by introducing some European specificities, where possible on a transitional basis.
In CRR, negotiators agreed that the “output floor” calculated by banks using internal models should be applied at an entity level. However, Parliament negotiators made sure that by 31 December 2028, the Commission would asses the overall situation of the banking system in the single market, in close cooperation with the EBA and the ECB, and report to the European Parilament and to the Council on the appropriateness of the Union regulatory and supervisory frameworks for banks.
This report shall also consider the impact of the output floor on capital requirements and capital and liquidity requirements more in general, and the Banking Union developments. The Commission declared that it will, where appropriate, present a legislative proposal based on this report.
Environmental and crypto risks
MEPs made sure that the EU carbon neutraility by 2050 objective and relevant agreed EU sustainability goals are taken into account. Negotiators agreed that financial institutions should take into account environmental, social and governance (ESG) risks when assessing the value of collateral. The European Banking Authority (EBA) is mandated to assess whether a dedicated prudential treatment for exposures to ESG risks would be warranted. They also agreed on lower risk weight for exposures to EU Emissions Trading System (40%) to fight climate change and to support the role of banks in financing the green transition.
To address potential risks, MEPs also made sure that banks will have to disclose their exposure to crypto-assets. Given the ongoing work of the Basel committee, it was decided that the Commission should come up with a relevant legislative proposal to implement these future Basel standard and specify the prudential treatment of such exposures during the transitional period.
Assessment of the members of the banks’ managements boards
In CRD, MEPs pushed for provisions to avoid unsuitable persons on the management boards of large financial institutions. Agreed provisions should also promote diversity and gender balance. Negotiators agreed on a process of sharing of information on the suitability assessment made by large entities of candidates for their boards at least 30 days before this candidates take up the position. In case the competent authority does not have sufficient information to conduct sustainability assessment, or as major concerns on the suitability of the candidate, it may require that the intended appointee does not take up his/her position before the required information has been provided or the concerns addressed.
Where members of management body do not fulfil the requirements of suitability, member states should ensure that competent authorities have necessary powers to prevent and remove such members from the management body.
Third country regime
Also in CRD, negotiators agreed on a framework for access to the EU markets for third country banks. New provisions include a requirement for third country credit institutions to establish a branch in the EU and apply for authorisation unless they are subject to an exemption (in case where clients approach a third country bank at their own initiative or in case of interbank activities). In order to maintain legal certainty negotiators agreed that existing contracts with third country entities should not be altered.
Jonás FERNÁNDEZ (S&D, ES) the lead MEP on both files said: “The new capital requirements regulation and directive (CRR/CRD) that we have just agreed on with the Council will strengthen the EU’s banking system, making it more resilient to potential future crises and adapting it to the Union’s climate goals.
The texts agreed this morning incorporate most of the key aspects defended by the European Parliament in the interinstitutional negotiations. These include ensuring that the transitional arrangements in the application of the output floor have a clear end-date; introducing ESG as an important aspect in the EU’s financial legislation; and setting capital requirements for crypto assets until the Commission puts forward a specific legislative proposal. Moreover, we have reinforced the governing framework for the appointment of top posts in large financial institutions and ensured stronger requirements for third country branches.
All things considered, the deal we have reached is a good one, as the new banking legislation of the EU will certainly have a positive impact for citizens by lowering the risk of future banking crises, that could eventually lead to deep economic and social crises, as we unfortunately saw following the 2008 financial crash”.
The provisional political agreement reached by the EP negotiating team will now have to be approved first by the Economic and Monetary Affairs Committee, followed by a plenary vote. The Council also has to approve the deal, before it can come into force.