On 27 October 2021, the European Commission put forward a proposal for amendments to EU banking rules.
Background
On 27 October 2021, the European Commission put forward a proposal for amendments to EU banking rules which aim to ensure that EU banks become more resilient to potential future economic shocks, while contributing to Europe´s recovery from the COVID-19 pandemic and the transition to climate neutrality.
The main objectives of this Banking Package are to:
- Strengthen the risk-based capital framework
- Enhance focus on ESG risks in prudential framework
- Further harmonise supervisory powers and tools
- Reduce administrative costs of disclosures and improve access to prudential data
The EU Banking Package is based on three legislative proposals.
1. Minimum Requirement for own funds and Eligible Liabilities; 2. Total loss absorbing capacity; 3. Single point of entry; 4. Multiple point of entry
Output Floor
- Setting of a lower limit to capital requirement calculated by internal models
- Distinguishes between floored and un-floored total risk exposure amount (TREA)
Credit Risk
- Revision of the standardised approach (SA-CR), including, amongst others, unrated, low-PD corporates
- Reduction of the scope of internal ratings-based approaches (IRB)
- Credit risks mitigation techniques
Market Risk
- Introduction of FRTB approaches to calculate own funds requirements
- Setting of alternative standardised approach (A-SA), alternative internal model approach (A-IMA) and simplified standardised approach (SSA)
Operational Risk
- Introduction of a new single, non-model-based, standardised approach
- Business indicator component (BIC) as unique factor in calculation of own funds requirements
- Entities with a business indicator ≥ EUR 750M to calculate and disclose annual operational risk losses
- EBA to report on the threat of use of insurance for regulatory arbitrage
CVA risk
- Definition captures both credit spread risk of counterparty and market risk of portfolio traded with that counterparty
- Introduction of basic approach, standardised approach and simplified approach
- New requirements for eligible hedges for own fund purposes
Other Topics
- ESG Risks - Institutions are expected to identify systematically, disclose and manage ESG risks at individual level
- Disclosures
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- Small and non-complex institutions and other non-listed institutions should disclose performing, non-performing and forborne exposures for loans, debt securities and off-balance-sheet exposures, and information on past due exposures on an annual basis
- New disclosure requirements for market risk (using SA approaches and the A-IMA) and for CVA risk
- Revised disclosure requirements for operational risk
- Leverage Ratio
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- Amended treatment of client-cleared derivatives
- Removal of minimum conservation factor of 10 % for certain off-balance-sheet items
- Provisions relating to regular-way purchases and sales awaiting settlement apply to financial assets, rather than only to securities
- Prudential Scope - Financial groups headed by Fintech companies or include entities engaged in financial activities are part of the prudential scope of consolidation
- EUCLID - centralised integrated system to aggregate reporting information shared by supervisors on the largest institutions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.