On 20 April 2022, the European Parliament’s Economic and Monetary Affairs (ECON) Committee held its first exchange of views on the European Commission’s (Commission) legislative package on the implementation of the final Basel III standards.
The legislative package includes:
- A Commission proposal for a Regulation amending the Capital Requirements Regulation (CRR) Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRR III).
- A Commission proposal for a Directive amending the Capital Requirements Directive IV (CRD IV) as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending THE Bank Recovery and Resolution Directive (BRRD) (CRD VI).
- A Commission proposal for a Regulation amending the CRR and the BRRD 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 (daisy chain proposal). This proposal was discussed in the ECON Committee in a separate legislative process. A legislative report was adopted in the European Parliament plenary on 16 February 2022.
During the debate, European Parliament rapporteur Jonás Fernández (S&D, ES) set out his initial views on the Commission’s proposals. Fernández considers that the proposals go beyond the strict implementation of the final Basel III standards. Still, he thinks that the new rules will not lead to a general increase of capital requirements across the board, and that, even if that were the case, it would lead to more financial stability as banks that currently use internal models to calculate their capital requirements would need to increase these because of the introduction of the output floor. The final rules would also need to ensure that there is a level playing field between EU banks and foreign banks regulated under third country law.
With regard to specific aspects of the Commission’s proposals, Fernández generally supports the inclusion of Environmental, Social and Governance (ESG) disclosures in the Pillar 3 framework and welcomes the Commission’s proposal to improve the supervision of third-country branches.
Following Fernández’ presentation, the ECON shadow rapporteurs, which follow the file on behalf of their respective political groupings, presented their own initial views on the Commission’s proposals:
- Othmar Karas (EPP, AT) told the ECON Committee that it should be made clear to stakeholders that the implementation of the final Basel III standards should contain EU-specific provisions, and that it should not lead to a general increase in capital requirements. Karas emphasised that the prudential framework in the EU should be proportionate and not lead to competitive disadvantages vis-à-vis third-country credit institutions. More specifically, Karas wants to reconsider risk weightings for a number of exposures, such as to certain corporates, real estate and trade financing.
- Gilles Boyer (RE, FR) hopes that the final outcome of the negotiations on the legislative texts will strike the right balance between a faithful implementation of final Basel III standards, and the mandate by the European Council which recommends no significant increase for capital holdings. Like the rapporteur, Boyer is of the view that the competitiveness of EU credit institutions should be taken into account throughout the negotiations. For him, the introduction of the output floor is one of the most important aspects of the current proposals.
- Linea Søgaard-Lidell (RE, DK) thinks that the Commission’s proposals include a number of good elements but warns that the legislator should be careful not to introduce too much red tape for EU credit institutions. Søgaard-Lidell is also concerned with the allocation of lower risk weights to investments for the reason that they are considered sustainable.
- Ville Niinistö (Greens/EFA, FI) asks for a fair, full and timely implementation of the final Basel III standards. That said, Niinistö thinks that the Commission’s proposals do not fully comply with these standards. On the output floor, Niinistö is of the view that the single-stack approach proposed by Commission is the only approach that respects the standards and that the proposed temporary deviations on real estate mortgage and unrated corporate exposures would create an uneven playing field between larger and smaller banks. Finally, Niinistö wants to improve the framework to ensure that risk caused by stranded assets are reflected in the EU prudential framework
- Marco Zanni (ID, IT) acknowledges the issues mentioned by the other shadow rapporteurs and thinks that it is crucial to define a more flexible approach instead of imposing too rigid a structure. Zanni also wants to improve reciprocal prudential recognition standards to avoid distortion in the markets.
- Raffaele Fitto (ECR, IT) welcomes the Commission proposal and thinks that it is largely balanced. Fitto supports the proposed temporary deviations on real estate mortgage and unrated corporate exposures.
Following the exchange of views in the ECON Committee, rapporteur Fernández is due to publish a draft report on the CRR III and CRD VI proposals in the coming months. The draft report will form the basis of discussions within the ECON Committee. Following the presentation of the draft report in the ECON Committee, other committee members can file their own amendments to the proposal. We expect these discussions to continue at least until Q3 2022, with a legislative report on the CRR III and CRD VI proposals expected to be adopted within the ECON Committee by the end of September at the earliest. Following adoption of the report in the ECON Committee, the rapporteurs need to obtain a mandate from the European Parliament plenary to engage in trilogue negotiations with the Council, who is working on its own position on the legislative proposals in parallel. A final compromise between the European Parliament and the Council on the text of the CRR III and CRD VI is not expected until just before the end of 2022 or the beginning of 2023.