On 23 January 2023, the European Parliament’s Economic and Monetary Affairs (ECON) Committee adopted its draft reports 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) as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRR III). The report adopted in the ECON Committee can be accessed here.
  • 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). The report adopted in the ECON Committee can be accessed here.

Among other things, the ECON Committee adopted the following amendments:

  • Output floor: The output floor will set a lower limit on the capital requirements that are calculated by credit institutions using their own internal models. Under the Commission proposal, the output floor would be applied at both the individual and EU consolidated level. The ECON report amends this proposal by ensuring that the output floor should be applied to the EU consolidated level only. National competent authorities will have the power to address an inappropriate distribution of capital among banking groups and the power to propose a capital redistribution. Under the ECON report, the Commission should review the application of the output floor by 2027.
  • Carve-outs: The Commission proposal contains temporary carve-outs that would provide certain exposures with lower risk weights. These carve-outs concern exposures to residential real-estate mortgages and lending to unrated corporates. The ECON report limits the carve-out to four years following the entry into force of the new rules.
  • Environmental, social and governance (ESG) risks: The ECON report increases the reporting and disclosure requirements for ESG risks. It also provides the European Banking Authority (EBA) with a mandate to assess whether there should be a dedicated prudential treatment of ESG risk-related exposures.
  • Crypto-assets: Under the ECON report, credit institutions will be required to disclosure their exposure to crypto-assets and crypto-assets services. It also invites the Commission to publish a legislative proposal on a dedicated prudential treatment for exposures to crypto-assets by June 2023.
  • Suitability: The ECON report on CRD VI contains enhanced suitability requirements for members of management bodies of credit institutions, including that such bodies should be sufficiently diverse and gender-balanced. The ECON Committee also adopted amendments to ensure that key function holders are replaced if they cease to comply with suitability criteria
  • Third-country branches: Under the ECON Committee’s position, new third-country branches must refrain from commencing their activities in an EU Member State until the EBA and the home third country have adopted a Memorandum of Understanding containing a cooperation framework, including on exchange of information in ongoing supervision, crisis management and resolution.

Next steps

Following adoption of the report in the ECON Committee, the rapporteurs received a mandate from the European Parliament plenary to engage in trilogue negotiations with the Council, who adopted its own position on the legislative proposals in November 2022. A final compromise between the European Parliament and the Council on the text of the CRR III and CRD VI is not expected until Q2 2023.