On 28 June 2024, the European Banking Authority (EBA) published a final report on draft regulatory technical standards (RTS) on conditions and indicators that the European Supervisory Authority shall use to determine whether extraordinary circumstances have occurred for the purposes of Articles 325az(5) and 325bf(6) of the Capital Requirements Regulation (CRR).

Articles 325bf(6) and 325az(5) of the CRR, as amended by Regulation (EU) 2024/1623 (CRR3) provides that Member State competent authorities may permit institutions to derogate from certain requirements of the regulatory framework for the use of internal models, or apply a softer version of those requirements, where a situation of extraordinary circumstances has occurred. Such a tool avoids the need to make cumbersome changes to the legislative framework every time circumstances are deemed to be too extraordinary to continue applying the regulatory requirements in full. Article 325az(9) of the CRR provides that the occurrence of extraordinary circumstances shall be determined by the EBA, which must issue an opinion to that effect.

The draft RTS:

  • Establish a high-level framework for identifying the occurrence of extraordinary circumstances, setting out conditions that need to be met and indicators that could support the identification of extraordinary circumstances.
  • Set out that only a situation of cross-border financial market stress, or a regime shift, can qualify as a situation of extraordinary circumstances, and only subject to the additional condition that this stress or regime shift impacts the validity or suitability of the results of the back-testing or the profit and loss attribution test.
  • Specify that, among other factors and indicators reflective of the nature of the stress or regime shift, the levels of volatility and correlations should be assessed. The draft RTS also require taking into consideration, how quickly the financial stress manifested or the regime shift happened.

The draft RTS will be submitted to the European Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the EU. The draft RTS will apply from 20 days after their entry into force.