On 8 November 2022, the Council of the EU adopted its general approach on the European Commission’s (Commission) legislative package on the implementation of the final Basel III standards.
The Basel III legislative package comprises of 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).
- 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).
- 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 has already been adopted and published in the Official Journal of the EU on 25 October 2022 as Regulation (EU) 2022/2036 and is out of the scope of this update.
Member States have been discussing the CRR III and CRD VI proposals since the Commission published them on 27 October 2022. Following the adoption of the general approach, the Czech Presidency of the Council provided an overview of the main amendments made by the Council to the original Commission proposal.
- Output floor: in terms of limiting the variability of capital levels of credit institutions computed by using internal models the Council has specified that the limit applies both at banking group level and at the level of each individual bank. However, Member States will have the power to apply the floor at the highest level of consolidation within their jurisdiction if they wish so.
- Small and non-complex institutions: the Council amended the proposal to enhance proportionality rules for smaller banks, in particular with regard to disclosure requirements.
- Fit and proper framework: the framework for assessing the suitability of members of the managed bodies and key function holders of credit institutions have been amended to further consider national specificities and practices.
- Cooling-off periods: the Council has amended the framework rules for staff and members of governance bodies of competent authorities wishing to start working for credit institutions to make it more proportionate and targeted.
The Council general approach has received some criticism from a number of stakeholders. In a blog post published on 4 November, European Central Bank (ECB) Supervisory Board Chair Andrea Enria, European Banking Authority (EBA) Chair José Manuel Campa voiced their concerns about the text, fearing that the final text of CRR III and CRD VI would deviate too far from the final Basel III standards. As a result, they write, the deviating EU prudential framework for credit institutions could increase financial stability risk. In addition, the deviations would add to the complexity of the framework, making it more difficult for credit institutions to apply. In response, European Commission Executive Vice-President Valdis Dombrovskis mentioned in a speech on 8 November that the deviations from the final Basel III standards in the Commission proposal and Council general approach are meant to take into account the specificities of the EU banking sector, and will increase their competitiveness.
As the Council has now adopted its position on the proposals, it is ready to engage in so-called trilogue negotiations with the European Parliament. At the moment of writing, the European Parliament is still in the process of adopting its own position on the legislative proposal, with rapporteur Jonás Fernández (S&D, ES) negotiating on compromise amendments with his colleagues of the Economic and Monetary Affairs (ECON) Committee. It is expected that the ECON Committee will adopt its draft reports on the legislative proposals before the end of 2022, with the European Parliament plenary likely to adopt the report in December 2022 or the beginning of 2023. Trilogue negotiations are then expected to start in Q1 2023 under the Swedish Presidency of the Council, with a compromise agreement in Q2 2023.