Round-up: EU votes to finalize Basel III reforms

The European Parliament’s Economic and Monetary Affairs (ECON) Committee voted to finalize reforms of international banking rules. Members of the European Parliament (MEPs) adopted changes set to make EU banks more resilient to future economic shocks and implement the Basel III agreement, taking into account specificities of the EU economy.

Adopting changes to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), MEPs agreed on the need to faithfully implement the Basel III reform, while avoiding a significant increase in overall capital requirements for the EU banking system. MEPs also aimed at achieving a harmonized internal market for banking with reduced compliance and reporting costs, especially for small and non-complex banks.

The Association for Financial Markets in Europe (AFME) welcomed the agreement. Caroline Liesegang, head of Prudential Regulation at AFME, said in a statement that the agreement is an important step in finalizing the EU implementation of the international Basel III reforms: “The Parliament has made positive steps forward via changes to the Commission’s legislative proposal which should be given due consideration during interinstitutional negotiations. More work is still needed on the crypto assets proposal to better define its scope to ensure tokenized securities are not captured. It is also vital that cross-border trading on financial markets can continue through the removal of the requirement for banks to establish a subsidiary or branch in the EU under Article 21c.”

AFME also noted that the industry welcomes the decision of the Committee to apply the Output Floor at the consolidated level, which reflects how it was calibrated at Basel. The main aim of the output floor is to address model risk, which in this specific case is the risk that a bank’s internal model incorrectly estimates the bank’s capital requirements. The main concern is that internal models might underestimate the amount of capital needed by banks. Studies conducted at EU and international level showed that capital requirements calculated by internal models can vary quite significantly, even for the same exposure. Some of this variability cannot be explained by the characteristics of the exposures. The output floor aims to reduce this unwarranted variability and therefore to increase the comparability of capital ratios of banks using internal models.

The crypto asset proposal that Liesegang noted refers to an interim treatment to apply a 1250% risk weight to crypto assets until 31 December 2024. AFME wrote in a statement that: “There is no definition of crypto assets in the CRR and therefore the requirement may apply to tokenized securities, as well as the non-traditional crypto assets the interim treatment is targeted at. The scope of application should be clarified in the trilogue process to ensure a faithful implementation of the finalized Basel standard to avoid any unintended impact on securities markets during the interim period.”

The International Capital Market Association’s (ICMA’s) European Repo and Collateral Council (ERRC) wrote in a newsletter that mandatory buy-ins look set to remain in EU law: “Despite concerted efforts by ICMA and the broader industry to remove the problematic mandatory buy-in (MBI) provisions from CSDR, recent positions from the European Parliament and the Council appear to support the Commission’s proposed ‘two-step approach’ to applying MBIs, albeit based on more robust criteria. ICMA continues to engage with policy makers to ensure that some of the more critical features, such as symmetrical settlement of the buy-in differential and the process for cash compensation, are dealt with in the final text. On a positive note, it seems likely that SFTs will be exempted from the scope of MBIs.”

Related Posts

Previous Post
ISLA Responds to Consultation on SDR & Investment Labels
Next Post
ISDA on netting and collateral enforceability after digital assets bankruptcies

Fill out this field
Fill out this field
Please enter a valid email address.


Reset password

Create an account