Provisional agreement reached on the implementation of Basel III reforms

“After intense negotiations we have reached an agreement on updated rules which we believe will boost the strength and resilience of banks operating in the Union. This is a major step forward which will help ensure that European banks can continue to operate also in light of external shocks, crises or disasters. The swift implementation of global standards is also an important signal for our international partners and the EU’s continued commitment to international cooperation and multilateralism,” commented Elisabeth Svantesson, Swedish Minister for Finance (pictured).

“Today’s agreement marks the culmination of a long process to reform the EU’s banking rules in the wake of the financial crisis. By making the banking sector more resilient, the new rules will help the EU continue to withstand challenges such as COVID-19 and the economic impact of the war in Ukraine. The rules will also support the green and digital transitions by means of a strong banking sector that can provide funding to the real economy, households and citizens,” said Niklas Wykman, Swedish Minister for Financial Markets.

Under the provisional agreement, negotiators have agreed on how to implement the so-called ‘output floor’, limiting banks’ variability of capital levels computed by using internal models, and the appropriate transitional arrangements to allow sufficient time for market players to adapt.

Negotiators further agreed to make improvements to the areas of credit risk, market risk and operational risk. They also agreed to provide for additional proportionality in the rules, in particular for small and non-complex institutions.

The agreement further includes a harmonised ‘fit and proper’ framework for assessing the suitability of members of the institutions’ management bodies and key function holders. Similarly, an agreement was also reached on rules to safeguard supervisory independence, notably by providing for a minimum cooling-off period for staff and members of governance bodies of competent authorities before they can take up positions in supervised institutions, and a limit on the time in office for the members of the governance bodies.

Negotiators also agreed on a transitional prudential regime for crypto assets and on amendments to enhance banks’ management of ESG risks.

Under the provisional agreement, negotiators decided to harmonise minimum requirements applicable to branches of third-country banks and the supervision of their activities in the EU.

The agreement has been agreed ‘ad referendum’ and is therefore provisional as it still needs to be confirmed by the Council and the Parliament before it can be formally adopted.

Caroline Liesegang, Head of Prudential Regulation at the Association for Financial Markets in Europe (AFME), welcomed the agreement: “This agreement will strengthen banks’ resilience and recognises their role in financing the economy. European banks have raised hundreds of billions in equity capital since the financial crisis, resulting in record capital levels and high resilience – as demonstrated by recent events in the banking sector. These market events also show that regulation is not necessarily only about capital levels, but about effective supervision. AFME therefore cautions against driving up minimum capital requirements further without a comprehensive economic assessment. We expect the impact of today’s agreement to be closely monitored going forward in line with the Commission’s impact assessment.

“It will be important that between now and the finalisation of the text that the implementation date of 1 January 2025 is kept under close review to ensure global consistency and competitiveness.”

Background

The EU is about to finalise the implementation of Basel III international agreements into EU law. The Basel III agreement was reached by the EU and its G20 partners in the Basel Committee on Banking Supervision to make banks more resilient to possible economic shocks. The Basel III-standards comprise a number of measures to enhance prudential regulatory standards, supervision and risk management of banks as a response to the Global Financial Crisis of 2007/2008.

The European Commission presented its proposals on a review of the Capital Requirements Regulation and the Capital Requirements Directive on 27 October 2021. In addition to amendments to implement the Basel III-standards, the proposals also included several measures related to the supervisory framework. The Council agreed on its General Approach for the proposals on 8 November 2022. Trilogues with the European Parliament started on 9 March 2023 and ended in the provisional agreement reached today.