Today, the Committee on Economic and Monetary Affairs (ECON) adopted by a large majority the agreement of the European Parliament, the Council of the Member States and the European Commission on new rules for banks in the EU. The new rules implement the internationally agreed Basel standards for a binding leverage ratio (LR) and a net stable funding ratio (NSFR) in the EU. The package also strengthens the resolution of struggling banks and the fight against money laundering. Small and low-risk banks benefit from a noticeable relief in their administrative burden. For the first time, large and listed institutions will be obliged to publish environmental, social and governance risks.
The numerous improvements to the current legislative text are being counteracted by the extension of existing exemptions or the creation of new privileges. Overall, risk reduction, especially at major institutions, falls short of the non-binding Basel rules.
Following the vote in ECON, the plenary of the EU Parliament must now approve the final text. The law will then be published in the EU Official Journal and will enter into force 18 months later.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The EU is putting the non-binding Basel standards into European law. From now on, European banks will have to limit their indebtedness, even though 3% leverage ratio will not prevent new bank failures. Small and low-risk banks such as savings banks and cooperative banks will be noticeably relieved from superfluous bureaucracy. Regional promotional banks will be freed from unnecessary requirements. Based on green and social-democratic initiative, large and listed institutions will have to publish their ecological and social risks in the future. That means a big step forward for green financial markets. With the support of the other groups, we are strengthening the fight against money laundering in the Banking Union. The exchange of information between prudential supervisors and money laundering authorities will become mandatory. Money laundering risks must be taken into account in bank-specific capital surcharges as well as in the suitability of shareholders and the granting of bank licences. The macroprudential framework is becoming clearer and tougher. We will better protect small private investors from losses due to bank failures.
Unfortunately, other groups in the European Parliament have bowed in several places to the interests of strong financial lobbies, thereby unnecessarily sabotaging the reduction of risk in European bank balance sheets. Under pressure from conservatives and liberals, investments in software should in future be eligible as equity if certain conditions are met. Conservatives, liberals and social democrats have pushed for extending the preferential treatment of SME loans without subjecting it to any proofs that the risks arising from these loans actually justify preferential treatment. Member States have also introduced additional weakening measures. Following pressure exerted by France, globally systemically important institutions are allowed to offset intra-group transactions within the euro zone and thus reduce their capital requirements. The bottom line is that even after the reform of the banking rules, some European banks are still holding too little common equity. Unfortunately, there was no majority in favour of a leverage ratio of 10% or tough requirements limiting risks from shadow banks. To tackle the problems of oversized, overly complex and overly interconnected institutions, Europe urgently needs a separate banking system. We best serve financial stability with hard rules that are as simple as possible. Today, we have taken a small step in this direction – no more and no less.”
Summary of the most important changes (CRR 2 / CRD V) compared to the status quo (CRR 1 / CRD IV)
Introduction of a binding leverage ratio (LR) of 3% for all EU banks (Basel/COM) plus surcharge for globally systemically important institutions, short: G-SIIs (S&D/Greens); until now only mandatory reporting of the LR
Obligation to disclose average leverage ratio values to prevent undermining the leverage ratio between reporting dates, so-called window dressing (S&D)
Introduction of a binding net stable funding ratio (NSFR) for all EU banks (Basel/COM); so far only reporting of the NSFR
Introduction of a binding Total Loss Absorbing Capacity (TLAC) for globally systemically important institutions in the EU (FSB/COM), whereby banks must hold at least 8% of their total liabilities and own funds (TLOF) in subordinated instruments (subordination requirement).
Obligation for third-country banking groups with more than one branch in the EU to set up a central entity (Intermediate Parent Undertaking, IPU) in the EU to facilitate the supervision and resolution of such a banking group (COM)
Comprehensive revision of the macroprudential legal framework, so that the various capital buffers are no longer offset against each other but applied additively, increase in the upper limits of the capital buffers, simplified activation procedure for the capital buffers, ESRB as central information point, regular review of the legal framework every three years (Council/Greens/EPP/S&D)
Tougher provisions for the Maximum Distributable Amount (MDA) in the event of a bank failing to meet its capital requirements and putting an end to double counting of capital instruments for more than one capital buffer (Council/EP)
Deletion of the special treatment for CoCo bonds (Additional Tier 1 instruments), whose coupons so far were continued to be paid in preference to dividends and bonuses in the event of distribution restrictions, thereby enforcing the liability principle (Greens)
Disclosure of environmental, social and governance risks by large and listed banks (Greens/S&D)
Consideration of ESG risks when setting bank-specific additional capital requirements in Supervisory Review and Evaluation Process (SREP) following a corresponding EBA report (Greens/S&D)
Extension of the deferral of variable remuneration from 3-5 years for all material risk takers including the management body to 4-5 years for material risk takers and 5 years for the management body (Greens)
Upgrade of the non-binding EBA guidelines for the definition of shadow banks to a binding Regulatory Technical Standard (COM/Greens)
Reporting on the effects of the application of the new Basel rules on market risk (Fundamental Review of the Trading Book, FRTB) by a Delegated Act by mid-2019; introduction of FRTB in line with Basel in 2022 by a Commission proposal by mid-2020 without phase-in (Council)
Stricter requirements for bank’s trading activities (trading desks) including the obligation to carry out consistency checks between the assumptions of risk management and accounting (“profit & loss attribution test”) (Basel/COM)
Clarification that the bonus cap applies to all material risk takers of a banking group when they provide services to the bank. This is achieved by removing the discretion of credit institutions to apply the bonus cap only “to the extent” appropriate to their size, internal organisation and the nature, scope and complexity of their activities (COM/EP)
Consideration of money laundering risks when setting bank-specific additional capital requirements (SREP), when reviewing the suitability of members of the board of directors and members of the supervisory board (Fit & Proper) and when granting bank licenses (EBA/Greens/S&D)
Mandatory exchange of information on money laundering between prudential supervisors and anti-money laundering authorities (Greens/EPP/S&D)
Introduction of more risk-sensitive approaches to counterparty default risk (Counterparty Credit Risk, CCR: SA-CRR, simplified SA-CCR and revised OEM)
Introduction of the Basel standard for interest rate risk in the banking book (IRRBB) (COM/Basel)
Phase-out of the possibility to count deferred tax assets (DTAs) as equity (COM)
Monitoring of loans to affiliated companies and members of the Management Board that could lead to conflicts of interest (S&D)
Relief in disclosure and reporting requirements for small and low-risk banks, including a conservatively calibrated simplified NSFR (COM/Council/S&D/Greens). Administrative relief for small banks will give us a more diversified and stable European banking landscape.
Reduction of additional capital requirements for globally systemically important banks (G-SIIs) by offsetting intra-group transactions within the euro area, subject to approval by the ECB (Council).
Several deviations from the Basel standard weakened the now binding net stable funding ratio (NSFR):
- Reversed Repos: Transitional treatment on the basis of the Council text (3 years with automatic return to Basel), but with weaker calibration on the basis of the EP text (required stable financing 0% and 5% instead of 5% and 10%)
- Trade Finance: National discretion in calibrating the required stable funding on the basis of the EP text, supported by ECB and COM
- Factoring: National discretion in calibrating the required stable funding on the basis of the EP text, supported by ECB and COM
Several deviations from the Basel standard weaken the now binding leverage ratio (LR):
- Building societies: Possibility of exempting certain transactions vis-à-vis building societies from the calculation of the leverage ratio
- Possibility to exempt transactions within members of an institutional protection scheme (IPS) from the calculation of the leverage ratio (i.e. equal treatment of institutions within an IPS and other banking groups) subject to supervisory approval and a review clause (Greens assessment: justified deviation from Basel).
Legalisation of the already practised, legally highly dubious distinction between binding Pillar 2 capital requirement and non-binding Pillar 2 capital guidance, whereby the breach of the capital guidance does not automatically lead to restrictions on the distribution of profits (COM).
Three-year exemption from the obligation to include losses from massive disposals of bad loans in the capital requirements calculated through internal models, which should help to reduce the stock of bad loans in European bank balance sheets (S&D)
Extension for two years from 2022 to 2024 (Danish Compromise) of the possibility to not deduct holdings in certain insurance holding companies from equity (EP)
Reduced risk weights for loans financing infrastructure projects without an obligation to demonstrate that their preferential treatment is justified by lower risk (COM/EP/Council)
Expansion of the preferential treatment for SME loans from a maximum of EUR 1.5 million to EUR 2.5 million (EP)
Introduction of the possibility to count investments in software as common equity, subject to a delegated act of the EBA (EP).
Risk neutral measures
Qualification of equity provided by a parent company as eligible equity at the subsidiary under the existence of a profit and loss transfer agreement, subject to strict conditions (EP)
Reduced risk weights for loans secured by pensions or salaries. Green assessment: seems justified (S&D)
Consumer protection measure
Protection of retail investors against financial instruments that suffer losses in the event of bank failures by means of larger bonds denominations