Implementing Basel IV in the EU – final negotiating positions on CRR3/CRD6
Executive Education / 16 May 2023
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After the European Council of Ministers agreed its negotiating position on CRR3/CRD6 at the end of November 2022, the European Parliament presented its own negotiating position in February 2023, following a series of intensive debates and voting.

The proposals form the basis of what is generally known as a “trilogue” – an informal tripartite negotiation between representatives of the three bodies involved in the EU’s legislative process (Commission, Parliament and Council) with the aim of reaching agreement on the final text of a piece of legislation. The first trilogue negotiations were held in March 2023; it is hoped that the text relating to CRR3/CRD6 will be finalised by the end of the second quarter or (more probably) during the third quarter of 2023.

Essentially, CRR3/CRD6 proposes the following amendments:

  • introduction of an output floor that limits the extent to which credit institutions can reduce their capital requirements based on their own internal models,
  • adjustments to the structure of exposure classes, and to the methods for calculating risk-weighted assets using the Standardised approach and Internal Ratings Based (IRB) approach,
  • stricter requirements for separating trading books from banking books, and for implementing the rules set down in the “Fundamental Review of the Trading Book” when calculating the corresponding capital requirements,
  • introduction of three new approaches for calculating capital requirements to cover CVA risk,
  • new standardised approach for calculating operational risk that replaces all previously applicable approaches,
  • new standards for managing and disclosing any sustainability risks to which credit institutions are exposed,
  • more rigorous requirements for third-country credit institutions providing banking services in the European Union.

Most of these amendments are expected to come into force on 1 January 2025. As far as the negotiating positions of the European Parliament and Council of Ministers are concerned, the following points in particular are worth highlighting:

Output Floor

The Council proposes that in principle, the output floor should apply to all credit institutions individually. It is possible that institutions with a parent company that is based in the same EU member state and is itself subject to the output floor may be exempted. According to the European Parliament’s proposal, however, the output floor would only apply to standalone credit institutions in the EU, or at the highest level of consolidation in the EU.

Credit risk framework and large exposure regimes

The amendments to the credit risk framework proposed by both Parliament and Council are largely based on the European Commission proposal published on 27 October 2021. Specific demands made in some of the Parliamentary debates – such as higher risk weighting of exposures and a “large exposure limit” applying to the fossil-fuel sector – have not been included in the European Parliament’s final negotiating position.

Operational risk

Neither the European Parliament nor the Council of Ministers anticipate the introduction of an “Internal Loss Multiplier” based on historical losses, as envisaged by the Basel Committee. Thus capital requirements shall be calculated solely as the product of business indicators.

Treatment of crypto assets

Contrary to earlier proposals by the European Parliament, the latter’s final negotiating position only contains a few specific proposals concerning the regulatory treatment of crypto assets. Instead, the European Commission is expected to develop a proposal for the treatment of crypto assets based on the Basel provisions, which could come into force in 2025. In addition, it is expected that crypto assets will be subject to a risk weighting of 1250% until the end of 2024.

Demarcation of trading and banking books

Both sets of proposals envisage that the rules for ring-fencing trading and banking books should be implemented in full on 1 January 2025. This means that the entry into force of provisions for the reclassification of positions between the trading and banking books (based on supervisory approval, disclosure, and additional capital requirements), and for internal hedging transactions – provisions which were originally intended to come into force on 28 June 2023 and would have partially anticipated the rules in the “Fundamental Review of the Trading Book” (FRTB) – has thus been deferred to the same date as the entry into force of the remaining FRTB rules on 1 January 2025.

CVA risks

Some of the proposals discussed by the European Parliament envisaged the abolition of exemptions from the duty to calculate capital requirements for CVA risk. These proposals did not, however, find their way into the final negotiating position. The Council also proposes to retain these exemptions.

In view of the dramatic changes made in the process of refining these regulations, and the limited time remaining prior to their implementation in 2025, both an in-depth understanding of and regular updates on the very latest developments are essential for banks seeking to comply with the new regulatory regime by 2025.