EU’s New Capital Requirements Focused Towards a Greener and Safer Banking Landscape

The Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) have been reformed in a historic move by negotiators from the European Parliament, the Council, and the Commission. While taking into consideration the unique circumstances of the EU banking industry, Basel III norms need to be aligned.

The parties reached an agreement to implement the “output floor,” a significant Basel III framework component, at the entity level. However, they also made sure that the Commission will extensively evaluate the effect of this floor on the capital and liquidity requirements by the end of 2028. Evaluation of the suitability of the regulatory and supervisory structures for banks inside the single market will be the main objective.

Also emphasized in the agreement is the value of environmental, social, and governance (ESG) factors in the banking industry. ESG risks must now be considered by financial institutions when determining the value of collateral. When deciding whether to create a separate prudential treatment for exposures to ESG risks, the European Banking Authority (EBA) will be a key player. Additionally, negotiators have reached an agreement on lower risk weights for exposures to the EU Emissions Trading System, demonstrating their steadfast commitment to halting climate change and assisting green finance projects.

Addressing Crypto Risks and Enhancing Management Board Oversight

Negotiators have required banks to declare their exposure to crypto-assets due to the rising importance of these assets. In order to meet future Basel criteria for the prudential management of these exposures throughout the transitional period, the Commission is entrusted with developing a legislative framework.

The evaluation of the management board members of the banks is another crucial element of the agreement. There are rules in place to prevent inappropriate people from holding seats on the management boards of significant financial institutions, which encourage diversity and gender balance. Members who don’t fit the bill will be prohibited from joining and expelled by competent authorities.

Third Country Access to EU Markets

The reform package includes a framework for banks from non-EU countries looking to access EU markets. If they do not qualify for exemptions based on customer initiatives or interbank activities, third country credit institutions will be forced to set up an EU branch and submit an application for permission. To preserve legal clarity, all current agreements with organizations from foreign countries shall be kept in place.

The main MEP in the negotiations, Jonás FERNNDEZ (S&D, ES), expressed pleasure with the agreement and emphasized the beneficial effects of the new banking regulations on the financial system of the EU. Among the agreement’s most significant accomplishments are the reduction of the danger of future financial crises and alignment with the Union’s climate goals.

Before the new laws can be put into effect, the Economic and Monetary Affairs Committee must approve them, the European Parliament must vote in favor of them, and then the Council must also approve them. The EU makes a huge step toward financial stability and sustainable growth with this comprehensive revamp of European banking regulations.