In response to the Great Financial Crisis of 2008-2009, the EU implemented substantial reforms of the prudential framework applicable to banks in order to enhance their resilience and thus help prevent the recurrence of a similar crisis. Those reforms were largely based on the Basel III standards.


Banking Package 2021

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The reforms implemented so far focused on increasing the quality and quantity of regulatory capital that banks have to hold to cover potential losses. Furthermore, they aimed at reducing banks’ excessive leverage, increasing banks’ resilience to short-term liquidity shocks, reducing their reliance on short-term funding and their concentration risk, and addressing too-big-to-fail problems.

As a result, the new rules strengthened the criteria for eligible regulatory capital, increased minimum capital requirements, and introduced new requirements for CVA risk and for exposures to central counterparties. Furthermore, several new prudential measures were introduced: a minimum leverage ratio requirement, a short-term liquidity ratio (the liquidity coverage ratio), a longer-term stable funding ratio (the net stable funding ratio), large exposure limits and macro-prudential capital buffers.

Finally, on December 2017, the BCBS published the Basel III: Finalising post-crisis reforms and on January 2019 the Revised minimum capital requirements for market risk, which have not been transposed yet to European regulation.

Executive summary

The European Commission (EC) has published the Banking Package 2021.With this set of rules ends the implementation of the Basel III framework in the EU. These new rules will ensure that EU banks become more resilient to potential future economic shocks, while contributing to Europe's recovery from the COVID-19 pandemic and the transition to climate neutrality. This package is composed of three proposals that complete the reform of banking regulation: i) CRD VI which amends CRD IV; ii) CRR III, which amends CRR; and, iii) a separate legislative proposal in the area of resolution (the "daisy chain proposal“), which also amends CRR.

Main content

This Technical Note summarizes the main aspects of the legislative package, highlighting the news with respect to BCBS version:

  • Credit risk: Among other changes, increase in the risk sensibility of the standardised approach in relation to several key aspects and amendments to the current treatment of exposures to institutions, as well as introduction of the Standardised Credit Risk Assessment Approach (SCRA) alongside existing External Credit Risk Assessment Approach (ECRA). Also, amendments the IRB advanced method (A-IRB) approach for certain exposure classes has been removed and new exposures classes is introduced. 
  • Market risk: Among others changes,modification of the elements of own funds requirements, general requirements and general provisions, the alternative standardized approach and the alternative internal model approach, are made to introduce binding own funds requirements for market risk in line with the revises fundamental review of the trading book (FRTB) Standards.
  • CVA risk: Transposition of the new capital regime synchronized with FRTB (2025-27).
  • Operational risk: Introduction of a new standardized approach to replace all existing approaches for operational risk, as well as new rules on data collection and changes on calculation of operational risk losses. 
  • Ouput floor (OF): Incorporation f a 5 year transition period for the implementation of OF, starting at 50% in 2025, with an annual increase of 5% until 2029 (70%) and finally setting 72.5% in 2030.
  • Own funds: Among other changes, introduction of new definitions of indirect holding and synthetic holding to also capture holdings of relevant liabilities and correction of asymmetries in the calculation of certain deductions (e.g. for insufficient coverage of non-performing exposures) from CET1 in the calculation of relevant CET1 items.
  • Leverage ratio: Modifications in the calculation of the exposure value, off-balance-sheet items and provisions related to regular way purchases and sales awaiting settlement. 
  • ESG risks: Introduction of new reporting requirements on exposure to ESG risks and new obligations on institutions to require that short-, medium- and long-term horizon of ESG risks are included in credit institutions’ strategies and processes.
  • Other updates: Development of other changes in regulation which include new supervisory powers, Fit and Proper Framework and Third Country Branches (TCBs).

Next Steps

The legislative package will now be discussed by the European Parliament and Council.

The entry into force of the changes will be gradual. The first amendments are expected to enter into force in 2023 at the earliest. However, the amendments shall apply from 2025 with some exceptions.

Download the technical note by clicking here.