On 27 June, the EU Parliament and the Council, mediated by the European Commission, reached an agreement on the EU banking package in the so-called trilogue (see press release of the European Commission). The EU banking package represents the final implementation of Basel III (also called "Basel IV") in the EU. Therefore, the EU is globally first to implement the Basel Committee's requirements in accordance with the commitments made at the G20 meeting in Seoul in 2010. In addition to adjustments to the capital requirements provisions, new measures regarding ESG linked risks are to be included.
Long legislative process comes to an end
With this, a long political process regarding the final implementation of the Basel III requirements is coming to an end. In October 2021, the Commission adopted the first drafts of an adjusted Capital Requirements Regulation (CRR III) and Capital Requirements Directive (CRD VI). Finally, the trilogue dragged on when it came to agreeing on the final details. The CRR III is now to be introduced gradually until 1 January 2025, the CRD VI is to be implemented by the member states by 30 June 2026.
Adjustments to banking regulation; exception for securitisations
The biggest change in banking regulation will be the new output floor for IRBA institutions. Banks will have to hold at least 75% of the own funds requirements calculated with the SA. Thus, IRBA institutions will be forced to calculate the own funds requirements according to SA as well. In the European banking sector, this will result in an increase in capital requirements of around 10% by 2025 and 20% by 2030. However, the impact on individual institutions is likely to vary considerably. In individual cases, institutions might even benefit from the new regulation, but others might also experience significantly larger increases than the average. This once again underlines the need for careful capital management and the increasing need for capital-relieving securitisations.
This new output floor provision appears also problematic with regard to securitisations: the already very conservatively calibrated capital requirements for securitisations threatened to increase even further. It can therefore be seen as a minor success that, according to the latest information, an exemption rule was included in the CRR III: For securitisations, the non-neutrality factor (p-factor) may be halved for the calculation of the output floor. However, according to current estimates, this measure will only prevent capital requirements for securitisations from increasing substantially again. Further relief for STS securitisations proposed by the EU Commission apparently did not make it into the final EU banking package.
The hope for timely and substantial regulatory relief for securitisations to account for their important role in the digital and green transformation has thus not been fulfilled.
Nevertheless, the inclusion of the exemption for securitisations in the calculation of the output floor shows that the legislator has recognised the urgent need for improvement.
The publication of the final drafts of the CRR III and CRD VI can be eagerly awaited.