Finance Watch: Basel III finalisation comes undone: A proposal that lets down citizens and backtracks on global agreements
28 March 2022
Finance Watch regrets that the so-called “draft Banking Package 2021” (finalising the implementation of the Basel III prudential framework for banks in Europe) leaves European banks insufficiently capitalised, and taxpayers exposed.
This article sums up Finance Watch’s
detailed analysis of the package
Overview
The global regulatory framework agreed by the Basel Committee on
Banking Supervision in December 2017 (Basel III), was created to address
the insufficient capitalisation and inadequate risk controls of the
banking sector that led to the financial crisis of 2008/09. The
Commission’s legislative proposal, also known as the ‚Banking Package 2021‘, aims to complete the post-crisis reforms and to ‘faithfully
implement the outstanding elements of the Basel III reform in the EU,
while taking into account EU specificities and avoiding significant
increases in capital requirements’.[1]
Contents of the legislative proposal
The Commission’s legislative proposal comprises:
- a regulation amending the Capital Requirements Regulation (CRR II)[2] as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor;[3]
- a regulation amending the Capital Requirements Regulation (CRR II) and the Capital Requirements Directive (CRD V)[4]
as regards the prudential treatment of global systemically important
institutions (G-SIIs) with a multiple point of entry (MPE) resolution
strategy and a methodology for the indirect subscription of instruments
eligible for meeting the minimum requirement for own funds and eligible
liabilities (MREL);[5]
- a directive amending the Capital Requirements Directive (CRD V) as
regards supervisory powers, sanctions, third-country branches, and
environmental, social and governance risks, and amending Directive
2014/59/EU.[6]
Regulatory objectives
The final instalment of the Basel III standards, agreed and published for the most part in December 2017[7],
aims at (i) completing the post crisis reform of the prudential
framework for banks at the global level; and (ii) correcting flaws that
have become apparent since the first Basel III standards came into force
in 2014.[8] In particular, the finalisation of Basel III comprises measures to
- reduce the excessive variability of risk-weighted assets (RWA)
calculated by banks under the internal ratings-based approach (IRB) by
limiting its use for certain categories of credit risk and removing it
altogether for operational risk and off-balance sheet exposures;
- improve the granularity and risk-sensitivity of calculating capital
requirements under the Standardised Approach (SA) for credit risk, and
introduce a new, standardised framework to cover operational risk and
risk related to off-balance sheet exposures;
- introduce an ‘output floor’ for banks using the internal-ratings
based approach (IRB) to limit the divergence between risk-weighted
assets calculated under the different approaches (SA and IRB); and
- introduce a ‘leverage ratio buffer’ to further limit the leverage of global systemically important institutions (G‑SIIs).
The Banking Package is intended to complete the implementation of the
Basel III framework into EU law. The Commission’s explanatory notes set
out four main objectives:
Finance Watch
© Finance Watch
