On 27th October 2021, the European Commission released its proposal of a new banking package, that (among other things) implements the first pillar of Basel IV into the banking regulation.
In 2010, the Basel committee of banking and supervision (BCBS) released a capital requirements package known as Basel III that was supposed to address the root causes of the 2008 financial crisis. At the time, the BCBS was fully aware that the Basel III standards as released in 2010, and as translated into the EU law in the form of the original CRR regulation of June 2013, were insufficient. The 2010 version of Basel III was a quick patch of the banking regulation intended to address the most pressing regulatory problems with finer work envisioned to be done in the future. Indeed, the BCBS has continued working on additional, more precise, or stricter requirement, culminating its work on the Basel III in December 2017. The industry meanwhile took to call these new reviewed standards the ‘Basel IV’. This title is unofficial but as the BCBS work on the Basel standards between 2010 and 2017 left no stone unturned, the title may be apt.
In 2019, the Official Journal of the EU released a regulation colloquially referred to as CRR 2 which surprised the experts by being rather limited in scope. It only concerned the reporting and disclosure of the market risk – a portion of a portion of Basel IV at a time where all parts of the framework were already out.
The release of 27th October 2021 has no smaller ambition then to bring the rest of the Basel IV framework (almost all of it) into the European Regulatory framework. This was done with distinctly European Flavour: The Basel standards tend only to apply on the cross-border institutions. In the common market of the EU, almost all banking institutions can be viewed as cross-border and therefore the Commission elects to apply its iteration of Basel standards on all of them. This required a greater degree of proportionality, to make the compliance, particularly for the smaller institutions, easier. Therefore, the requirements of CRR 3 sometimes differ from the original Basel IV.
The Banking package also introduces requirements in line with the Environmental, Social and Governance (ESG) framework pursuant to the Green Deal. The way this is done does not impact the RWAs or the Eligible Capital. CRR 3 merely requires the institutions to report them and CRD brings them into the SREP process.
Before the release of CRR 3, the EBA periodically lamented that the regulatory capital, particularly of the institutions that make use of the internal approaches, but also others, differed wildly across the institutions in a manner that could not be explained by the differences in their risk profiles. CRR 3 therefore ensures that the regulatory risk calculations reflect as much as possible the real risks. This is also a guiding principle for understanding the probable impact of the new package on the regulatory capital of the banks. For those that so far benefited from low capital requirements relative to their actual risk profiles, the increase of the regulatory capital is going to be substantial. Those institutions whose regulatory capital has been consistent with their actual risks will not see much of a change. And the institutions whose capital requirements overappreciated their risks may see a slight decrease in their capital requirements. However, on average, capital requirements will increase slightly, though their impact will be disproportional.
The current release is a Commission proposal only and still needs to go through the council and the parliament before its release in the official Journal of the EU. However, it is not expected to undergo very many additional changes and its adoption should be smooth.