Changes from plenary report to adopted text

RemovedDRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

AddedP9_TA(2024)0363

Changedon the proposal for a regulation of the European Parliament and of the Council amendingAmending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor

Removed(COM(2021)0664 – C90397/2021 – 2021/0342(COD))

AddedCommittee on Economic and Monetary Affairs

AddedPE731.818

AddedEuropean Parliament legislative resolution of 24 April 2024 on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (COM(2021)0664 – C9-0397/2021 – 2021/0342(COD))

▸7 unchanged paragraphs

(Ordinary legislative procedure: first reading)

The European Parliament,

– having regard to the Commission proposal to Parliament and the Council (COM(2021)0664),

– having regard to Article 294(2) and Article 114 of the Treaty on the Functioning of the European Union, pursuant to which the Commission submitted the proposal to Parliament (C90397/2021),

– having regard to Article 294(3) of the Treaty on the Functioning of the European Union,

– having regard to the opinion of the European Central Bank of 24 March 2022,

– having regard to the opinion of the European Economic and Social Committee of 23 March 2022,

Added– having regard to the provisional agreement approved by the committee responsible under Rule 74(4) of its Rules of Procedure and the undertaking given by the Council representative by letter of 6 December 2023 to approve Parliament’s position, in accordance with Article 294(4) of the Treaty on the Functioning of the European Union,

– having regard to Rule 59 of its Rules of Procedure,

– having regard to the report of the Committee on Economic and Monetary Affairs (A9-0030/2023),

1. Adopts its position at first reading hereinafter set out;

Change 1

Added2. Takes note of the statement by the Commission annexed to this resolution, which will be published in the C series of the Official Journal of the European Union;

3. Calls on the Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal;

4. Instructs its President to forward its position to the Council, the Commission and the national parliaments.

Change 2

RemovedAMENDMENTS BY THE EUROPEAN PARLIAMENT*

AddedP9_TC1-COD(2021)0342

Removedto the Commission proposal

AddedPosition of the European Parliament adopted at first reading on 24 April 2024 with a view to the adoption of Regulation (EU) 2024/… of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor

Removed---------------------------------------------------------

Added(As an agreement was reached between Parliament and Council, Parliament's position corresponds to the final legislative act, Regulation (EU) 2024/1623.)

Removed2021/0342 (COD)

AddedANNEX TO THE LEGISLATIVE RESOLUTION

RemovedProposal for a

AddedStatement by the Commission with respect to Article 1, point (253), of Regulation (EU) 2024/1623 of the European Parliament and of the Council concerning Article 518c of Regulation (EU) No 575/2013

RemovedREGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

AddedThe Commission undertakes to carry out a fair and balanced assessment of the state of the Single Market for banking, taking into consideration in particular prudential requirements, including the level of application of the output floor and the provisions on the waiver of capital and liquidity requirements. It will carry out this mandate based on inputs from the European Banking Authority and from the European Central Bank/Single Supervisory Mechanism, and will consult with interested parties to ensure that the various perspectives are appropriately considered. The Commission will, where appropriate, present a legislative proposal based on the report.

Removedamending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor

Removed(Text with EEA relevance)

RemovedTHE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

RemovedHaving regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

RemovedHaving regard to the proposal from the European Commission,

RemovedAfter transmission of the draft legislative act to the national parliaments,

RemovedHaving regard to the opinion of the European Economic and Social Committee,

RemovedActing in accordance with the ordinary legislative procedure,

RemovedWhereas:(1) In response to the global financial crisis, the Union embarked on a wide-ranging reform of the prudential framework for institutions aimed at increasing the resilience of the EU banking sector. One of the main elements of the reform consisted in implementing international standards agreed by the Basel Committee for Banking Supervision (BCBS), specifically the so-called “Basel III reform”. Thanks to this reform, the EU banking sector entered the COVID-19 crisis on a resilient footing. However, while the overall level of capital in EU institutions is now satisfactory on average, some of the problems that were identified in the wake of global financial crisis have not yet been addressed.

Removed(2) To address those problems, provide legal certainty and signal our commitment to our international partners in the G20, it is of utmost importance to implement the outstanding elements of the Basel III reform faithfully. At the same time, the implementation should avoid a significant increase in overall capital requirements for the EU banking system on the whole and take into account specificities of the EU economy where there is sufficient and robust evidence that the international framework does not capture these specificities, as stressed in the European Parliament resolution of 23 November 2016 on the finalisation of Basel III. Where possible, adjustments to the international standards should be applied on a transitional basis. The implementation should ▌avoid competitive disadvantages for EU institutions, in particular in the area of trading activities, where EU institutions directly compete with their international peers. Furthermore, the proposed approach should be coherent with the logic of the banking union and harmonise the Single Market for banking. Finally, it should ensure proportionality of the rules and aim at further reducing compliance and reporting costs, in particular for small and non-complex institutions, without loosening the prudential standards, in line with the “Study of the Cost of Compliance with Supervisory Reporting Requirements” that the European Supervisory Authority (European Banking Authority) (EBA) published in 2021 which targeted a reduction of reporting costs of 10% to 20%.

Removed(3) Regulation (EU) No 575/2013 enables institutions to calculate their capital requirements either by using standardised approaches, or by using internal model approaches. Internal model approaches, approved by national competent authorities, allow institutions to estimate most or all the parameters required to calculate capital requirements on their own, whereas standardised approaches require institutions to calculate capital requirements using fixed parameters, which are based on relatively conservative assumptions and laid down in Regulation (EU) No 575/2013. The Basel Committee decided in December 2017 to introduce an aggregate output floor. That decision was based on an analysis carried out in the wake of the financial crisis of 2008-2009, which revealed that internal models tend to underestimate the risks that institutions are exposed to, especially for certain types of exposures and risks, and hence, tend to result in insufficient capital requirements. Compared to capital requirements calculated using the standardised approaches, internal models produce, on average, lower capital requirements for the same exposures.

Removed(4) The output floor represents one of the key measures of the Basel III reforms. It aims at limiting the unwarranted variability in the regulatory capital requirements produced by internal models and the excessive reduction in capital that an institution using internal models can derive relative to an institution using the revised standardised approaches. Those institutions can do so by setting a lower limit to the capital requirements that are produced by institutions’ internal models to 72.5% of the capital requirements that would apply if standardised approaches were used by those institutions. Implementing the output floor faithfully should increase the comparability of the institutions’ capital ratios, restore the credibility of internal models and ensure that there is a level playing field between institutions that use different approaches to calculate capital requirements.

Removed(5) In order to harmonize the internal market for banking, the approach for the output floor should be coherent with the principle of risk aggregation across different entities within the same banking group and the logic of consolidated supervision. At the same time, the output floor should address risks stemming from internal models in both home and host Member States. The output floor should therefore be calculated at the highest level of consolidation in the Union. However, to avoid unintended impacts and ensure a fair distribution of capital, a competent authority may submit a capital redistribution proposal to the consolidating supervisor if it deems that this would lead to an inappropriate distribution of capital among the group entities. The notifying competent authority and the consolidating supervisor should then endeavour to make a joint decision on the application of the output floor, and if they do not reach a decision within three months, EBA should have a legally binding mediation role. EBA should assess the level of application of the output floor by 31 December 2027 in light of potential financial stability concerns and the progress in the banking union.

Removed(6) The Basel Committee has found the current standardised approach for credit risk (SA-CR) to be insufficiently risk sensitive in a number of areas, leading to inaccurate or inappropriate – either too high or too low – measurement of credit risk and hence, of capital requirements. The provisions regarding the SA-CR should therefore be revised to increase the risk sensitivity of that approach in relation to several key aspects.

Removed(7) For rated exposures to other institutions, some of the risk weights should be recalibrated in accordance with the Basel III standards. In addition, the risk weight treatment for unrated exposures to institutions should be rendered more granular and decoupled from the risk weight applicable to the central government of the Member State in which the bank is established, as no implicit government support for institutions is assumed.

Removed(8) For subordinated debt and equity exposures, a more granular and stringent risk weight treatment is necessary to reflect the higher loss risk of subordinated debt and equity exposures when compared to debt exposures, and to prevent regulatory arbitrage between the banking book and the trading book. Union institutions have long-standing, strategic equity investments in financial and non-financial corporates. As the standard risk weight for equity exposures increases over a 5-year transition period, existing strategic equity holdings in corporates and insurance undertakings under significant influence of the institution should be grandfathered to avoid disruptive effects and to preserve the role of Union institutions as long-standing, strategic equity investors. Given the prudential safeguards and supervisory oversight to foster financial integration of the financial sector, however, for equity holdings in other institutions within the same group or covered by the same institutional protection scheme, the current regime should be maintained. In addition, to reinforce private and public initiatives to provide long-term equity to EU corporates, be they listed or unlisted, investments should not be considered as speculative where they are made with the firm intention of the institution’s senior management to hold it for three or more years.

Removed(9) To promote certain sectors of the economy, the Basel III standards provide for a supervisory discretion to enable institutions to assign, within certain limits, a preferential treatment to equity holdings made pursuant to ‘legislative programmes’ that entail significant subsidies for the investment and involve government oversight and restrictions on the equity investments. Implementing that discretion in the Union should also help fostering long-term equity investments.

Removed(10) Corporate lending in the Union is predominantly provided by institutions which use the internal ratings based (IRB) approaches for credit risk to calculate their capital requirements. With the implementation of the output floor, those institutions will also need to apply the SA-CR, which relies on credit assessments by external credit assessment institutions (‘ECAI’) to determine the credit quality of the corporate borrower. The mapping between external ratings and risk weights applicable to rated corporates should be more granular, to bring such mapping in line with the international standards on that matter.

Removed(11) Most EU corporates, however, do not seek external credit ratings, in particular due to cost considerations. To avoid disruptive impacts on bank lending to unrated corporates and to provide enough time to establish public or private initiatives aimed at increasing the coverage of external credit ratings, it is necessary to provide for a transitional period for such increase in the coverage. During that transitional period, institutions using IRB approaches should be able to apply a favourable treatment when calculating their output floor for investment grade exposures to unrated corporates.▌

Removed(11a) After the transition period, institutions should be able to refer to credit assessments by ECAIs to calculate the capital requirements for a significant part of their corporate exposures. EBA, European Supervisory Authority (European Insurance and Occupational Pensions Authority) (EIOPA) and European Supervisory Authority (European Securities and Markets Authority) (ESMA), should monitor the use of the transitional arrangement and should have regard to relevant developments and trends in the ECAI market. The transition period should be used to significantly expand the availability of ratings for European corporates. To this end, rating solutions beyond the currently existing rating ecosystem should be developed to incentivise especially larger corporates to become rated. Next to the positive externality the rating process generates, a wider rating coverage will foster, inter alia, the capital markets union. Avenues to attain this goal should consider the requirements related to external credit assessments, or the establishment of additional institutions providing such assessments, and might therefore entail substantial implementation efforts. Member States, in close cooperation with their central bank, should assess whether a request for the recognition of their central bank as ECAI in accordance with Article 2 of Regulation (EC) No 1060/2009 of the European Parliament and the Council and the provision of corporate ratings by the central bank for the purposes of this Regulation may be desirable in order to increase the coverage of external ratings.

Removed(11b) To inform any such future initiative on the set-up of public or private rating schemes, the European Supervisory Authorities (ESAs) should be requested to prepare a report on the impediments to the availability of external credit ratings by ECAIs, in particular for corporates, and on possible measures to address those impediments. In the meanwhile, the European Commission stands ready to provide technical support to Member States via its Technical Support Instrument in this area, e.g. to formulate strategies on increasing the rating-penetration of their unlisted corporates or to explore best practices on setting up entities capable of providing ratings or providing related guidance to corporates. The transition period should be extended only if necessary and justified and for four years at the most.

Removed(12) For both residential and commercial real estate exposures, more risk-sensitive approaches have been developed by the Basel Committee to better reflect different funding models and stages in the construction process.

Removed(13) The financial crisis of 2008-2009 revealed a number of shortcomings of the current standardised treatment of real estate exposures. Those shortcomings have been addressed in the Basel III standards. In fact, the Basel III standards introduced income producing real estate (‘IPRE’) exposures as a new sub-category of the corporate exposure class which is subject to a dedicated risk weight treatment to reflect more accurately the risk associated with those exposures, but also to improve consistency with the treatment of IPRE under the Internal Rating Based Approach (‘IRBA’) referred to in Part III, Title II, Chapter 3 of Regulation (EU) No 575/2013.

Removed(14) For general residential and commercial real estate exposures, the loan splitting approach in Articles 124-126 of the Regulation should be kept, as that approach is sensitive to the type of borrower and reflects the risk mitigating effects of the real estate collateral in the applicable risk weights, even in case of high ‘loan-to-value’ (LTV) ratios. Its calibration, however, should be adjusted in accordance with the Basel III standards as it has been found to be too conservative for mortgages with very low LTV ratios.

Removed(15) To ensure that the impacts of the output floor on low-risk residential mortgage lending by institutions using IRB approaches are spread over a sufficiently long period and thus avoid disruptions to that type of lending that could be caused by sudden increases in own funds requirements, it is necessary to provide for a specific transitional arrangement. For the duration of the arrangement, when calculating the output floor, IRB institutions should be able to apply a lower risk weight to the part of their residential mortgage exposures that is considered secured by residential property under the revised SA-CR. To ensure that the transitional arrangement is available only to low-risk mortgage exposures, appropriate eligibility criteria, based on established concepts used under the SA-CR, should be set. The compliance with those criteria should be verified by competent authorities. Because residential real estate markets may differ from one Member States to another, the decision on whether to activate the transitional arrangement should be left to individual Member States. The use of the transitional arrangement should be monitored by EBA. The transition period should be extended only if necessary and justified and for four years at the most.

Removed(16) As a result of the lack of clarity and risk-sensitivity of the current treatment of speculative immovable property financing, capital requirements for those exposures are currently often deemed to be too high or too low. That treatment therefore should be replaced by a dedicated treatment for ADC exposures, comprising loans to companies or special purpose vehicles financing any of the land acquisition for development and construction purposes, or development and construction of any residential or commercial immovable property.

Removed(17) It is important to reduce the impact of cyclical effects on the valuation of property securing a loan and to keep capital requirements for mortgages more stable. In the case of a revaluation beyond the value at the time of the loan was granted, the property’s value recognised for prudential purposes should therefore not exceed the average value of a comparable property measured over a sufficiently long monitoring period, unless modifications to that property unequivocally increase its value. To avoid unintended consequences for the functioning of the covered bond markets, competent authorities may allow institutions to revalue immovable property on a regular basis without applying those limits to value increases. Modifications that improve the energy efficiency, and performance on improvements to the resilience, protection and adaptation to physical risks of buildings and housing units should be considered as value increasing.