Changes from report parliamentary committee draft to plenary report

DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

▸8 unchanged paragraphs

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 – C90397/2021 – 2021/0342(COD))

(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,

Changed– having regard to the opinion of the European Economic and Social Committee of 23 March 2021,2022,

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

Changed– having regard to the report of the Committee on Economic and Monetary Affairs (A9-0000/2022),(A9-0030/2023),

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

Added2. Calls on the Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal;

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

Change 1

RemovedRecital 11: (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, whilst initiatives to foster widespread use of credit ratings should be established. After the transition period, institutions should be able to refer to credit assessments by ECAIs to calculate the capital requirements for most of their corporate exposures.

AddedAMENDMENTS BY THE EUROPEAN PARLIAMENT*

RemovedRecital 11 a (new): (11 a) The transitional regime should not apply to large corporates. Large corporates are in a good position to get a private credit rating, or they might choose to remain unrated where a rating would not lead to a lower risk weight, in which case the institution should hold more capital for the loan, in line with its risk profile.

Addedto the Commission proposal

RemovedRecital 15: (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. The use of the transitional arrangement should be monitored by EBA.

Added---------------------------------------------------------

RemovedRecital 36 a (new): (36 a) The severe, double economic shock caused by the COVID-19 pandemic and the Russian-Ukrainian war might have far-reaching impacts on the European economy and disrupt businesses. Institutions will have a key role in contributing to the recovery by extending concessions towards worthy debtors facing or about to face difficulties in meeting their financial commitments. In that regard, institutions should be encouraged, where appropriate, to extend concessions to obligors, without necessarily considering that a default has occurred. In that respect, EBA should adopt guidelines to specify what constitutes a material diminished financial obligation in the case of distressed restructuring, providing adequate flexibility to institutions. In particular, due consideration should be given to the kind of concession granted, the residual maturity of the exposure and the length of the postponement.

Added2021/0342 (COD)

RemovedRecital 40: (40) To ensure convergence across the Union and a uniform understanding of the environmental, social and governance (ESG) factors and risks, general definitions should be laid down. The exposure to ESG risks is not necessarily proportional to an institution’s size and complexity. ESG factors refer to environmental, social or governance factors that can have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Common examples of ESG factors include environmental factors such as greenhouse gas emissions, biodiversity and water use and consumption; social factors such as human rights, and labour and workforce considerations; and governance factors such as the rights and responsibilities of senior staff members and remuneration.

AddedProposal for a

RemovedRecital 40 a (new): (40 a) Level of exposures across the Union are also quite heterogeneous, with some countries showing potential mild transitional impacts and others showing potential high transitional impacts on exposures related to activities that have a significant negative impact on the environment. The transparency requirements that institutions are subject to and the sustainability reporting requirements laid down in other pieces of Union legislation will provide more granular data in a few years. However, to properly assess the ESG risks that institutions might face, it is essential that markets and supervisors obtain adequate data from all entities exposed to those risks, irrespective of their size. In order to ensure that competent authorities have at their disposal data that are granular, comprehensive and comparable for an effective supervision, information on exposures to ESG risks should be included in the supervisory reporting of institutions. The scope and granularity of that information should be consistent with the principle of proportionality, and should have regard to the size and complexity of the institutions.

AddedREGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

RemovedRecital 42 a (new): (42 a) There has been a rapid growth in cryptoassets in recent years, and growing exposures by banks to cryptoasset exposures could lead to financial stability risks, in particular as certain types of cryptoassets exhibit a high degree of volatility. The existing prudential rules are not designed to adequately capture the risks inherent to cryptoassets. According to the consultative document entitled “Prudential treatment of cryptoasset exposures” issued by the Bank for International Settlements on 10 September 2021, those risks could include liquidity risk, credit risk, market risk, operational risk (including fraud and cyber risks), money laundering and terrorist financing risk and legal and reputation risks. BCBS is currently working on how to reliably capture the risks deriving from exposures to cryptoassets in banks’ balance sheets. The Commission should follow up on those developments and, if appropriate, and after consulting EBA, report to the European Parliament and the Council on whether a dedicated prudential treatment should be developed for exposures to cryptoassets.

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

RemovedRegulation (EU) No 575/2013

Added(Text with EEA relevance)

RemovedArticle 1 – paragraph 1 – point 1 – point -a (new), Article 4 – paragraph 1 – point 12: (-a) point (12) is deleted

AddedTHE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

RemovedRegulation (EU) No 575/2013

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

RemovedArticle 1 – paragraph 1 – point 1 – point h, Article 4 – paragraph 1 – point 28: (28) ‘parent institution in a Member State’ means an institution in a Member State which has an institution or a financial institution as a subsidiary, or which holds a participation in an institution or financial institution, and which is not itself a subsidiary of another institution authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in the same Member State;;

AddedHaving regard to the proposal from the European Commission,

RemovedRegulation (EU) No 575/2013

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

RemovedArticle 1 – paragraph 1 – point 1 – point k, Article 4 – paragraph 1 – point 52: (52) ‘operational risk’ means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including, but not limited to, legal risk, model risk and ICT risk, but not strategic and reputational risk;

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

RemovedRegulation (EU) No 575/2013

AddedActing in accordance with the ordinary legislative procedure,

RemovedArticle 1 – paragraph 1 – point 1 – point l, Article 4 – paragraph 1 – point 52a – introductory part: (52a) ‘legal risk’ means the risk of losses, including, but not limited to, expenses, fines, penalties or punitive damages, which an institution may incur as a consequence of events that result in legal proceedings, including the following:

AddedWhereas:(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.

RemovedRegulation (EU) No 575/2013

Added(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%.

RemovedArticle 1 – paragraph 1 – point 1 – point l, Article 4 – paragraph 1 – point 52b – introductory part: (52b) ‘model risk’ means the risk of loss an institution may incur as a consequence of decisions that could be principally based on the output of internal models, due to errors in the development, implementation or use of such models, including the following:

Added(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.

RemovedRegulation (EU) No 575/2013

Added(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.

RemovedArticle 1 – paragraph 1 – point 1 – point l, Article 4 – paragraph 1 – point 52c: (52c) ‘ICT risk’ means the risk of losses or potential losses related to the use of information technology and communication systems, including, but not limited to, breach of confidentiality, failure or unavailability of systems, inability to change the information technology within a reasonable time and cost frame, lack of integrity of data and systems, and cyberattacks;

Added(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.

RemovedRegulation (EU) No 575/2013

Added(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.

RemovedArticle 1 – paragraph 1 – point 1 – point l, Article 4 – paragraph 1 – point 52d: (52d) ‘environmental, social or governance risk’ or ‘ESG risk’ means the risk of any negative financial impact on the institution stemming from the current or prospective impacts of environmental, social or governance (ESG) factors on the institution’s counterparties or invested assets;

Added(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.

RemovedRegulation (EU) No 575/2013

Added(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.

RemovedArticle 1 – paragraph 1 – point 1 – point l, Article 4 – paragraph 1 – point 52e – introductory part: (52e) ‘environmental risk’ means the risk of any negative financial impact on the institution stemming from the current or prospective impacts of environmental factors on the institution’s counterparties or invested assets, including factors related to the transition towards the following environmental objectives: