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EU Banking Package – Basel III

On 27 October 2021, the European Commission (EC) released a banking package to amend the current Capital Requirements Directive and Regulation (CRD/CRR) to versions 6 and 3, respectively. These texts will have a significant impact on European banks and credit institutions. While currently, there is no clear path to the Investment Firm Regulation and Directive (IFR/IFD), this is likely a next step. These texts are still drafts, meaning they will need to follow the European Institutional process and be discussed in the European Parliament and European Council.

The review consists of:
✓ A legislative proposal to amend the Capital Requirements Directive (Directive 2013/36/EU)
✓ A legislative proposal to amend the Capital Requirements Regulation (Regulation 2013/575/EU)
✓ A separate proposal to amend the Capital Requirements Regulation regarding resolution (the so-called “daisy chain” proposal)

Basel III standards will build a solid and resilient banking sector in the EU. Both the Swedish and Spanish Presidencies committed to finalizing Capital Requirements Regulation 3 (CRR3) and Capital Requirements Directive 6 (CRD6) by the end of 2023 to ensure they will enter to force by January 1st, 2025.

This is a 9-week course. Each module will be delivered every week.
Scope: Credit Institution (US, UK & EU); Legal & Comp. Dept; Finance; Audit
Level: Expert

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The EU Banking Package has three priorities that the proposals seek to address to help the European banking system:

Firstly, they aim to increase the robustness of banking models through a review that ensures banks’ internal models do not underestimate risks, and through increased standardization, comparison across entities should be facilitated. To achieve this, the proposals introduce the output floor concept, which will limit banks’ ability to be too optimistic in their risk modeling. For banks using internal models, the following steps to calculate risk-weighted assets (RWA) will apply gradually starting 2025:

1. Calculate the risk-weighted assets using whichever model the bank is permitted to use;
2. Calculate the risk-weighted assets using the standardized approach as a form of benchmarking;
3. Multiply the amount obtained with the standardized approach in step 2 by 72,5% (50% in year 1); and
4. Compare this result with the standardized approach and take both higher as the basis.

Secondly, the proposals also introduce a sustainability twist to the capital provisions, strengthening the banking sector’s resilience to Environmental, Social, and Governance (ESG) objectives by factoring in ESG risk weightings. The approach focuses on:

✓ Enlarging the scope of ESG disclosures to all institutions, both listed and non-listed;
✓ Explicitly empowering supervisory authorities to incorporate ESG risks by banks, both in Supervisory Review and Evaluation Process (SREP) and in stress tests; and
✓ Requiring management bodies to sign off plans on how to deal with ESG risks and deploy robust governance.

Thirdly, these proposals aim to boost regulators, supervisory capacities and so their confidence in supervised entities.

Courses:
1. Introduction to Basel 3
2. EU Banking activities
3. Governance of Banking EU Banking Supervision
4. Internal control
5. IFRS Methodology
6. Operational Risk
7. Credit Risk
8. Liquidity Risk
9. Minimum Capital Requirements

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EU Banking Package – Basel III
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1. Introduction to Basel 3

In the aftermath of the Great Financial Crisis (GFC), regulators and central banks from 28 different jurisdictions came to an agreement on a new international standard for strengthening banks (Basel III), within the Basel Committee on Banking Supervision (BCBS). This agreement was implemented in 2017, which has resulted in the EU’s banking sector being more robust and resilient during the Covid-19 pandemic.

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2. EU Banking activities

The consolidation in the EU banking sector continues to enhance profitability and reduce the overcapacity of many credit institutions. The downward trend that started in 2009 continued every year since falling to 5 981 credit institutions legally incorporated in the EU-28 in 2019. Considering all the new regulatory frameworks that credit institutions have to comply with in the next three years, it has become vital to understanding the core activities of large banks (G-SIBs).

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3. Governance of Banking EU Banking Supervision

As part of the Economic and Monetary Union (EMU), the Banking Union is an important step forward in defining a regulatory framework for EU banks in the participating countries. The need for a Banking Union emerged after the Great Financial Crisis (GFC), which was a turning point in building a safer financial market. It had become clear that the problems caused by the links between public sector finances and the banking sector can easily cause distress in the other EU countries.

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4. Internal control for European banks

Effective internal control in the banking sector has become key for sound management. Effective internal control will provide bankers and supervisors with reasonable assurance that:
* bank operations are efficient
* record transactions are accurate
* financial reporting is reliable
* bank complies with laws and regulations, and internal policies
* risk management system is effective and operational.

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5. International Financial Reporting Standard 9 Methodology

As part of the many factors of the Great Financial Crisis (GFC), the change in the accounting methodology for expected-credit-loss (ECL) was a regulatory challenge to bank’s loan/loss provisioning levels. The International Financial Reporting Standard 9 (IFRS 9) is an attempt to take better consideration of risk events, and global inflationary pressures and build an operational accounting model taking into consideration required changes to the models.

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6. Operational risks for European banks in 2023

The news Basel III agreement led to many changes in the way banks manage their capital and their regulatory risk. The Basel Committee has introduced a standardized approach (SA) to calculate the minimum operational risk capital requirements. The implementation of the revised operational risk framework pushes banks to improve their internal processes with potential impacts on the bank’s data, business models and capital.

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7. Credit risks for European banks in 2023

Basel compliant banks (depending on the jurisdiction) where credit ratings from external credit assessment institutions (ECAIs) are allowed will be required to use the revised standardized approach (SA) to calculate their risk-weighted assets (RWAs). Under the Basel III agreement, banks will have to adopt SA for individual exposures, the external credit assessment (ECRA), and the standardized credit risk assessment approach (SRA). The RWAs will be permanently set at a minimum of 72,5% of those calculated under the revised SA.

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8. Liquidity risk for European banks

Compared to the earlier Basel I and Basel II regulatory frameworks, the Basel III agreement introduced additional capital leverage and liquidity standards to strengthen the regulation and the supervision of the banking sector such as:
* higher minimum Tier 1 Capital requirement
* capital conservation buffer
* countercyclical capital buffer
* higher minimum Tier 1 common Equity Requirement
* leverage ratio

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9. Minimum Capital Requirements for European Banks in 2023

The Basel III agreement has introduced a new regulatory framework designed to mitigate risk within the international banking sector by requiring to maintain certain level of reserve capital. The 6% Tier 1 ratio must be composed of at least 4,5% of Common Equity Tier 1 (CET1). Once the Basel III agreement is fully implemented, banks will need a mandatory conservation buffer of at least 2,5% of the bank’s RWAs. In that case the bank’s CET1 will be of at least 7%.

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The best way to address regulatory change is by accepting that new legislation is a natural progression. Nothing ever stays the same, and as we move forward, these regulations will continue to evolve. Our regulatory poster and accompanying explanations will help you navigate this changing regulatory landscape. We invite you to explore how your business activities will be affected by our Compliance Vision specialists so that you can stay ahead of the regulatory curve.

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EU Banking Package – Basel III

The EU Banking Package has three priorities that the proposals seek to address to help the European banking system:

Curriculum

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Don’t miss your next regulatory compliance deadline!

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