On 23 November 2016, the European Commission presented a comprehensive package of reform proposals building on the existing regulatory system applying to the financial markets. The aim of the proposals is to reduce risk and enhance financial stability.

The package contains proposals for additions to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV) as well as to the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) which implement global standards into EU law. The Commission stresses that its initiative aims to take into account European specificities and avoid undue impact on the financing of the real economy. The European Parliament and the Council will now consider the legislative proposals.

The Commission's reform proposals are primarily based on elements of the regulatory framework recently agreed by the Basel Committee on Banking Supervision and the Financial Stability Board (FSB). Their principal objective is to enhance the resilience of the European institutions and to improve the supervision of cross-border banking groups.

Refinancing, internal models and leverage ratio

In keeping with this objective, the Commission is putting forward a proposal for the introduction of an indicator for stable funding in accordance with its responsibility under Article 510(3) of the CRR. This is based on the Basel Committee's net stable funding ratio (NSFR), but currently still has some features that are different, in particular in relation to the treatment of derivatives.

In addition to this, as part of its revision of the CRR, the Commission is implementing the standard on determining the minimum capital requirements for market risk, which resulted from a fundamental review of the trading book rules by the Basel Committee. The standard lays down new rules for the approval of internal models and also puts forward a distinctly more risk-sensitive standardised approach, which is also suitable as a fallback solution for modelling applications that are turned down or withdrawn.

With respect to the leverage ratio, the Commission's draft envisages a mandatory Tier 1 capital requirement of 3%. The text also includes adjustments to the exposure value, for example to bring the calculation of derivatives positions into line with the Basel rules. The Commission is also proposing to exclude certain exposures – such as loans to finance public-sector investments by public development banks, pass-through promotional loans and officially guaranteed export credits – from the calculation of the leverage ratio.

Large exposure rules, consolidation and banks from third countries

The main objective with respect to the large exposure rules is to implement the large exposure framework published by the BCBS in April 2014. A central feature is that Tier 2 capital will no longer be included in the determination of the upper limit for large exposures and in future only an institution's Tier 1 capital is intended to be used for this purpose.

Changes to the CRR and CRD IV are intended to ensure that financial holding companies and mixed financial holding companies come under closer supervisory control. In particular, it is proposed that in future they should require authorisation by the supervisory authorities.

Total loss-absorbing capacity

A further component of the reform package is the implementation of the global standard on total loss-absorbing capacity (TLAC). The total loss-absorbing capacity is made up of the Basel III own funds requirements and liabilities that are particularly suitable for conversion into equity. According to the Commission's proposal, it is intended to be incorporated into the minimum requirement for own funds and eligible liabilities (MREL) which already applies to all European banks.¹

Reduced burden for smaller institutions

With regard to small, less complex banks, the Commission wants to reduce what it considers to be the disproportionate administrative burden caused by some of the rules on remuneration, for example the deferral of some components of remuneration and remuneration in the form of instruments such as shares. Furthermore, the CRD IV and CRR are supposed to take greater account of the proportionality principle in future in order to reduce the burden for these institutions.²

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