The measures are aimed at reducing risks and hence enhancing financial stability, as well as reinforcing market confidence in the European banking sector. Specifically, this is to be achieved by

• increasing the resilience of banks and investment firms in the EU,
• improving banks’ lending capacity and hence supporting the EU economy, and
• supporting banks in achieving deeper and more liquid capital markets in the EU.

Amendments to CRR, CRD IV, BRRD and SRM Regulation

The package contains proposals to amend the Capital Requirements Regulation (CRR), the Capital Requirements Directive IV (CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR). These implement international standards into EU law, whereby according to the Commission they also take European specificities into account and are intended to avoid undue impact on the financing of the real economy.

As well as additional rules governing banks’ ability to withstand potential shocks, the Commission is also proposing amendments to existing requirements to make the regulatory framework more growth-friendly and proportionate to banks’ complexity, size and business profile. It also intends to introduce measures that will support SMEs and investment in infrastructure. The European Parliament and the Council will now consider the legislative proposals.

The Commission’s proposed amendments incorporate in particular elements of the regulatory framework agreed recently by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). Their specific aim is to strengthen the resilience of European institutions and to improve the supervision of cross-border banking groups.

Funding, internal models and leverage ratio

The Commission is submitting a proposal to introduce a ratio to ensure stable funding in accordance with its obligation under Article 510(3) of the CRR. This is based on the Basel Committee’s Net Stable Funding Ratio (NSFR), albeit with some modifications in particular as regards the treatment of derivatives. It remains to be seen whether these differences will be retained in the further course of the negotiations. BaFin holds the view that the highest possible consistency with the Basel requirements would be welcome.

In addition, as part of the revision of the CRR, the Commission is implementing the standard for minimum capital requirements for market risk that was published by the BCBS in January 2016 as the outcome of a fundamental review of the rules governing the trading book. The standard firstly stipulates new rules for approving internal models. Secondly, it defines a significantly more risk-sensitive standardised approach that is also suitable as a fall-back for rejected or withdrawn model applications. The design of the new standardised approach is therefore considerably more complex than that of the existing one, and demands a considerably higher quality and quantity for the data being used. Relief is provided in the form of a derogation: the Commission is proposing a substantial increase in the threshold for the derogation for small trading book business in accordance with Article 94 of the CRR, as well as the definition of a second, higher threshold above which use of the BCBS standard will be obligatory. Institutions with trading book business less than the new threshold can then continue to use the old standardised approach to calculate their own funds requirement for market risk.

For the leverage ratio, the Commission’s proposal requires 3 per cent of Tier 1 capital. The text additionally contains adjustments to the leverage ratio exposure measure, for example to align the calculation of derivatives exposures with the Basel requirements. The Commission is also proposing that certain exposures – for example loans to the public sector by public development banks, pass-through loans and officially guaranteed export credits – should no longer be included in the calculation of the leverage ratio. The Commission has not stipulated additional requirements for Global Systemically Important Institutions (G-SIIs) at this point. These rules will be based on the BCBS requirements, which have not yet been finalised.

Large exposure rules, consolidation and third-country banks

The Commission’s proposals also contain far-reaching changes to the large exposure rules. In particular, these are to implement the framework for large exposures that the BCBS published in April 2014. A key aspect here is that Tier 2 capital is no longer to be taken into account in determining the large exposure limit, with only an institution’s Tier 1 capital being used to calculate this limit in future. The draft also proposes a new upper limit of 15 per cent of Tier 1 capital for a G-SII’s exposure to other G-SIIs. The Commission plans to simplify the reporting requirements for small banks, which would then only have to submit their large exposure reports once a year, instead of every quarter.

In the area of consolidation, a number of amendments to the CRR and CRD IV are intended to bring financial holding companies and mixed financial holding companies more directly within the scope of the prudential regime. Specifically, there is a proposal that they will require supervisory approval in future. In addition, they will be made directly responsible at a consolidated level for ensuring compliance with the supervisory requirements by the financial holding group or mixed financial holding group that they head.
The Commission’s proposal also requires third-country banks with more than one subsidiary in the EU to establish an intermediate EU parent if certain conditions are met. This will apply to global systemically important non-EU banking groups and to cases where the aggregate total assets of the EU subsidiaries and branches exceed EUR 30 billion. The Commission expects that this will make it easier to stabilise and recapitalise the subsidiaries of third-country banks. This proposal picks up on a comparable requirement in the USA.

Total Loss Absorbing Capacity

Another key element of the reform package is the planned implementation of the global standard on Total Loss-Absorbing Capacity (TLAC). Total Loss Absorbing Capacity consists of the Basel III own funds requirements plus debt that can be specifically converted into equity. Under the Commission’s proposal, which BaFin helped to shape in an advisory capacity, TLAC will be incorporated into the Minimum Requirement for own funds and Eligible Liabilities (MREL) that already apply to all European banks.

Under the current rules, the responsible resolution authorities define the MREL individually for each institution, reflecting the resolution strategy planned for the institution among other factors. According to the draft legislation, the minimum requirements for the TLAC standard are now to become the statutory minimum MREL requirements for global systemically important institutions. The MREL requirements will continue to be determined individually for all other institutions. The statutory minimum will be addressed in the CRR; the rules governing the individual definition of MREL will continue to be a part of the BRRD.

MREL is very important for the effective application of bail-ins. In the event of resolution, liabilities are written down and converted into equity in order to cover losses and inject new equity into the institution without additional costs for taxpayers. MREL ensures that sufficient eligible liabilities are available to do this. The Commission is proposing to harmonise the priority ranking of unsecured debt instruments stipulated in national insolvency law to make bail-ins easier. The order in which owners and creditors in Germany bear losses in resolution and liabilities are written down or converted can be seen in an article published by BaFin on its website.

Help for smaller banks and support for the European economy

The Commission also wants to use a number of specific measures to improve banks’ lending capacity so as to support the European economy.

These include measures to enhance the capacity of banks to lend to SMEs and to fund infrastructure projects. For small, less complex banks, the Commission wants to reduce what it sees as a disproportionate administrative burden resulting from certain rules on remuneration, for example rules on deferred remuneration and remuneration using instruments such as shares.

In addition, CRD IV and the CRR are to reflect the proportionality principle to a greater extent in future in order to reduce the burden for small, less complex institutions, which are currently subject to a number of disclosure and reporting obligations, as well as complex trading book requirements, that the Commission does not think are justified by prudential considerations.

Achieving deeper and more liquid capital markets

Finally, to drive forward the goal of capital markets union, the Commission is proposing several amendments designed to support the banks in achieving deeper and more liquid capital markets in the EU.

The Commission intends to avoid disproportionate capital requirements for trading book positions, including exposures relating to market-making activities. Under the proposals, the cost of issuing and holding certain instruments, such as covered bonds, high-quality securitisation instruments, sovereign debt instruments and derivatives used for hedging will be reduced. In addition, disincentives for institutions that act as intermediaries for clients for trades cleared by central counterparties should be avoided.