The reforms primarily address elements of the regulatory framework agreed by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). They are intended to strengthen the resilience of European institutions and improve the supervision of cross-border banking groups. The reforms are designed to achieve a number of objectives, including:

More stringent capital requirements

The capital requirements placed on banks are to be made more stringent in order to reduce incentives to take excessive risks. A binding leverage ratio will be introduced for this purpose. In addition, new capital requirements for institutions’ trading and derivative transactions are envisaged, which are to be based on the Fundamental Review of the Trading Book by the BCBS.

Since the new standard is currently being revised once again by the BCBS, in a first step the European banking reform package will only include new reporting obligations. These requirements will not become binding until the work in the Basel Committee has been finalised.

In order to strengthen institutions’ long-term liquidity, the net stable funding ratio, which previously only existed as a reporting obligation, will be introduced as a binding requirement.
In addition, more importance will be attached to the issue of sustainability.

More proportionality

The framework for banks is to be made more proportional: in introducing a definition of “small, non-complex institutions”, whose total assets do not exceed EUR 5 billion and which fulfil a range of qualitative criteria, the reforms create an important basis for granting simplifications specifically for these institutions.

This primarily concerns requirements that involve an administrative burden disproportionate to the supervisory benefit. Simplifications are envisaged above all in relation to reporting and disclosure obligations, but also with regard to remuneration rules. The simplified net stable funding ratio is intended to facilitate a sustained reduction in the number of data points to be collected. Furthermore, the European Banking Authority (EBA) will be asked to develop proposals for increasing the degree of proportionality in reporting, with a clear target for the cost savings to be achieved.

BaFin has continuously worked to reduce the burden on smaller institutions and was actively involved in the development of pertinent proposals. At the same time, it has always emphasised that this should not come at a cost to financial stability. BaFin therefore views the simplifications that have already been planned, in particular regarding reporting and disclosure obligations, as a positive first step. However, consistency is required in continuing along this path with the upcoming amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD).

Loans to SME and securitisation instruments

Regulations specific to the EU concerning the granting of loans to small and medium-sized enterprises (SMEs) are to be maintained and institutions are to be given more leeway. Alongside this, financing certain infrastructure projects will be made easier. Furthermore, the costs of issuing or holding certain instruments, such as high-quality securitisation instruments or covered bonds, are to be reduced.

Resolution and prevention of money laundering

In addition, the framework for bank resolution is to be improved, particularly with regard to the level and quality of the subordination of liabilities. The intention is to guarantee a more efficient and orderly bail-in process.

Furthermore, resolution authorities are to be given a moratorium tool. This would give them the opportunity to suspend the payments and/or contractual obligations of a bank undergoing resolution.
The standards for cooperation and the exchange of information between various authorities entrusted with the supervision or resolution of cross-border banking groups will also be amended.

This cooperation between authorities will also be improved in relation to the combating of money laundering and terrorist financing.

Eligibility of own funds

Based on proposals made by the European Parliament, various aspects of the rules regarding the eligibility of regulatory own funds are to be changed. As a result, profit and loss transfer agreements should, under certain circumstances, no longer result in Common Equity Tier 1 capital being rendered ineligible for the subsidiary institution in future. Furthermore, the existing requirement that the intangible asset software be completely excluded from Tier 1 capital will be relaxed with an exception planned for certain types of software.

Promotional banks no longer under ECB supervision

A further important point is that the German promotional banks are to be exempted from the scope of the CRR and the CRD. As a result, the European Central Bank will no longer be responsible for the supervision of Germany’s three largest promotional banks, NRW.BANK, Landwirtschaftliche Rentenbank and L-Bank. These are currently classified as significant institutions within the meaning of the SSM Regulation.

Substantive changes to the CRD

New substantive regulations are to be added to the CRD: for example, institutions domiciled in third countries that have subsidiaries in at least two EU member states must in future establish an intermediate parent undertaking domiciled in an EU country for these subsidiary institutions if they reach certain thresholds.

In addition, financial holding companies and mixed financial holding companies will, as a rule, require supervisory authorisation and will be directly responsible for ensuring compliance with the supervisory requirements at a consolidated level.

Non-binding Pillar II guidance

In addition to the rules on determining increased own funds requirements, which have already been specified in greater detail in the CRD IV, a basis in EU law for the introduction of non-binding Pillar II guidance is also to be established. This should specify which own funds the supervisory authority expects an institution to hold beyond the minimum capital requirements.

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