2024-05-30 06:19:52 ET
On Thursday, the European Council adopted a new set of rules under the Basel III standards aimed at increasing the resilience of the
banking sector
, enhancing supervision, and reinforcing risk management.
The most significant change introduced is the “output floor,” which sets a lower limit on the capital requirements determined by banks’ internal models to 72.5% of the capital requirements that would apply if they used standardized measurements.
These rules will come into force on January 1, 2025.
Basel III: addressing the fallout from the 2008 crisis
The Basel accords, comprising Basel I, II, and III, are international banking regulation agreements set by the Basel Committee on Banking Supervision (BCBS).
These standards ensure that banks maintain sufficient capital and liquidity to meet their obligations and absorb unexpected losses.
Basel III, the latest in the series, was agreed upon to address the aftermath of the 2007-2008 global financial crisis.
Implemented in phases to allow banks time to adjust, Basel III is now largely in force within the EU.
New rules to enhance banking stability
The new rules adopted by the European Council aim to make EU banks more resilient to economic shocks, strengthen their supervision, and improve risk management.
These reforms are crucial for ensuring that European banks can withstand economic disruptions and support the transition towards more sustainable and digital economies.
Belgian Finance Minister Vincent Van Peteghem highlighted the importance of these reforms in deepening the Banking Union and enhancing the sector’s resilience.
The updated rules amend the capital requirements regulation and the capital requirements directive, translating the Basel III standards into EU legislation.
The key feature of these reforms is the “output floor,” designed to prevent excessive reductions in banks’ capital requirements and to make these requirements more comparable across institutions.
This floor limits the capital requirements determined by banks’ internal models to at least 72.5% of the standardized measurements.
New rules harmonize the minimum requirements
Beyond implementing Basel III standards, the new rules harmonize the minimum requirements for authorizing branches of third-country banks and supervising their activities within the EU.
Additionally, they establish a transitional prudential regime for crypto assets and introduce amendments to improve banks’ management of Environmental, Social, and Governance (ESG) risks.
This adoption marks the final step in the implementation procedure.
The amended capital requirements regulation and directive will be published in the EU’s Official Journal and will enter into force 20 days later.
Member states will have 18 months to transpose the directive into national legislation, with the regulation becoming applicable from January 1, 2025.
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