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EU strikes major deal that strengthens EU banks and our climate ambitions

Date

27 Jun 2023

Sections

Euro & Finance

After long and challenging final negotiations that lasted the whole night, the EU has agreed on the major legislative package on capital requirements for banks. The agreement reached today by the European Parliament and EU member states will enhance the resilience of EU banks to future economic shocks and help us achieve climate goals.

The leading negotiator on behalf of the Parliament was the S&D Group’s spokesperson on economic and monetary affairs, Jonás Fernández, who fought hard to align the European banking legislation with the international rules on capital requirements for banks as closely as possible.

Today’s agreement covers two legislative proposals presented by the European Commission in October 2021 to amend the Capital Requirement Regulation (CRR) and the Capital Requirement Directive (CRD). The aim is to transpose the global Basel III agreement into European legislation and to introduce additional reforms into the EU legislation. The deal reached in the trilogue negotiations today still needs to be formally confirmed by the European Parliament and EU member states.

Jonás Fernández, MEP, European Parliament’s rapporteur on the capital requirement legislation, and S&D spokesperson on economic and monetary affairs, said:

“As regards the Capital Requirement Regulation, we are very proud that we managed to fend off numerous deviations from the Basel rules requested by EU member states. We remained faithful to the spirit and letter of the global Basel III agreement. Specifically, we managed to introduce a clear cut-off date for transitional arrangements regarding the output floor*. This means that these arrangements will be genuinely transitional and all financial institutions will move to full compliance with the Basel rules after the cut-off date.

“Furthermore, we secured many extra provisions on environment, social and governance (ESG) aspects in both legislative acts. The use of a capital deduction for infrastructure will now be limited to projects with a neutral or positive impact on sustainability, which is broadly in line with the ‘do no harm principle’. The Parliament has also succeeded with stronger ESG requirements for banks by demanding transition plans as well as strengthening stress tests and the supervisory review process.

“Another key achievement in this new banking package is the introduction of transitional capital requirements for crypto currencies in the EU regulation until the European Commission presents its proposal on the matter. We also introduced a requirement to limit exposures to shadow banking institutions, so that banking activities will not move to bank-like institutions with weaker rules.

“In the Capital Requirement Directive, we managed to reinforce the governance framework for the nomination of members of boards of large financial institutions. We introduced strong requirements for third country branches to ensure that financial services to customers are provided through European establishments, subject to European rules. Moreover, we managed to avert EU member states’ attempts to weaken supervision of large investments firms.”

*Note to editors:

The output floor is one of the core elements of the Basel III reform. It is a measure that sets a lower limit on the capital requirements that banks calculate when using their internal models. The main purpose of this measure is to mitigate the risk that a bank’s internal model underestimates the amount of capital needed by banks.

The application of the output floor was one of the most challenging points of negotiations, open until the end. According to the deal, the output floor will be applied at institution level, like in the current CRR. For the S&Ds, it was important to get a link with the banking union, which has been included. Concretely, the level of application of the output floor might be revised by the Commission upon the development of the banking union. 

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