Regulation (EU) 2024/1623 of the European Parliament and of the Council of 31 May 2024 amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Central Bank (1),

Having regard to the opinion of the European Economic and Social Committee (2),

Acting in accordance with the ordinary legislative procedure (3),

Whereas:

(1) In response to the global financial crisis of 2008-2009, the Union embarked on a wide-ranging reform of the prudential framework for institutions, as defined in Regulation (EU) No 575/2013 of the European Parliament and of the Council (4) with a view to increasing the resilience of the Union banking sector. One of the main elements of the reform consisted of the implementation of the international standards agreed in 2010 by the Basel Committee on Banking Supervision (BCBS), specifically the so-called ‘Basel III reform’ and the resulting Basel III standards. Thanks to that reform, the Union banking sector entered the COVID-19 crisis on a resilient footing. However, while the overall level of capital in institutions in the Union is now generally satisfactory, some of the problems that were identified in the wake of the global financial crisis have yet to be addressed.

(2) To address those problems, provide legal certainty and signal the commitment of the Union to its international partners in the G20, it is of utmost importance to implement faithfully in Union law the outstanding elements of the Basel III reform agreed in 2017 (the ‘finalised Basel III framework’). At the same time, the implementation should avoid a significant increase in overall capital requirements for the Union banking system as a whole and take into account specificities of the Union economy. Where possible, adjustments to the international standards should be applied on a transitional basis. The implementation should help avoid competitive disadvantages for institutions in the Union, in particular in the area of trading activities, where those institutions directly compete with their international peers. Moreover, with the implementation of the finalised Basel III framework, the Union completes a decade-long process of reform. In that context, the Union should carry out an overall assessment of its banking system, taking into account all relevant dimensions. The Commission should be mandated to perform a holistic review of the framework for prudential and supervisory requirements. That review should take into consideration the various types of corporate forms, structures and business models across the Union. That review should also take into account the implementation of the output floor as part of the prudential rules on capital and liquidity, as well as its level of application. The review should assess whether the output floor and its level of application ensure an adequate level of depositor protection and safeguard financial stability in the Union, taking into account both the Union-wide and banking union developments in all its dimensions. In that regard, the Commission shall duly consider the corresponding statements and conclusions on the banking union of both the European Parliament and the European Council.

(3) On 27 June 2023, the Commission committed to carrying out a holistic, fair and balanced assessment of the state of the banking system and applicable regulatory and supervisory frameworks in the single market. In doing so, it will take into account the impact of the amendments introduced to Regulation (EU) No 575/2013 by this Regulation, as well as of the state of the banking union in all its dimensions. Among the issues to be analysed, the Commission will examine the implementation of the output floor, including its level of application. It will carry out that assessment based on input from the European Supervisory Authority (European Banking Authority) (EBA) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council (5) and from the European Central Bank and the single supervisory mechanism, and will consult with interested parties to ensure that the various perspectives are appropriately considered. The Commission will, where appropriate, submit a legislative proposal based on that report.

(4) Regulation (EU) No 575/2013 enables institutions to calculate their own funds requirements either by using standardised approaches or by using internal model approaches. Standardised approaches require institutions to calculate the own funds requirements using fixed parameters, which are based on relatively conservative assumptions and laid down in Regulation (EU) No 575/2013. Internal model approaches, that are to be approved by competent authorities, allow institutions to estimate for themselves most or all of the parameters required to calculate the own funds requirements. The BCBS decided in December 2017 to introduce an aggregate output floor. That decision was based on an analysis carried out in the wake of the global financial crisis of 2008-2009, which revealed that internal models tend to underestimate the risks that institutions are exposed to, especially for certain types of exposures and risks, and hence, tend to result in insufficient own funds requirements. Compared to own funds requirements calculated using the standardised approaches, internal models produce, on average, lower own funds requirements for the same exposures.

(5) The output floor represents one of the key measures of the Basel III reform. It aims to limit the unwarranted variability in the own funds requirements produced by internal models and the excessive reduction in capital that an institution using internal models can derive relative to an institution using the standardised approaches. By setting a lower limit on the own funds requirements that are produced by institutions’ internal models of 72,5 % of the own funds requirements that would apply if standardised approaches were used by those institutions, the output floor limits the risk of excessive reductions in capital. To that end, institutions using internal models should calculate two sets of total own funds requirements, with each set aggregating all own funds requirements without any double counting. Implementing the output floor faithfully would increase the comparability of institutions’ capital ratios, restore the credibility of internal models and ensure that there is a level playing field between institutions that use different approaches to calculate their own funds requirements.

(6) In order to ensure that own funds are appropriately distributed and available to protect savings where needed, the output floor should apply at all levels of consolidation, unless a Member State considers that that objective can be effectively achieved in other ways, in particular as regards groups, such as cooperative groups with a central body and affiliated institutions situated in that Member State. In such cases, a Member State should be able to decide not to apply the output floor on an individual or sub-consolidated basis to institutions in that Member State, provided that, at the highest level of consolidation in that Member State, the parent institution of those institutions in that Member State complies with the output floor on the basis of its consolidated situation.

(7) The BCBS has found the current Standardised Approach for credit risk (SA-CR) to be insufficiently risk sensitive in a number of areas, leading to inaccurate or inappropriate — either too high or too low — measurements of credit risk and hence, of own funds requirements. The provisions regarding the SA-CR should therefore be revised to increase the risk sensitivity of that approach in relation to several key aspects.

(8) For rated exposures to other institutions, some of the risk weights should be recalibrated in accordance with the Basel III standards. In addition, the risk weight treatment for unrated exposures to institutions should be rendered more granular and decoupled from the risk weight applicable to the central government of the Member State in which the borrowing institution is established, as implicit government support for such institutions should no longer be assumed.

(9) For subordinated and prudentially assimilated debt exposures, as well as for equity exposures, a more granular and stringent risk weight treatment is necessary to reflect the higher loss risk of subordinated debt and equity exposures as compared to debt exposures, and to prevent regulatory arbitrage between the non-trading book and the trading book. Institutions in the Union have long-standing, strategic equity investments in financial and non-financial corporates. As the standard risk weight for equity exposures increases over a five-year transitional period, existing strategic equity holdings in corporates and certain insurance undertakings under the control or significant influence of the institution should be grandfathered to avoid disruptive effects and to preserve the role of institutions in the Union as long-standing, strategic equity investors. Given the prudential safeguards and supervisory oversight to foster integration of the financial sector, for equity holdings in other institutions within the same group or covered by the same institutional protection scheme, the current regime should be maintained. In addition, to reinforce private and public initiatives to provide long-term equity to unlisted Union companies, investments undertaken directly or indirectly, for instance through venture capital firms, should not be considered speculative where those investments are made with the firm intention of the senior management to hold them for at least three years.

(10) To stimulate certain sectors of the economy, the Basel III standards provide for a discretion of competent authorities in carrying out their supervisory tasks that enables institutions to apply, within certain limits, a preferential treatment to equity holdings acquired pursuant to legislative programmes that entail significant subsidies for the investment and involve government oversight and restrictions on the equity investments. Implementing that discretion in Union law should also help to foster long-term equity investments.

(11) Corporate lending in the Union is predominantly provided by institutions which use the Internal Ratings Based Approach (the ‘IRB Approach’) for credit risk to calculate their own funds requirements. With the implementation of the output floor, those institutions will also need to apply the SA-CR, which relies on credit assessments provided by nominated external credit assessment institutions (ECAIs) to determine the credit quality of the corporate borrower. The mapping between external ratings and risk weights applicable to rated corporates should be more granular to bring such mapping in line with international standards on that matter.

(12) Most Union corporates, however, do not seek external credit ratings. To avoid a disruptive impact on bank lending to unrated corporates and to provide enough time to establish public or private initiatives aiming to increase the coverage of external credit ratings, it is necessary to provide for a transitional period. During that transitional period, institutions using the IRB Approach should be able to apply a favourable treatment when calculating their output floor for investment grade exposures to unrated corporates, whilst initiatives to foster a widespread use of credit ratings should be established. Any extension of the transitional period should be substantiated and limited to four years at most.

(13) After the transitional period, institutions should be able to refer to credit assessments by nominated ECAIs to calculate the own funds requirements for a significant part of their corporate exposures. EBA, the European Supervisory Authority (European Insurance and Occupational Pensions Authority) (EIOPA) established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council (6) and the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (7), (collectively the ‘European Supervisory Authorities’) should monitor the use of the transitional arrangement and should consider relevant developments and trends in the ECAI market, impediments to the availability of credit assessments by nominated ECAIs, in particular for corporates, and possible measures to address those impediments. The transitional period should be used to significantly expand the availability of ratings for Union corporates. To that end, rating solutions beyond the currently existing rating ecosystem should be developed to incentivise especially larger Union corporates, to become externally rated. In addition to the positive externalities generated by the rating process, a wider rating coverage will foster, inter alia, the capital markets union. In order to achieve that goal, it is necessary to consider the requirements related to external credit assessments, or the establishment of additional institutions providing such assessments, which might entail substantial implementation efforts. Member States, in close cooperation with their central banks, should assess whether a request for the recognition of their central bank as an ECAI in accordance with Regulation (EC) No 1060/2009 of the European Parliament and of the Council (8) and the provision of corporate ratings by the central bank for the purposes of Regulation (EU) No 575/2013 might be desirable in order to increase the coverage of external ratings.

(14) For exposures secured by residential property and exposures secured by commercial immovable property, more risk-sensitive approaches have been developed by the BCBS to better reflect different funding models and stages in the construction process.

(15) The global financial crisis of 2008-2009 revealed a number of shortcomings of the current treatment under the standardised approach of exposures secured by residential property and exposures secured by commercial immovable property. Those shortcomings have been addressed in the Basel III standards. The Basel III standards differentiate between exposures where the repayment is materially dependent on cash flows generated by the property and exposures where that is not the case. The former should be subject to a dedicated risk weight treatment to reflect more accurately the risk associated with those exposures, but also to improve consistency with the treatment of income producing real estate under the IRB Approach.

(16) For exposures secured by residential property and exposures secured by commercial immovable property, the loan-splitting approach should be kept, as that approach is sensitive to the type of borrower and reflects the risk mitigating effects of the immovable property collateral in the applicable risk weights, even in the case of exposures featuring high loan-to-value ratios. However, the loan-splitting approach should be adjusted in accordance with the Basel III standards as it has been found to be too conservative for certain mortgages with very low loan-to-value ratios.

(17) To ensure that the impact of the output floor on low-risk residential mortgage lending by institutions using the IRB Approach is spread over a sufficiently long period, and thus avoid the disruptions to that type of lending that could be caused by sudden increases in own funds requirements, it is necessary to provide for a specific transitional arrangement. For the duration of the transitional period, when calculating the output floor, institutions using the IRB Approach should be able to apply a lower risk weight to the part of their exposures secured by a mortgage on residential property under the SA-CR. To ensure that the transitional arrangement is available only to low-risk mortgage exposures, appropriate eligibility criteria, based on established concepts used under the SA-CR, should be set. Compliance with those criteria should be verified by competent authorities. Because residential property markets can differ from one Member State to another, the decision on whether to apply the transitional arrangement should be left to individual Member States. The use of the transitional arrangement should be monitored by EBA. Any extension of the transitional period should be substantiated and limited to four years at most.

(18) Due to the lack of clarity and the risk sensitivity of the current treatment of speculative immovable property financing, own funds requirements for those exposures are often deemed to be too high or too low. That treatment should therefore be replaced by a dedicated treatment for land acquisition, development and construction exposures, comprising loans to companies or special purpose entities financing any land acquisition for development and construction purposes, or development and construction of any residential property or commercial immovable property.

(19) It is important to reduce the impact of cyclical effects on the valuation of immovable property securing a loan and to keep own funds requirements for mortgages more stable. In the case of a revaluation above the value at the time the loan was granted, provided that there is sufficient data, the value of the immovable property recognised for prudential purposes should therefore not exceed the average value of a comparable property measured over a sufficiently long period, unless modifications to that property unequivocally increase its value. To avoid unintended consequences for the functioning of the covered bond markets, competent authorities should be able to allow institutions to revalue immovable property on a regular basis without applying those limits to value increases. Modifications that improve the energy performance or the resilience, protection and adaptation to physical risks of buildings and housing units could be considered as increasing the value of the immovable property.