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.

(20) The specialised lending business is conducted with special purpose entities that typically serve as borrowing entities, for which the return on investment is the primary source of repayment of the financing obtained. The contractual arrangements of the specialised lending model provide the lender with a substantial degree of control over the assets being financed, while the primary source of repayment for the obligation is the income generated by those assets. To reflect the associated risk more accurately, that form of lending should therefore be subject to specific own funds requirements for credit risk. In line with the Basel III standards on assigning risk weights to specialised lending exposures, a dedicated specialised lending exposures class should be introduced under the SA-CR, thereby improving consistency with the already existing specific treatment of specialised lending exposures under the IRB Approach. A specific treatment for specialised lending exposures should be introduced, whereby a distinction should be made between ‘project finance’, ‘object finance’ and ‘commodity finance’ to better reflect the inherent risks of those sub-classes of the specialised lending exposures class.

(21) While the new treatment under the standardised approach for unrated specialised lending exposures laid down in the Basel III standards is more granular than the current standardised treatment of exposures to corporates, the former is not sufficiently risk-sensitive to be able to reflect the effects of comprehensive security packages and pledges usually associated with those exposures in the Union, which enable lenders to control the future cash flows to be generated over the life of the project or asset. Due to the lack of external rating coverage of specialised lending exposures in the Union, that new treatment might also create incentives for institutions to stop financing certain projects or take on higher risks in otherwise similarly treated exposures which have different risk profiles. Whereas the specialised lending exposures are mostly financed by institutions using the IRB Approach that have in place internal models for those exposures, the impact might be particularly significant in the case of object finance exposures, which could be at risk of discontinuation of the activities, in the particular context of the application of the output floor. To avoid unintended consequences of the lack of risk sensitivity in the Basel III standards for unrated object finance exposures, object finance exposures that comply with a set of criteria capable of lowering their risk profile to high quality standards compatible with prudent and conservative management of financial risks, should benefit from a reduced risk weight on a transitional basis. That transitional arrangement should be assessed in a report prepared by EBA.

(22) The classification of retail exposures under the SA-CR and the IRB Approach should be further aligned to ensure a consistent application of the corresponding risk weights to the same set of exposures. In line with the Basel III standards, rules should be laid down for a differentiated treatment of revolving retail exposures that meet a set of conditions of repayment or usage capable of lowering their risk profile. Those exposures should be defined as transactor exposures. Exposures to one or more natural persons that do not meet all of the conditions to be considered retail exposures should be assigned a risk weight of 100 % under the SA-CR.

(23) The Basel III standards introduce a credit conversion factor of 10 % for unconditionally cancellable commitments in the SA-CR. That is likely to result in a significant impact on obligors that rely on the flexible nature of unconditionally cancellable commitments to finance their activities when dealing with seasonal fluctuations in their business or when managing unexpected short-term changes in working capital needs, especially during the recovery from the COVID-19 pandemic. It is therefore appropriate to provide for a transitional period during which institutions should be able to continue to apply a lower credit conversion factor to their unconditionally cancellable commitments, and, afterwards, to assess whether a potential gradual increase of the applicable credit conversion factors is warranted to allow institutions to adjust their operational practices and products without hampering credit availability to institutions’ obligors.

(24) Institutions should play a key role in contributing to the recovery from the COVID-19 pandemic also by extending proactive debt restructuring measures towards worthy debtors facing or about to face difficulties in meeting their financial commitments. In that regard, institutions should not be discouraged from extending meaningful concessions to obligors where deemed appropriate as a result of a potential and unwarranted classification of counterparties as being in default where such concessions might restore the likelihood of those obligors paying the remainder of their debt obligations. When developing guidelines on the definition of default of an obligor or credit facility, EBA should duly consider the need for providing adequate flexibility to institutions.

(25) The global financial crisis of 2008-2009 has revealed that, in some cases, institutions have also used the IRB Approach on portfolios unsuitable for modelling due to insufficient data, which had detrimental consequences for the reliability of the results. It is therefore appropriate not to oblige institutions to use the IRB Approach for all of their exposures and to apply the roll-out requirement at the level of exposure classes. It is also appropriate to restrict the use of the IRB Approach for exposure classes where robust modelling is more difficult in order to increase the comparability and robustness of own funds requirements for credit risk under the IRB Approach.

(26) Institutions’ exposures to other institutions, other financial sector entities and large corporates typically exhibit low levels of default. For such low-default portfolios, it is difficult for institutions to obtain reliable estimates of the loss given default (LGD), due to an insufficient number of observed defaults in those portfolios. That difficulty has resulted in an undesirable level of dispersion across institutions in the level of estimated risk. Institutions should therefore use regulatory LGD values rather than internal LGD estimates for those low-default portfolios.

(27) Institutions that use internal models to estimate the own funds requirements for credit risk with regard to equity exposures typically base their risk assessment on publicly available data, to which all institutions can be presumed to have identical access. Under those circumstances, differences in own funds requirements cannot be justified. In addition, equity exposures held in the non-trading book form a very small component of institutions’ balance sheets. Therefore, to increase the comparability of institutions’ own funds requirements and to simplify the regulatory framework, institutions should calculate their own funds requirements for credit risk with regard to equity exposures using the SA-CR, and the use of the IRB Approach should not be allowed for that purpose.

(28) It should be ensured that the estimates of the probability of default, the LGD and the credit conversion factors of individual exposures of institutions that are allowed to use internal models to calculate own funds requirements for credit risk do not reach unsuitably low levels. It is therefore appropriate to introduce minimum values for own estimates and to oblige institutions to use the higher of their own estimates of risk parameters and the minimum values for those own estimates. Such minimum values for risk parameters (‘input floors’) should constitute a safeguard to ensure that own funds requirements do not fall below prudent levels. In addition, such input floors should mitigate model risk due to factors such as incorrect model specification, measurement error and data limitations. Input floors would also improve the comparability of capital ratios across institutions. In order to achieve those results, input floors should be calibrated in a sufficiently conservative manner.

(29) Input floors that are calibrated too conservatively might discourage institutions from adopting the IRB Approach and the associated risk management standards. Institutions might also be incentivised to shift their portfolios to higher risk exposures to avoid the constraints imposed by input floors. To avoid such unintended consequences, input floors should appropriately reflect certain risk characteristics of the underlying exposures, in particular by taking on different values for different types of exposures, where appropriate.

(30) Specialised lending exposures have risk characteristics that differ from those of general corporate exposures. It is thus appropriate to provide for a transitional period during which the LGD input floor applicable to specialised lending exposures is reduced. Any extension of the transitional period should be substantiated and limited to four years at most.

(31) In accordance with the Basel III standards, the IRB Approach for the sovereign exposure class should remain largely untouched, due to the special nature of and risks related to the underlying obligors. In particular, sovereign exposures should not be subject to input floors.

(32) To ensure a consistent approach for all exposures to regional governments, local authorities and public sector entities, two new regional governments, local authorities and public sector entities exposure classes should be created, independent from both sovereign and institutions exposure classes. The treatment of assimilated exposures to regional governments, local authorities and public sector entities, which under the SA-CR would qualify for a treatment as exposures to central governments and central banks should not be assigned to those new exposure classes under the IRB Approach and should not be subject to input floors. Moreover, specific lower input floors under the IRB Approach should be calibrated for exposures to regional governments, local authorities and public sector entities, which are not assimilated, in order to appropriately reflect their risk profile compared to exposures to corporates.

(33) It should be clarified how the effect of a guarantee should be recognised for a guaranteed exposure treated under the IRB Approach using own estimates of LGD where the guarantor belongs to a type of exposures treated under the IRB Approach but without using own estimates of LGD. In particular, the use of the substitution approach, whereby the risk parameters related to the underlying exposure are substituted with the ones of the guarantor, or of a method whereby the probability of default or LGD of the underlying obligor is adjusted using a specific modelling approach to take into account the effect of the guarantee, should not lead to an adjusted risk weight that is lower than the risk weight applicable to a comparable direct exposure to the guarantor. Consequently, where the guarantor is treated under the SA-CR, recognition of the guarantee under the IRB Approach should generally lead to assigning the SA-CR risk weight of the guarantor to the guaranteed exposure.

(34) The finalised Basel III framework no longer requires an institution that adopted the IRB Approach for one exposure class to adopt that approach for all of its non-trading book exposures. To ensure a level playing field between institutions currently treating some exposures under the IRB Approach and those that do not, a transitional arrangement should allow institutions to revert to less sophisticated approaches under a simplified procedure. That procedure should allow competent authorities to oppose requests to revert to a less sophisticated approach that are made with a view to engaging in regulatory arbitrage. For the purposes of that procedure, the sole fact that the reversal to a less sophisticated approach results in a reduction of own funds requirements determined for the respective exposures should not be considered sufficient to oppose a request on grounds of regulatory arbitrage.

(35) In the context of removing unwarranted variability in own funds requirements, existing discounting rules applied to artificial cash flows should be revised in order to remove any unintended consequences. EBA should be mandated to revise its guidelines on the return to non-defaulted status.

(36) The introduction of the output floor could have a significant impact on the own funds requirements for securitisation positions held by institutions using the Securitisation Internal Ratings Based Approach or the Internal Assessment Approach. Although such positions are generally small relative to other exposures, the introduction of the output floor could affect the economic viability of the securitisation operation because of an insufficient prudential benefit of the transfer of risk. This could occur where the development of the securitisation market is part of the action plan on the capital markets union set out in the communication of the Commission of 24 September 2020 entitled ‘A Capital Markets Union for people and businesses — new action plan’ (the ‘capital markets union action plan’) and also where originator institutions might need to use securitisation more extensively in order to manage more actively their portfolios if they become bound by the output floor. During a transitional period, institutions using the Securitisation Internal Ratings Based Approach or the Internal Assessment Approach should be able to apply a favourable treatment for the purpose of calculating their output floor to their securitisation positions that are risk weighted using either of those Approaches. EBA should report to the Commission on the need to possibly review the prudential treatment of securitisation transactions, with a view to increasing the risk sensitivity of the prudential treatment.

(37) Regulation (EU) 2019/876 of the European Parliament and of the Council (9) amended Regulation (EU) No 575/2013 to implement the Basel III standards on the fundamental review of the trading book finalised by the BCBS in 2019 (the ‘final FRTB standards’) only for reporting purposes. The introduction of binding own funds requirements based on those standards was left to a separate legislative proposal, following the assessment of their impact on institutions in the Union.

(38) The final FRTB standards in relation to the boundary between the trading book and the non-trading book should be implemented in Union law, as they have significant bearing on the calculation of the own funds requirements for market risk. In line with the Basel III standards, the implementation of the boundary requirements should include the lists of instruments to be assigned to the trading book or the non-trading book, as well as the derogation allowing institutions to assign, subject to the approval of the competent authority, certain instruments usually held in the trading book, including listed equities, to the non-trading book, where positions in those instruments are not held with trading intent or do not hedge positions held with trading intent.

(39) In order to avoid a significant operational burden for institutions in the Union, all of the requirements implementing the final FRTB standards for the purpose of calculating the own funds requirements for market risk should have the same date of application. Therefore, the date of application of a limited number of FRTB requirements that were already introduced by Regulation (EU) 2019/876 should be aligned with the date of application of this Regulation. On 27 February 2023, EBA issued an opinion that if provisions referred to in Article 3(6) of Regulation (EU) 2019/876 entered into force and the applicable legal framework did not yet provide for the application of the FRTB-inspired approaches for capital calculation purposes, competent authorities referred to in Regulation (EU) No 1093/2010 should not prioritise any supervisory or enforcement action in relation to those requirements, until full implementation of the FRTB has been achieved, which is expected to be from 1 January 2025.

(40) In order to complete the reform agenda introduced after the global financial crisis of 2008-2009 and to address deficiencies in the current market risk framework, binding own funds requirements for market risk based on the final FRTB standards should be implemented in Union law. Recent estimates of the impact of the final FRTB standards on institutions in the Union have shown that the implementation of those standards in the Union will lead to a large increase in the own funds requirements for market risk for certain trading and market making activities which are important to the Union economy. To mitigate that impact and to preserve the good functioning of financial markets in the Union, targeted adjustments should be introduced to the implementation of the final FRTB standards in Union law.

(41) Institutions’ trading activities in wholesale markets can easily be carried out across borders, including between Member States and third countries. The implementation of the final FRTB standards should therefore converge as much as possible across jurisdictions, both in terms of substance and timing. Otherwise, it would be impossible to ensure an international level playing field for those activities. The Commission should therefore monitor the implementation of the final FRTB standards in other BCBS member jurisdictions. In order to address, where necessary, potential distortions in the implementation of the final FRTB standards, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union (TFEU) should be delegated to the Commission. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making (10). In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States’ experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts. The measures introduced by means of delegated acts should remain temporary. Where it is appropriate for such measures to apply on a permanent basis, the Commission should submit a legislative proposal to the European Parliament and to the Council.

(42) The Commission should take into account the principle of proportionality in the calculation of the own funds requirements for market risk for institutions with a medium-sized trading book business and calibrate those requirements accordingly. Therefore, institutions with a medium-sized trading book business should be allowed to use a simplified standardised approach to calculate the own funds requirements for market risk, in line with the internationally agreed standards. In addition, the eligibility criteria for identifying institutions with medium-sized trading book business should remain consistent with the criteria for exempting such institutions from the FRTB reporting requirements introduced by Regulation (EU) 2019/876.

(43) In light of the updated design of the Union carbon emissions allowance market, its stability in recent years and the limited volatility of the prices for carbon credits, a specific risk weight for exposures to carbon trading under the EU Emissions Trading System (EU ETS) should be introduced under the alternative standardised approach.

(44) Under the alternative standardised approach, exposures to instruments bearing residual risks are subject to a residual risk add-on charge to take into account risks that are not covered by the sensitivities-based method. Under the Basel III standards, an instrument and its hedge can be netted for the purposes of that charge only if they perfectly offset. However, institutions are able to hedge in the market, to a large extent, the residual risk of some of the instruments within the scope of the residual risk add-on charge thus reducing the overall risk of their portfolios, even though those hedges might not perfectly offset the risk of the initial position. To allow institutions to continue hedging without undue disincentives and in recognition of the economic rationale of reducing the overall risk, the implementation of the residual risk add-on charge should allow on a temporary basis, under strict conditions and supervisory approval, for the hedges of those instruments that can be hedged in the market to be excluded from the residual risk add-on charge.

(45) The BCBS has revised the international standard on operational risk to address weaknesses that emerged in the wake of the global financial crisis of 2008-2009. Besides a lack of risk sensitivity in the standardised approaches, a lack of comparability arising from a wide range of internal modelling practices under the advanced measurement approach was identified. Therefore, and in order to simplify the operational risk framework, all existing approaches for estimating the own funds requirements for operational risk were replaced by a single non-model-based method, namely the new standardised approach for operational risk. Regulation (EU) No 575/2013 should be aligned with the finalised Basel III framework to contribute to a level playing field internationally for institutions established in the Union but operating also outside the Union, and to ensure that the operational risk framework at Union level remains effective.

(46) The new standardised approach for operational risk introduced by the BCBS combines an indicator that relies on the size of the business of an institution with an indicator that takes into account the loss history of that institution. The finalised Basel III framework envisages a degree of discretion as to how the indicator that takes into account the loss history of an institution may be implemented. Jurisdictions are able to disregard historical losses for calculating the own funds requirements for operational risk for all relevant institutions, or to take historical loss data into account even for institutions below a certain business size. To ensure a level playing field within the Union and to simplify the calculation of own funds requirements for operational risk, that discretion should be exercised in a harmonised manner for the minimum own funds requirements by disregarding historical operational loss data for all institutions.

(47) When calculating the own funds requirements for operational risk, insurance policies might in the future be allowed to be used as an effective risk mitigation technique. To that end, EBA should report to the Commission on whether it is appropriate to recognise insurance policies as an effective risk mitigation technique and on the conditions, criteria and the standard formula to be used in such cases.

(48) The extraordinary and unprecedented pace of monetary policy tightening in the aftermath of the COVID-19 pandemic might give rise to significant levels of volatility in the financial markets. Together with increased uncertainty leading to increased yields for public debt, that might, in turn, give rise to unrealised losses on certain institutions’ holdings of public debt. In order to mitigate the considerable negative impact of the volatility in central government debt markets on institutions’ own funds and thus on institutions’ capacity to lend, a temporary prudential filter that would partially neutralise that impact should be reintroduced.

(49) Public financing through the issuance of government bonds denominated in the domestic currency of another Member State might continue to be necessary to support public measures to fight the consequences of the severe, double economic shock caused by the COVID-19 pandemic and Russia’s war of aggression against Ukraine. To avoid constraints on institutions investing in such bonds, it is appropriate to reintroduce the transitional arrangement for exposures to central governments or central banks where those exposures are denominated in the domestic currency of another Member State for the purposes of the treatment of such exposures under the credit risk framework.

(50) Regulation (EU) 2019/630 of the European Parliament and of the Council (11) introduced a requirement for minimum loss coverage for non-performing exposures (NPEs), the so-called prudential backstop. The measure aimed to avoid the rebuilding of non-performing exposures held by institutions, while, at the same time, promoting pro-active management of NPEs by improving the efficiency of institutions’ restructuring or enforcement proceedings. Against that background, some targeted changes should be applied to NPEs guaranteed by export credit agencies or public guarantors. Furthermore, certain institutions that meet stringent conditions and are specialised in the acquisition of NPEs should be excluded from the application of the prudential backstop.

(51) Information on the amount and quality of performing, non-performing and forborne exposures, as well as an ageing analysis of accounting past due exposures, should also be disclosed by listed small and non-complex institutions and by other institutions. That disclosure obligation does not create an additional burden on those institutions, as the disclosure of such limited set of information has already been implemented by EBA on the basis of the 2017 Council Action plan to tackle non-performing loans in Europe, which invited EBA to enhance disclosure requirements on asset quality and non-performing loans for all institutions. That disclosure obligation is also fully consistent with the communication of the Commission of 16 December 2020 entitled ‘Tackling non-performing loans in the aftermath of the COVID-19 pandemic’.

(52) It is necessary to reduce the compliance burden for disclosure purposes and to enhance the comparability of disclosures. EBA should therefore establish a centralised web-based platform that enables the disclosure of information and data submitted by institutions. That centralised web-based platform should serve as a single access point for institutions’ disclosures, while ownership of the information and data and the responsibility for their accuracy should remain with the institutions that produce them. The centralisation of the publication of disclosed information should be fully in line with the capital markets union action plan. In addition, that centralised web-based platform should be interoperable with the European single access point.

(53) To allow for a greater integration of supervisory reporting and disclosures, EBA should publish institutions’ disclosures in a centralised manner, while respecting the right of all institutions to publish data and information themselves. Such centralised disclosures should allow EBA to publish the disclosures of small and non-complex institutions, based on the information reported by those institutions to competent authorities and should thus significantly reduce the administrative burden to which small and non-complex institutions are subject. At the same time, the centralisation of disclosures should have no cost impact for other institutions, and increase transparency and reduce the cost of access to prudential information for market participants. Such increased transparency should facilitate the comparability of data across institutions and promote market discipline.

(54) Achieving the environmental and climate ambitions of the European Green Deal set out in the communication of the Commission of 11 December 2019 and contributing to the United Nations 2030 Agenda for Sustainable Development requires the channelling of large amounts of investments from the private sector towards sustainable investments in the Union. Regulation (EU) No 575/2013 should reflect the importance of environmental, social and governance (ESG) factors and a full understanding of the risks of exposures to activities that are linked to overall sustainability or ESG objectives. To ensure convergence across the Union and a uniform understanding of ESG factors and risks, general definitions should be laid down. ESG factors can have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Common examples of ESG factors include greenhouse gas emissions, biodiversity and water use and consumption in the environment area; human rights, and labour and workforce considerations in the social area; and rights and responsibilities of senior staff members and remuneration in the governance area. Assets or activities subject to the impact of environmental or social factors should be defined by reference to the ambition of the Union to become climate-neutral by 2050 as set out in Regulation (EU) 2021/1119 of the European Parliament and of the Council (12), a Regulation of the European Parliament and of the Council on nature restoration and amending Regulation (EU) 2022/869, and the relevant sustainability goals of the Union. The technical screening criteria in relation to the principle of ‘do no significant harm’ adopted in accordance with Regulation (EU) 2020/852 of the European Parliament and of the Council (13), as well as specific Union legal acts to avert climate change, environmental degradation and biodiversity loss should be used to identify assets or exposures for the purpose of assessing dedicated prudential treatments and risk differentials.

(55) Exposures to ESG risks are not necessarily proportional to an institution’s size and complexity. The levels of exposures to ESG risks across the Union are also quite heterogeneous, with some Member States showing a potential mild transitional impact and others showing a potential high transitional impact on exposures related to activities that have a significant negative impact, in particular on the environment. The transparency requirements that institutions are subject to and the disclosure requirements with regard to sustainability laid down in other existing Union legal acts will provide more granular data in a few years’ time. However, to properly assess the ESG risks that institutions might face, it is imperative that markets and competent authorities obtain adequate data from all entities exposed to those risks. Institutions should be in a position to systematically identify and ensure adequate transparency as regards their exposures to activities that are deemed to do significant harm to one of the environmental objectives within the meaning of Regulation (EU) 2020/852. In order to ensure that competent authorities have at their disposal data that are granular, comprehensive and comparable for the purposes of an effective supervision, information on exposures to ESG risks should be included in the supervisory reporting of institutions. To guarantee comprehensive transparency towards the markets, disclosures of ESG risks should also be extended to all institutions. The granularity of that information should be consistent with the principle of proportionality, having regard to the size and complexity of the institution concerned and the materiality of its exposures to ESG risks. When revising the implementing technical standards as regards the disclosure of ESG risks, EBA should assess means to enhance disclosures of ESG risks of cover pools of covered bonds and consider whether information on the relevant exposures of the pools of loans underlying covered bonds issued by institutions, whether directly or through the transfer of loans to a special purpose entity, should either be included in the revised implementing technical standards or in the regulatory and disclosure framework for covered bonds.

(56) As the transition of the Union economy towards a sustainable economic model gains momentum, sustainability risks become more prominent and potentially require further consideration. An appropriate assessment of the availability and accessibility of reliable and consistent ESG data should form the basis for establishing a full link between ESG risk drivers and traditional categories of financial risks and sets of exposures. ESMA should also contribute to that evidence gathering by reporting on whether ESG risks are appropriately reflected in credit risk ratings of the counterparties or exposures that institutions might have. In a context of rapid and continuous developments around identification and quantification of ESG risks by both institutions and supervisors, it is also necessary to bring forward to the date of entry into force of this Regulation part of EBA’s mandate to assess and report on whether a dedicated prudential treatment of exposures related to assets or activities substantially associated with environmental or social objectives would be justified. The existing EBA mandate should be broken into a series of reports due to the length and complexity of the assessment work to be conducted. Therefore, two successive and annual follow-up EBA reports should be prepared by the end of 2024 and 2025, respectively. According to the International Energy Agency, to reach the carbon neutrality objective by 2050, no new fossil fuel exploration and expansion can take place. That means that fossil fuel exposures are prone to representing a higher risk both at the micro level, as the value of such assets is set to decrease over time, and at the macro level, as financing fossil fuel activities jeopardises the objective of limiting the increase in the global temperature to 1,5 oC above pre-industrial levels and therefore threatens financial stability. Competent authorities and market participants should, therefore, benefit from increased transparency by institutions on their exposures towards fossil fuel sector entities, including their activity in respect of renewable energy sources.

(57) To ensure that any adjustments for exposures for infrastructure do not undermine the climate ambitions of the Union, new exposures would get the risk weight discount only where the assets being financed contribute positively to one or more of the environmental objectives set out in Regulation (EU) 2020/852 and do not significantly harm the other objectives set out in that Regulation, or the assets being financed do not significantly harm any of the environmental objectives set out in that Regulation.

(58) It is essential for supervisors to have the necessary powers to assess and measure in a comprehensive manner the risks to which a banking group is exposed at a consolidated level and to have the flexibility to adapt their supervisory approaches to new sources of risk. It is important to avoid loopholes between prudential and accounting consolidation which can give rise to transactions that aim to move assets out of the scope of prudential consolidation, even though risks remain in the banking group. The lack of coherence in the definitions of ‘parent undertaking’, ‘subsidiary’ and ‘control’, and the lack of clarity in the definition of ‘ancillary services undertaking’, ‘financial holding company’ and ‘financial institution’ make it more difficult for supervisors to apply the applicable rules consistently in the Union and to detect and appropriately address risks at a consolidated level. Those definitions should therefore be amended and further clarified. In addition, it is deemed appropriate for EBA to investigate further whether those powers of the supervisors might be unintendedly constrained by any remaining discrepancies or loopholes in the regulatory provisions or in their interaction with the applicable accounting framework.

(59) Markets in crypto-assets have grown rapidly in recent years. To address potential risks for institutions caused by their crypto-asset exposures that are not sufficiently covered by the existing prudential framework, the BCBS published in December 2022 a comprehensive standard for the prudential treatment of crypto-asset exposures. The recommended date of application of that standard is 1 January 2025, but some technical elements of the standard were being further developed at BCBS level during 2023 and 2024. In light of ongoing developments in markets in crypto-assets and acknowledging the importance of fully implementing the Basel standard on institutions’ crypto-asset exposures in Union law, the Commission should submit a legislative proposal by 30 June 2025 to implement that standard, and should specify the prudential treatment applicable to those exposures during the transitional period until the implementation of that standard. The transitional prudential treatment should take into account the legal framework introduced by Regulation (EU) 2023/1114 of the European Parliament and of the Council (14) for issuers of crypto-assets and specify a prudential treatment of those crypto-assets. Therefore, during the transitional period, tokenised traditional assets, including e-money tokens, should be recognised as entailing similar risks to traditional assets and crypto-assets compliant with that Regulation and referencing traditional assets other than a single fiat currency should benefit from a prudential treatment consistent with the requirements of that Regulation. Exposures to other crypto-assets, including tokenised derivatives on crypto-assets different from the ones that qualify for the more favourable capital treatment, should be assigned a 1 250 % risk weight.

(60) The lack of clarity of certain aspects of the minimum haircut floor framework for securities financing transactions, developed by the BCBS as part of the finalised Basel III framework, as well as reservations about the economic justification of applying it to certain types of securities financing transactions, have raised the question of whether the prudential objectives of that framework can be attained without creating undesirable consequences. The Commission should therefore reassess the implementation of the minimum haircut floor framework for securities financing transactions in Union law. In order to provide the Commission with sufficient evidence, EBA, in close cooperation with ESMA, should report to the Commission on the impact of that framework, and on the most appropriate approach for its implementation in Union law.

(61) Under the finalised Basel III framework, the very short-term nature of securities financing transactions might not be well reflected in the SA-CR, leading to own funds requirements calculated under that approach that could be excessively higher than own funds requirements calculated under the IRB Approach. As a result, and given as well the introduction of the output floor, the own funds requirements calculated for those exposures could significantly increase, affecting the liquidity of debt and securities markets, including the sovereign debt markets. EBA should therefore report on the appropriateness and the impact of the credit risk standards for securities financing transactions, and specifically whether an adjustment of the SA-CR for those exposures would be warranted to reflect their short-term nature.

(62) The Commission should implement in Union law the revised Basel III standards on the own funds requirements for credit valuation adjustment (CVA) risk, published by the BCBS in July 2020, as those standards overall improve the calculation of the own funds requirements for CVA risk by addressing several previously observed issues, in particular that the existing CVA own funds requirements framework fails to appropriately capture CVA risk.

(63) When implementing the initial Basel III standards on the treatment of CVA risk in Union law, certain transactions were exempted from the calculation of the own funds requirements for CVA risk. Those exemptions were agreed in order to prevent a potentially excessive increase in the cost of some derivative transactions triggered by the introduction of the own funds requirements for CVA risk, particularly when institutions could not mitigate the CVA risk of certain clients that were unable to exchange collateral. According to the estimated impact calculated by EBA, the own funds requirements for CVA risk under the revised Basel III standards would remain unduly high for exempted transactions with those clients. To ensure that those clients continue hedging their financial risks via derivative transactions, the exemptions should be maintained when implementing the revised Basel III standards.

(64) However, the actual CVA risk of the exempted transactions could be a source of significant risk for institutions applying those exemptions. If those risks materialise, the institutions concerned could suffer significant losses. As EBA highlighted in its report on CVA of 25 February 2015, the CVA risk of the exempted transactions raises prudential concerns that are not addressed in Regulation (EU) No 575/2013. To help supervisors monitor the CVA risk arising from the exempted transactions, institutions should report the calculation of own funds requirements for CVA risk of the exempted transactions that would be required if those transactions were not exempted. In addition, EBA should develop guidelines to help supervisors identify excessive CVA risk and to improve the harmonisation of supervisory actions in that area across the Union.

(65) The Commission should be empowered to adopt the regulatory technical standards developed by EBA with regard to the indicators for determining extraordinary circumstances for additional value adjustments; the method for specifying the main risk driver for a position and whether it is a long or short position; the process for calculating and monitoring net short credit or net short equity positions in the non-trading book; the treatment of foreign exchange risk hedges of capital ratios; the criteria to be used by institutions to assign off-balance-sheet items; the criteria for high quality project finance and object finance exposures in the context of specialised lending for which a directly applicable credit assessment is not available; the types of factors to be considered for the assessment of the appropriateness of the risk weights; the term ‘equivalent legal mechanism in place to ensure that the property under construction will be finished within a reasonable time frame’; the conditions for assessing the materiality of the use of an existing rating system; the assessment methodology for compliance with the requirements to use the IRB Approach; the categorisation of project finance, object finance and commodity finance; further specifying the exposure classes under the IRB Approach; the factors for specialised lending; the calculation of risk-weighted exposure amount for dilution risk of purchased receivables; the assessment of the integrity of the assignment process; the methodology of an institution for estimating probability of default; the comparable property; the supervisory delta of call and put options; the components of the business indicator; the adjustment of the business indicator; the definition of unduly burdensome in the context of calculating the annual operational risk loss; the risk taxonomy of operational risk; the competent authorities’ assessment of the computation of annual operational risk loss; the adjustments to loss data; the operational risk management; the calculation of the own funds requirements for market risk for non-trading book positions that are subject to foreign exchange risk or commodity risk; the assessment methodology for competent authorities for the alternative standardised approach; the collective investment undertaking trading books; the criteria for the residual risk add-on derogation; the conditions and indicators used to determine whether extraordinary circumstances have occurred; the criteria for the use of data inputs in the risk-measurement model; the criteria to assess the modellability of risk factors; the conditions and the criteria according to which an institution may be permitted not to count an overshooting; the criteria specifying whether the theoretical changes in the value of a trading desk’s portfolio are either close or sufficiently close to the hypothetical changes; the conditions and criteria for assessing the CVA risk arising from fair-valued securities financing transactions; the proxy spreads; the assessment of the extensions and changes to the standardised approach for CVA risk; and the technical elements necessary for institutions to calculate their own funds requirements in relation to certain crypto-assets. The Commission should adopt those regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

(66) The Commission should be empowered to adopt the implementing technical standards developed by EBA with regard to the joint decision process for the IRB Approach submitted by EU parent institutions, EU parent financial holding companies and EU parent mixed financial holding companies; the items of the business indicator by mapping those items with the reporting cells concerned; uniform disclosure formats, the associated instructions, information on the resubmission policy and IT solutions for disclosures; and ESG disclosures. The Commission should adopt those implementing technical standards by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010.

(67) Since the objective of this Regulation, namely to ensure uniform prudential requirements that apply to institutions throughout the Union, cannot be sufficiently achieved by the Member States but can rather, by reason of its scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve that objective.

(68) Regulation (EU) No 575/2013 should therefore be amended accordingly,

HAVE ADOPTED THIS REGULATION:

Article 1

Amendments to Regulation (EU) No 575/2013

Regulation (EU) No 575/2013 is amended as follows:

(4) Article 10a is replaced by the following: ‘Article 10a Application of prudential requirements on a consolidated basis where investment firms are parent undertakings For the purposes of this Chapter, investment firms and investment holding companies shall be considered to be parent financial holding companies in a Member State or EU parent financial holding companies where such investment firms or investment holding companies are parent undertakings of an institution or of an investment firm subject to this Regulation that is referred to in Article 1(2) or (5) of Regulation (EU) 2019/2033.’

(5) in Article 13(1), the second subparagraph is replaced by the following: ‘Large subsidiaries of EU parent institutions shall disclose the information specified in Articles 437, 438, 440, 442, 449a, 449b, 450, 451, 451a and 453 on an individual basis or, where applicable in accordance with this Regulation and Directive 2013/36/EU, on a sub-consolidated basis.’

(9) Article 22 is replaced by the following: ‘Article 22 Sub-consolidation in the case of entities in third countries

(10) in Article 27(1), point (a), point (v) is deleted;

(11) Article 34 is replaced by the following: ‘Article 34 Additional value adjustments

(16) in Article 49, paragraph 4 is replaced by the following: ‘4.   The holdings in respect of which deduction is not made in accordance with paragraph 1 shall qualify as exposures and shall be risk weighted in accordance with Part Three, Title II, Chapter 2. The holdings in respect of which deduction is not made in accordance with paragraph 2 or 3 shall qualify as exposures and shall be risk weighted at 100 %.’

(20) in Article 72b(3), first subparagraph, the introductory wording is replaced by the following: ‘In addition to the liabilities referred to in paragraph 2 of this Article, the resolution authority may permit liabilities to qualify as eligible liabilities instruments up to an aggregate amount that does not exceed 3,5 % of the total risk exposure amount calculated in accordance with Article 92(3), provided that:’

(22) Article 74 is replaced by the following: ‘Article 74 Holdings of capital instruments issued by regulated financial sector entities that do not qualify as regulatory capital Institutions shall not deduct from any element of own funds direct, indirect or synthetic holdings of capital instruments issued by a regulated financial sector entity that do not qualify as regulatory capital of that entity. Institutions shall apply risk weights to such holdings in accordance with Part Three, Title II, Chapter 2.’

(26) the following article is inserted: ‘Article 88b Undertakings in third countries For the purposes of this Title, the terms “investment firm” and “institution” shall be understood to include undertakings established in third countries, which would, if established in the Union, fall under the definitions of those terms in this Regulation.’

(33) in Article 102, paragraph 4 is replaced by the following: ‘4.   For the purpose of calculating the own funds requirements for market risk in accordance with the approach referred to in Article 325(1), point (b), trading book positions shall be assigned to trading desks.’

(41) the following article is inserted: ‘Article 110a Monitoring of contractual arrangements that are not commitments Institutions shall monitor contractual arrangements that meet all of the conditions set out in Article 5, points (10)(a) to (e), and shall document to the satisfaction of their competent authorities their compliance with all those conditions.’

(48) in Article 119, paragraphs 2 and 3 are deleted;

(60) in Article 132a(3), the first subparagraph is replaced by the following: ‘By way of derogation from Article 92(4), point (e), institutions that calculate the risk-weighted exposure amount of a CIU’s exposures in accordance with paragraph 1 or 2 of this Article may calculate the own funds requirement for the credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50 % of the own funds requirement for those derivative exposures calculated in accordance with Chapter 6, Section 3, 4 or 5, of this Title, as applicable.’

(61) in Article 132b, paragraph 2 is replaced by the following: ‘2.   Institutions may exclude from the calculations referred to in Article 132 equity exposures underlying exposures in the form of units or shares in CIUs to entities whose credit obligations are assigned a 0 % risk weight under this Chapter, including those publicly sponsored entities where a 0 % risk weight can be applied, and equity exposures referred to in Article 133(5), and instead apply the treatment set out in Article 133 to those equity exposures.’

(62) in Article 132c(2), the first subparagraph is replaced by the following: ‘Institutions shall calculate the exposure value of a minimum value commitment that meets the conditions set out in paragraph 3 of this Article as the discounted present value of the guaranteed amount using a discount factor that is derived from a risk-free rate pursuant to Article 325l(2) or (3), as applicable. Institutions may reduce the exposure value of the minimum value commitment by any losses recognised with respect to the minimum value commitment under the applicable accounting standard.’

(64) in Article 134, paragraph 3 is replaced by the following: ‘3.   Cash items in the process of collection shall be assigned a 20 % risk weight. Cash owned and held by the institution, or in transit, and equivalent cash items shall be assigned a 0 % risk weight.’

(65) in Article 135, the following paragraph is added: ‘3.   By 10 July 2025, ESMA shall prepare a report on whether ESG risks are appropriately reflected in ECAI credit risk rating methodologies and submit that report to the Commission. On the basis of that report, the Commission shall, where appropriate, submit a legislative proposal to the European Parliament and to the Council by 10 January 2026.’

(68) Article 141 is replaced by the following: ‘Article 141 Domestic and foreign currency items

(80) Article 155 is deleted;

(84) in Part Three, the following Sub-Section is inserted after Section 4 ‘PD, LGD and maturity’: ‘Sub-Section - 1 Exposures covered by guarantees provided by Member States’ central governments and central banks or the ECB

Article 159a

Non-application of PD, LGD and CCF input floors For the purposes of Chapter 3, and in particular with regard to Articles 160(1), 161(4), 164(4) and 166(8c), where an exposure is covered by an eligible guarantee provided by a central government or central bank or by the ECB, the PD, LGD and CCF input floors shall not apply to the part of the exposure covered by that guarantee. However, the part of the exposure that is not covered by that guarantee shall be subject to the PD, LGD and CCF input floors concerned.’

(85) in Part Three, Title II, Chapter 3, Section 4, the title of Sub-Section 1 is replaced by the following: ‘Exposures to corporates, institutions, central governments and central banks, regional governments, local authorities and public sector entities’

(91) in Part Three, Title II, Chapter 3, Section 4, Sub-Section 3 is deleted;

(93) Article 167 is deleted;

(94) in Article 169(3), the following subparagraph is added: ‘EBA shall issue guidelines, in accordance with Article 16 of Regulation (EU) No 1093/2010, on how to apply in practice the requirements on model design, risk quantification, validation and application of risk parameters using continuous or very granular rating scales for each risk parameter.’

(96) in Article 171, the following paragraph is added: ‘3.   Institutions shall use a time horizon longer than one year in assigning ratings. An obligor rating shall represent the institution’s assessment of the obligor’s ability and willingness to contractually perform despite adverse economic conditions or the occurrence of unexpected events. Rating systems shall be designed in such a way that idiosyncratic changes and, where they are material drivers of risk for the type of exposure, industry-specific changes are a driver of migrations from one grade or pool to another. Business cycle effects may also be a driver of migrations.’

(108) in Part Three, Title II, Chapter 3, Section 6, Sub-Section 4 is deleted;

(110) in Article 193, the following paragraph is added: ‘7.   Collateral that satisfies all eligibility requirements set out in this Chapter can be recognised even for exposures associated with undrawn facilities, where drawing under the facility is conditional on the prior or simultaneous purchase or reception of collateral to the extent of the institution’s interest in the collateral once the facility is drawn, such that the institution does not have any interest in the collateral to the extent the facility is not drawn.’

(111) in Article 194, paragraph 10 is deleted;

(116) Article 202 is deleted;

(117) in Article 204, the following paragraph is added: ‘3.   First-to-default and all other nth-to-default credit derivatives shall not be eligible types of unfunded credit protection under this Chapter.’

(124) Article 217 is deleted;

(125) Article 219 is replaced by the following: ‘Article 219 On-balance-sheet netting Loans to and deposits with the lending institution subject to on-balance-sheet netting shall be treated by that institution as cash collateral for the purpose of calculating the effect of funded credit protection for those loans and deposits of the lending institution subject to on-balance-sheet netting.’

(128) in Article 222, paragraph 3 is replaced by the following: ‘3.   Institutions shall assign to those portions of exposure values that are collateralised by the market value of eligible collateral the risk weight that they would assign under Chapter 2 where the lending institution had a direct exposure to the collateral instrument. For that purpose, the exposure value of an off-balance-sheet item listed in Annex I shall be equal to 100 % of the item’s value rather than the exposure value indicated in Article 111(2).’

(131) Article 225 is deleted;

(133) in Article 227, paragraph 1 is replaced by the following: ‘1.   Institutions that use the Supervisory Volatility Adjustments Approach referred to in Article 224, may, for repurchase transactions and securities lending or borrowing transactions, apply a 0 % volatility adjustment instead of the volatility adjustments calculated under Articles 224 and 226, provided that the conditions set out in paragraph 2, points (a) to (h), of this Article are satisfied. Institutions that use the internal model approach set out in Article 221 shall not use the treatment set out in this Article.’

(134) Article 228 is replaced by the following: ‘Article 228 Calculating risk-weighted exposure amounts under the Financial Collateral Comprehensive method for exposures treated under the Standardised Approach Under the Standardised Approach, institutions shall use E as calculated under Article 223(5) as the exposure value for the purposes of Article 113. In the case of off-balance-sheet items listed in Annex I, institutions shall use E as the value to which the percentages indicated in Article 111(2) shall be applied to arrive at the exposure value.’

(139) in Article 233, paragraph 4 is replaced by the following: ‘4.   Institutions shall base the volatility adjustments for any currency mismatch on a 10 business day liquidation period, assuming daily revaluation, and shall calculate those adjustments based on the Supervisory Volatility Adjustments Approach as set out in Article 224. Institutions shall scale up the volatility adjustments in accordance with Article 226.’

(142) Article 236 is replaced by the following: ‘Article 236 Calculating risk-weighted exposure amounts and expected loss amounts under the substitution approach where the guaranteed exposure is treated under the IRB Approach without the use of own estimates of LGD and a comparable direct exposure to the protection provider is treated under the IRB Approach

(143) the following article is inserted: ‘Article 236a Calculating risk-weighted exposure amounts and expected loss amounts under the substitution approach where the guaranteed exposure is treated under the IRB Approach using own estimates of LGD and a comparable direct exposure to the protection provider is treated under the IRB Approach

(144) in Part Three, Title II, Chapter 4, Section 6 is deleted;

(145) in Article 252, point (b), the definition of RW is replaced by the following: ‘RW = risk-weighted exposure amounts for the purposes of Article 92(4), point (a);’

(151) in Article 277a(2), the following subparagraph is added: ‘For the purposes of the first subparagraph, point (a), of this paragraph, institutions shall assign transactions to a separate hedging set of the relevant risk category following the same hedging set construction set out in paragraph 1.’

(161) in Article 325q, paragraph 2 is replaced by the following: ‘2.   The foreign exchange vega risk factors to be applied by institutions to options with underlyings that are sensitive to foreign exchange shall be the implied volatilities of exchange rates between currency pairs. Those implied volatilities shall be mapped to the following maturities in accordance with the maturities of the corresponding options subject to own funds requirements: 0,5 years, 1 year, 3 years, 5 years and 10 years.’

(162) in Article 325s(1), the formula sk for is replaced by the following: ‘ ’;

(165) in Article 325v, the following paragraph is added: ‘3.   For traded non-securitisation credit and equity derivatives, JTD amounts by individual constituents shall be determined by applying a look-through approach.’

(166) in Article 325x, the following paragraph is added: ‘5.   Where the contractual or legal terms of a derivative position having a debt or equity cash instrument as an underlying, and hedged with that debt or equity cash instrument, allow an institution to close out both legs of that position at the time of the expiry of the first-to-mature of the two legs with no exposure to default risk of the underlying, the net jump-to-default amount of the combined position shall be set equal to zero.’

(167) in Article 325y, the following paragraph is added: ‘6.   For the purposes of this Article, an exposure shall be assigned the credit quality category corresponding to the credit quality category that it would be assigned under the standardised approach for credit risk set out in Title II, Chapter 2.’

(168) in Article 325ab, paragraph 2 is deleted;

(172) in Article 325ai(1), the definition of ρkl (name) is replaced by the following: ‘ρkl (name) shall be equal to 1 where the two names of sensitivities k and l are identical; it shall be equal to 35 % where the two names of sensitivities k and l are in buckets 1 to 18 in Article 325ah(1), Table 4, otherwise it shall be equal to 80 %’

(180) in Article 325bc, the following paragraph is added: ‘6.   EBA shall develop draft regulatory technical standards to specify the criteria for the use of data inputs in the risk-measurement model referred to in this Article, including criteria on data accuracy and criteria on the calibration of the data inputs where market data are insufficient. EBA shall submit those draft regulatory technical standards to the Commission by 10 January 2026. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.’

(181) in Article 325bd, the following paragraph is inserted: ‘5a.   Currencies of Member States participating in ERM II shall be included in the most liquid currencies and domestic currency sub-category within the broad category of interest rate risk factor of Table 2.’

(187) in Article 325bo, paragraph 3 is replaced by the following: ‘3.   In their internal default risk models, institutions shall capture material basis risks in hedging strategies that arise from differences in the type of product, seniority in the capital structure, internal or external ratings, vintage and other differences. Institutions shall ensure that maturity mismatches between a hedging instrument and the hedged instrument that could occur during the one-year time horizon, where those mismatches are not captured in their internal default risk model, do not lead to a material underestimation of risk. Institutions shall recognise a hedging instrument only to the extent that it can be maintained even as the obligor approaches a credit event or other event.’

(189) in Article 332, paragraph 3 is replaced by the following: ‘3.   Credit derivatives in accordance with Article 325(6) or (8) shall be included only in the determination of the specific risk own funds requirement in accordance with Article 338(2).’

(192) in Article 348, paragraph 1 is replaced by the following: ‘1.   Without prejudice to other provisions in this Section, positions in CIUs shall be subject to an own funds requirement for position risk, comprising general and specific risk, of 32 %. Without prejudice to Article 353 taken together with the amended gold treatment set out in Article 352(4) positions in CIUs shall be subject to an own funds requirement for position risk, comprising general and specific risk, and foreign exchange risk of 40 %.’

(193) Article 351 is replaced by the following: ‘Article 351 De minimis and weighting for foreign exchange risk If the sum of an institution’s overall net foreign exchange position and its net gold position, calculated in accordance with the procedure set out in Article 352, exceeds 2 % of its total own funds, the institution shall calculate an own funds requirement for foreign exchange risk. The own funds requirement for foreign exchange risk shall be the sum of its overall net foreign exchange position and its net gold position in the reporting currency, multiplied by 8 %.’

(194) in Article 352, paragraph 2 is deleted;

(196) in Part Three, Title IV, Chapter 5 is deleted;

(197) in Article 381, the following paragraph is added: ‘For the purposes of this Title, “CVA risk” means the risk of losses arising from changes in the value of CVA, calculated for the portfolio of transactions with a counterparty as set out in the first paragraph, due to movements in counterparty credit spread risk factors and in other risk factors embedded in the portfolio of transactions.’

(204) in Article 395, the following paragraph is inserted: ‘2a.   By 10 January 2027, EBA, after consulting ESMA, shall issue guidelines, in accordance with Article 16 of Regulation (EU) No 1093/2010, to update the guidelines referred to in paragraph 2 of this Article. In updating those guidelines, EBA shall take due account, among other considerations, of the contribution of shadow banking entities to the capital markets union, the potential adverse impact that any changes of those guidelines, including additional limits, could have on the business model and risk profile of the institutions and on the stability and the orderly functioning of financial markets. In addition, by 31 December 2027, EBA, after consulting ESMA, shall submit a report to the Commission on the contribution of shadow banking entities to the capital markets union and on institutions’ exposures to such entities, including on the appropriateness of aggregate limits or tighter individual limits to those exposures, while taking due account of the regulatory framework and business models of such entities. By 31 December 2028, the Commission shall, where appropriate, on the basis of that report, submit to the European Parliament and to the Council a legislative proposal on exposure limits to shadow banking entities.’

(213) in Article 429g, paragraph 1 is replaced by the following: ‘1.   Institutions shall treat cash related to regular-way purchases and financial assets related to regular-way sales which remain on the balance sheet until the settlement date as assets in accordance with Article 429(4), point (a).’

(216) Article 430b is deleted;

(217) Article 433 is replaced by the following: ‘Article 433 Frequency and scope of disclosures Institutions shall disclose the information required under Titles II and III in the manner set out in this Article, Articles 433a, 433b, 433c and 434. EBA shall publish annual disclosures on its website on the same day as the institutions publish their financial statements or as soon as possible thereafter. EBA shall publish semi-annual and quarterly disclosures on its website on the same day as the institutions publish their financial reports for the corresponding period, where applicable, or as soon as possible thereafter. Any delay between the date of publication of the disclosures required under this Part and the relevant financial statements shall be reasonable and, in any event, shall not exceed the timeframe set by competent authorities pursuant to Article 106 of Directive 2013/36/EU.’

(221) Article 434 is replaced by the following: ‘Article 434 Means of disclosures

(223) the following article is inserted: ‘Article 434c Report on the feasibility of the use of information reported by institutions other than small and non-complex institutions to publish an extended set of disclosures on the EBA website EBA shall prepare a report on the feasibility of using information reported by institutions other than small and non-complex institutions to competent authorities in accordance with Article 430 in order to publish that information on its website thereby reducing the disclosure burden for such institutions. That report shall consider the previous work of EBA regarding integrated data collections, shall be based on an overall cost and benefit analysis, including costs incurred by competent authorities, institutions and EBA, and shall consider any potential technical, operational and legal challenges. EBA shall submit that report to the European Parliament, to the Council, and to the Commission by 10 July 2027. On the basis of that report, the Commission shall, where appropriate, submit to the European Parliament and to the Council a legislative proposal by 31 December 2031.’

(230) the following article is inserted: ‘Article 449b Disclosure of aggregate exposure to shadow banking entities Institutions shall disclose the information concerning their aggregate exposure to shadow banking entities, as referred to in Article 394(2), second subparagraph.’

(245) Article 500c is replaced by the following: ‘Article 500c Exclusion of overshootings from the calculation of the back-testing addend in view of the COVID-19 pandemic By way of derogation from Article 325bf, competent authorities may, in exceptional circumstances and in individual cases, permit institutions to exclude the overshootings evidenced by the institution’s back-testing on hypothetical or actual changes from the calculation of the addend set out in Article 325bf, provided that those overshootings do not result from deficiencies in the internal model and provided that they occurred between 1 January 2020 and 31 December 2021.’

(252) in Article 514, the following paragraph is added: ‘2.   On the basis of the EBA report referred to in paragraph 1 and taking due account of the implementation in third countries of the internationally agreed standards developed by the BCBS, the Commission shall, where appropriate, submit a legislative proposal to the European Parliament and to the Council to amend the approaches set out in Part Three, Title II, Chapter 6, Sections 3, 4 and 5.’

(253) the following article is inserted: ‘Article 518c Review of the framework for prudential requirements By 31 December 2028, the Commission shall assess the overall situation of the banking system in the single market, in close cooperation with EBA and the ECB, and report to the European Parliament and to the Council on the appropriateness of the Union regulatory and supervisory frameworks for banking. That report shall take stock of the reforms to the banking sector which took place after the great financial crisis and assess whether these ensure an adequate level of depositor protection and safeguard financial stability at Member State, banking union and Union level. That report shall also consider all banking union dimensions, as well as the implementation of the output floor as part of capital and liquidity requirements more generally. 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.’

(255) Annex I is replaced by the text set out in the Annex to this Regulation.

Article 2

Entry into force and application

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

It shall apply from 1 January 2025.

However, the following points of Article 1 of this Regulation shall apply from 9 July 2024: point (1)(a)(iv); point (1)(b); points (2), (3) and (4); point (6)(f); point (8)(c); point (11) concerning Article 34(4) of Regulation (EU) No 575/2013; point (30)(d); point (34) concerning Article 104(9) of Regulation (EU) No 575/2013; point (35)(a); point 37 concerning Article 104c(4) of Regulation (EU) No 575/2013; point (42) concerning Article 111(8) of Regulation (EU) No 575/2013; point (52) concerning Article 122a(4) of Regulation (EU) No 575/2013; point (53) concerning Article 123(1), third subparagraph, of Regulation (EU) No 575/2013; point (55) concerning Article 124(11), (12) and (14) of Regulation (EU) No 575/2013; point (56) concerning Article 126a(3) of Regulation (EU) No 575/2013; points (57) and (65); point (70)(c) concerning Article 143(5) of Regulation (EU) No 575/2013; point (71)(b); point (72)(i); point 75(d); point (78)(e); point (81); point (98)(b); point (102)(d); point (104)(c); point (105)(c); point (106)(e); point (135)(c); point (152)(b)(ii); point (155) concerning Article 314(9) and (10), Article 315(3), Article 316(3), Article 317(9) and (10), Article 320(3), Article 321(2) and Article 323(2) of Regulation (EU) No 575/2013; point (156)(b); point (159)(c) concerning Article 325c(8) of Regulation (EU) No 575/2013; point (160)(c) concerning Article 325j(7) of Regulation (EU) No 575/2013; point (164)(b); point (178)(e); point (180); point (182)(d); point (183)(c); point (184)(b)(iii); point (198)(c); point (201) concerning Article 383a(4) and (5) of Regulation (EU) No 575/2013; point (204); point (205)(b)(i); points (214)(a) and (c); points (222) and (223); point (229) concerning Article 449a(3) of Regulation (EU) No 575/2013; points (232), (235), (236) and (238); point (239)(a); point (242) concerning Article 495b(2) and (4) and Article 495c(2) of Regulation (EU) No 575/2013; points (243), (244), (248) and (249); point (250) concerning Article 506 of Regulation (EU) No 575/2013; point (251) concerning Articles 506e and 506f of Regulation (EU) No 575/2013; points (252), (253) and (254).

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 31 May 2024.

For the European Parliament The President R. METSOLA

For the Council The President H. LAHBIB

(1) OJ C 233, 16.6.2022, p. 14.

(2) OJ C 290, 29.7.2022, p. 40.

(3) Position of the European Parliament of 24 April 2024 (not yet published in the Official Journal) and decision of the Council of 30 May 2024.

(4) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

(5) Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12).

(6) Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (OJ L 331, 15.12.2010, p. 48).

(7) Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, p. 84).

(8) Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (OJ L 302, 17.11.2009, p. 1).

(9) Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012 (OJ L 150, 7.6.2019, p. 1).

(10) OJ L 123, 12.5.2016, p. 1.

(11) Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures (OJ L 111, 25.4.2019, p. 4).

(12) Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (‘European Climate Law’) (OJ L 243, 9.7.2021, p. 1).

(13) Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (OJ L 198, 22.6.2020, p. 13).

(14) Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (OJ L 150, 9.6.2023, p. 40).