REGULATORY SCRUTINY BOARD OPINION Review of the capital requirements legislation (Basel III)

EUROPEAN COMMISSION
22/7/2021
SEC(2021) 380
REGULATORY SCRUTINY BOARD OPINION
Review of the capital requirements legislation (Basel III)
COM(2021) 663, 664
SWD(2021)320
SWD(2021)321
Offentligt
KOM (2021) 0663 - SEK-dokument
Europaudvalget 2021
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This opinion concerns a draft impact assessment which may differ from the final version.
Commission européenne, B-1049 Bruxelles - Belgium. Office: BERL 08/010. E-mail: regulatory-scrutiny-board@ec.europa.eu
EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB
Opinion
Title: Impact assessment / Amendments to the Capital Requirements Regulation and
the Capital Requirements Directive
Overall 2nd
opinion: POSITIVE WITH RESERVATIONS
(A) Policy context
To ensure a resilient banking system that supports the real economy, the EU requires banks
to meet capital standards. These standards have evolved in multilateral talks in Basel
following the financial crisis. The Commission has committed to implement these
standards, known as Basel III rules, taking into account European specificities.
The Parliament and the Council have expressed concerns about further increases in overall
capital requirements for the banking sector.
This impact assessment examines changes to capital requirements, management of
environmental, social and governance risks, the enforcement of prudential rules and the
access to prudential information.
In light of the COVID-19 pandemic, the implementation of the Basel III rules was
postponed by one year in March 2020. This allowed the Commission to reassess the reform
in view of the crisis and to resubmit a revised report.
(B) Summary of findings
The Board notes the changes to the report reflecting the new political and
econonomic context. The report is now less technical, the analysis has been updated
and the preferred option adapted.
However, the report still contains significant shortcomings. The Board gives a
positive opinion with reservations because it expects the DG to rectify the following
aspects:
(1) The report fails to present evidence that confidence has yet to be sufficiently
restored in the EU banking sector.
(2) It is not clear why supervisors’ approval is not an option to tackle the
problems with internal models. The report does not demonstrate that the lack
of harmonisation in supervision is a problem.
(3) The comparison of options does not take into account the macroeconomic costs
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and benefits and the impact on SMEs, competitiveness of EU banks and
administrative and compliance costs. Furthermore, the SME analysis does not
include the costs of obtaining company credit ratings after the transition
period.
(C) What to improve
(1) The problem description should demonstrate better the need for the initiative by
providing evidence that confidence in the EU banking sector has not yet been sufficiently
restored. In particular, it should show how the risk-based capital framework in place is
affecting trust in the EU banking system. It should clarify the nature of the EU
commitment to implement the final elements of the Basel III reform.
(2) The report should clarify better why supervisory approval of internal models is not
sufficient to ensure their appropriateness. It should explain why the European Central
Bank, which is responsible for supervision of the larger banks, would not have the capacity
to assess and control those banks’ use of internal models to assess portfolio risks. It should
justify why there is no option on strengthening of supervision on internal models.
(3) If the report considers that more harmonisation is needed between the capital
requirements of different types of banks and in supervision across countries, it should more
clearly demonstrate that there is a problem. It should include harmonisation in the
objectives and in the monitoring framework.
(4) The report should explain why not having a credit rating is considered a problem and
how it increases the credit risk of EU SMEs.
(5) The report should justify better some of the proposed options. On equity exposure, it
should explain why it differentiates between existing and future strategic equity
investments in counterparties outside the banking sector (including in insurance
undertakings). It should also better argue why it proposes to maintain the existing
supporting factors for SMEs and for infrastructure investment, taking into account their
level of effectiveness. On sanction powers, greater clarity is needed on the role and impacts
of materiality thresholds. Concerning environmental, social and governance risks, it should
clarify how and when the Taxonomy would cover all these risks and would be able to
identify unsustainable activities.
(6) As regards the options aiming to improve the current framework for calculating risk-
based capital requirements, the report presents possible EU specific adjustments in an ‘all-
or nothing’ manner, leaving no policy choice. It should explain why a more incremental
approach, for instance starting with the most important or beneficial adjustments, was not
considered.
(7) The main report should include the impacts of the options on macroeconomic
developments, competitiveness of EU banks, SMEs and on administrative and compliance
costs. It should also integrate these impacts in the comparison of options, to clarify policy
trade-offs of the initiative and of individual options.
(8) The report should elaborate more clearly the effect of the proposed measures on
SMEs. It should assess the impacts of the introduction of a higher risk weight for credits to
unrated companies. If the analysis assumes that a substantial part of SMEs will use the
transition period to obtain a credit rating, it should incorporate the cost of doing this. If
SMEs would only obtain credit ratings after the transition period, this should be included
in the analysis.
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(9) The report should provide a clearer presentation of the overall benefits and costs of the
preferred set of options, including quantitative estimates where available.
(10)The consultation annex should present better the different stakeholder views, including
diverging views.
The Board notes the estimated costs and benefits of the preferred option(s) in this
initiative, as summarised in the attached quantification tables.
(D) Conclusion
The DG must revise the report in accordance with the Board’s findings before
launching the interservice consultation.
If there are any changes in the choice or design of the preferred option in the final
version of the report, the DG may need to further adjust the attached quantification
tables to reflect this.
Full title Amendments to the Capital Requirements Regulation and the
Capital Requirements Directive
Reference number PLAN/2019/5320, PLAN/2019/5321
Submitted to RSB on 25 June 2021
Date of RSB meeting Written procedure
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ANNEX: Quantification tables extracted from the draft impact assessment report
The following tables contain information on the costs and benefits of the initiative on
which the Board has given its opinion, as presented above.
If the draft report has been revised in line with the Board’s recommendations, the content
of these tables may be different from those in the final version of the impact assessment
report, as published by the Commission.
OBJECTIVE 1 – STRENGTHEN THE RISK-BASED CAPITAL FRAMEWORK FOR CREDIT
INSTITUTIONS
Preferred Option – Implement Basel III reforms with EU-specific adjustments and
transitional arrangements adapted to the COVID-19 crisis
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Implement in EU law
the set of reforms to
the risk-based
capital framework
for banks agreed at
international level
(the Basel III
framework or Basel
III standards)
- The revisions to the standardised
approach for credit risk (SA-CR) will
improve the robustness and risk
sensitivity of the existing approach;
- The revisions to the IRB approaches
for credit risk will reduce
unwarranted variability in banks’
calculations of RWAs;
- The minimum haircut floors for non-
centrally cleared securities SFTs will
limit the pro-cyclicality of these
transactions and the build-up of
excessive leverage in the financial
system;
- The revisions to the CVA risk
framework as well as revisions to the
standardised approach for CVA (SA-
CVA) will enhance the risk sensitivity,
strengthen the robustness and
improve the consistency of the
framework;
- The new standardised approach for
operational risk (SA-OR) will simplify
the framework and increase
comparability; and
- The output floor (OF) will limit the
unwarranted variability in the
regulatory capital requirements
- These enhancements of the
prudential standards will make
banks more resilient and restore
confidence in the banking system
and, thus, make the financial
system more stable as a whole.
- Better capitalised banks will be
less likely to fail as a result of
financial crisis and more able to
continue lending through
economic downturns.
- A steadier flow of credit to the
economy will reduce the
likelihood of borrowers failing due
to a shortage of bank funding.
- Bank bail-outs and the recourse
on governments to fund them can
be expected to be less likely in
future financial crisis.
- Economic crisis following future
financial crisis (and the political
instability and social hardship
caused by those) can be expected
to last less and be less severe.
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produced by internal models and the
excessive reduction in capital that a
bank using internal models can
derive relative to a bank using the
revised standardised approaches.
Adjust to the Basel
III revisions to take
into account the
specific features of
the EU banking
system
- The proposed adjustments will more
than halve the average Basel III
standards-induced capital increase
from 18.5%to between 6.4% and
8.4% by the end of the phase in
period.
- The adjustments are designed to
cater for the distinctive features
of the EU banking system and
economy, namely the significant
reliance by SMEs in bank lending
as key source of funding.
- The reduced impact on capital
requirements should be regarded
as a proportionate measure that
adequately balance the primary
objective of enhancing the
banking prudential framework
while maintaining a sufficient flow
of bank lending to the EU
economy.
- Hence, the proposed adjustments
do not compromise the overall
purpose or negate the stated
benefits of the Basel III reform.
Delay the starting
date of application
of the new rules by
two years. Starting
date would, thus, be
set on 1 January
2025 with a 5-year
transition period.
- No impact on banks’ capital
requirements until 1 January 2025.
Full impact on capital requirements
delayed to January 2030.
- The suggested delay of the phase-
in period would prevent material
disruption of bank lending in the
short-term.
- Hence, banks’ flow of lending
would not be materially affected
during the economic recovery
phase that is expected for
following the current COVID 19
pandemic crisis.
Indirect benefits
- Implementing the Basel III reforms would meet the EU international commitments and help
improve the confidence in European banks across international markets.
II. Overview of costs – Preferred option
Citizens/Consumers/non-
financial corporates
Banks Administrations (including
competent authorities)
One-off Recurrent One-off Recurrent One-off Recurrent
Direct costs
Costs to
adapt banks’
systems to
incorporate
Increased cost
of capital for
exposures
that would be
Costs to
adapt
current
supervisory
Costs for
running the
new
procedures
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the changes
made to the
prudential
framework
subject to
higher capital
requirements
compared to
the current
rules
practices
and
processes
to the new
standards
(depending
on
magnitude of
change
compared to
current
procedures)
Indirect costs Increase in the
costs for bank
loans/financial
products which
are subject to
higher capital
requirements
compared to
the current
rules
(depending on
the size of the
increase in the
capital
requirements
for the bank
loan and the
level of
competition in
the market)
OBJECTIVE 2 – INCORPORATE SUSTAINABILITY RISKS IN THE PRUDENTIAL FRAMEWORK.
Preferred Option – Introduce measures for a better management of environmental risks by
banks
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Requirements for
banks to manage
ESG risks
- Banks would integrate ESG factors in
day-to-day decision-making.
- ESG-targeted risk management
provisions will contribute to a
more robust and resilient
banking system in the face of
transition and physical risks.
- A more resilient banking
system will, in turn, help to
reinforce overall financial
stability in the EU.
Reinforced
supervisory powers
over ESG risks
- Improved supervisory monitoring of
individual banks’ exposures to ESG risks.
Ad hoc disclosures of
ESG risks by banks
- Enhanced market discipline.
- Stakeholders concerned about ESG risks
and/or ESG-related externalities may
incentivise credit institutions to better
manage ESG risks and take externalities
of their actions into account.
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Indirect benefits
Better availability of
finance for
sustainable
exposures
- To the extent that sustainable activities
may be less risky than non-sustainable
activities, this difference may be better
reflected in banks’ credit decision-
granting and, as a result, lead to an
increase in the availability of finance for
sustainable activities.
- Increased bank funding of
sustainable activities would
help the EU reach the target of
the EGD.
II. Overview of costs – Preferred option
Citizens/Consumers/non-
financial corporates
Banks Administrations
(including
competent
authorities)
One-off Recurrent One-off Recurrent One-off Recurr
ent
Reinforce
d
requirem
ents for
banks to
manage
ESG risks
Direct
costs
Cost of
adjusting
risk
managemen
t systems
and
processes to
the new
requirement
.
Indirect
costs
Cost of
providing
additional
information to
banks.
Reinforc
ed
supervis
ory
powers
for ESG
risks
Direct
costs
Cost of
setting up
new
supervisor
y
processes
and
systems.
Costs
of
runni
ng
the
new
proce
sses
and
syste
ms.
Indirect
costs
Reinforc
ed
disclosur
e of ESG
Direct
costs
Changes to
systems to
accommod
ate new
Costs of
preparing
the new
information
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risks by
banks
disclosure
templates.
for
disclosure.
Indirect
costs
Cost of
providing
additional
information
to banks.
OBJECTIVE 3 – FURTHER HARMONISE SUPERVISORY POWERS AND TOOLS
Preferred Option – harmonise the supervisory powers and tools of banking competent
authorities to the greatest possible degree between two available options
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Harmonise the
supervisory powers
of banking
competent
authorities to the
greatest possible
degree between two
available options in
relation to:
(i) ex ante
notifications of
events of
prudential
relevance;
(ii) assessment of
board members
and significant
function
holders
(iii) sanctions and
penalties
- A more consistent application of the
banking prudential framework across
the EU in general, and within the
Banking Union in particular.
- Less scope for regulatory arbitrage and
loopholes that limit the effective and
consistent application of the prudential
framework across the EU.
- Reduced compliance costs for banks, as
they will be able to operate across
similar legal frameworks within the EU.
- More effective and consistent
application of sanctions may
contribute to fostering
confidence in the EU system of
banking supervision and
reduce the incidence of rules
breaches in the future.
Indirect benefits
-
II. Overview of costs – Preferred option
Citizens/Consumers/non-
financial corporates
Banks Administrations (including
competent authorities)
9
One-off Recurrent One-off Recurrent One-off Recurrent
Direct
costs
Administrativ
e costs to
adjust internal
processes to
meet new
requirements.
Administrativ
e costs to
comply with
new ex ante
notification
and
assessment
requirements.
Scope limited
to “material”
events for ex
ante
notifications.
Costs to
change
current
supervisory
procedures or
to set up new
procedures to
meet the new
requirements.
Costs to
deal on
an on-
going
basis with
new ex
ante
notificatio
n and
assessme
nt
requirem
ents.
Indirect
costs
OBJECTIVE 4 – REDUCE ADMINISTRATIVE COSTS RELATED TO PUBLIC DISCLOSURES AND
IMPROVE ACCESS TO BANKING PRUDENTIAL DATA
Preferred Option – centralise the disclosure of both quantitative and qualitative prudential
banking disclosures
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
EBA to disclose on a
single on-line
platform the
prudential data and
information of all EU
credit institutions.
- The suggested centralised provision of
prudential data and information will
significantly improve market
transparency and the comparability of
that information, and will reduce the
costs for market participants to access
information that is currently scattered.
- Reduced information costs.
- Enhanced transparency would
result in more effective and
efficient market discipline of
banks.
Small and non-
complex credit
institutions
exempted from the
obligation to
disclose prudential
information
(replaced by EBA
disclosures)
- Costs of disclosure reduced to zero.
Indirect benefits
-
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II. Overview of costs – Preferred option
Citizens/Consumers/no
n-financial corporates
Credit institutions Administrations (including
competent authorities)
One-off Recurre
nt
One-off Recurrent One-off Recurrent
Direct
costs
EBA to incur
costs to build
up the
systems,
processes and
get the
necessary
resources to
provide the
centralised
disclosures.
There will
be
increased
on-going
costs for
the EBA to
maintain
and
operate
the
disclosure
platform.
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EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB/
Opinion
Title: Impact assessment / Amendments to the Capital Requirements Regulation and
the Capital Requirements Directive
Overall opinion: NEGATIVE
(A) Policy context
To reduce the risk of banking crises and to ensure a resilient banking system that supports
the real economy, the EU requires banks to meet capital standards. New global standards
have evolved in the multilateral talks at the Basel Committee on Banking Supervision
(BCBS) following the financial crisis. The Commission has committed to implement these
standards, known as Basel III rules, taking into account European specificities.
The Parliament and the Council have expressed concerns about further increases in overall
capital requirements for the banking sector.
This report examines impacts of several proposed changes to capital requirements. Some
reflect Basel III, others address EU-specific issues. A main thrust is to better match capital
requirements to risk and prevent gaming of the rules.
(B) Summary of findings
The Board notes that the report concerns amendments to many elements of the
legislation that collectively have wide-ranging effects.
However, the Board gives a negative opinion, because the report contains the following
significant shortcomings:
(1) The report lacks a clear and evidence-based narrative that is transparent about
remaining uncertainties and knowledge gaps.
(2) The report does not show the need to act with regard to current EU banking sector
issues. The nature and scale of the problems are unclear.
(3) The report does not adequately describe how the proposed measures would
contribute to better outcomes for different types of banks, for different economic
actors, including SMEs, and for the economy as a whole.
(4) The report does not adequately analyse the policy trade-offs of the proposed
measures.
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(C) What to improve
(1) The report should present a clear and non-technical narrative for the main issues at stake.
It should present available evidence of current problems with the resilience of European
banks and the banking system, and compare against other jurisdictions implementing
Basel III. If relevant, it should differentiate between types of banks.
(2) The narrative should also show the overall trade-offs involved in the decisions. This
would help to clarify the key issues to non-expert policymakers and prioritise elements of
the report, adding structure to the more technical analysis of components.
(3) The report should consolidate in one place all relevant policy objectives, some of which
are now only referred to or hinted at later on in the report (e.g. relating to financing of the
economy and sustainable finance). The definition of the objectives should allow a
systematic analysis of the relevant trade-offs in the impacts sections.
(4) The operational meaning of ‘level playing field’ and other specific objectives should be
made clear, including what success would look like. The problem description might also
clarify what the problems are that relate to an unlevel playing field. The report should
explain to what extent and how the proposal will result in a level playing field in the EU
in line with the objective and with other jurisdictions. The explanation should ideally be
in terms that can later be tested against outcomes.
(5) While it is an important objective to contain administrative and compliance costs, it is
less clear whether this is different from cost-effectiveness used to select the preferred
option. The initiative would not appear to deliver significantly lower costs, and cost
efficiency is in any case among the assessment criteria. The report should apply uniform
definitions of cost-effectiveness and efficiency. The objective on legal clarity also
requires better justification.
(6) The report should present an intervention logic that describes the channels through which
policy measures would contribute to better final outcomes. This would help to better
structure the report around the relative importance of various measures and their impacts
on different elements of the EU banking ecosystem. The logic should connect actions to
specific objectives that relate clearly to the general objectives.
(7) The report needs to be clearer on impacts that do not map onto the objectives. This
includes the likely reactions from those banks, which will need to significantly raise
capital. The report should explain the available means for them to do so (e.g. through
retained profits, sale of equity, sale of assets, mergers) and the likely impacts of the
different choices on the sector and on different Member State economies.
(8) Other relevant impacts to explore may include the impact on competitiveness of banks
and sectoral consolidation. For example, different ways of calculating the output floor
have direct impacts on large banks and indirect impacts on small banks. By contrast,
changes to the standardised approach directly affect small banks. The impact on venture
capital may also be worth exploring.
(9) The report should expand the analysis of the limits to supervisory powers in controlling
banks’ discretion in using internal models to calculate capital requirements. Any
reduction of discretionary authority of national and ECB banking supervisors needs to be
presented transparently, including feedback from those supervisors regarding the
proposed changes. The report should explain what the proposal would mean for the
internal market and for the competitive situation between small and large banks, public
banks, and large or complex banks whose failure would involve systemic risk. It should
explain the reason for more pronounced impacts on banks in some Member States, and
13
whether this is likely to affect these economies more broadly.
(10)The report should thoroughly analyse the effect of the proposed measures on SMEs. It
should assess the effects of the introduction of a higher risk weight for credits to unrated
companies under the standard approach. This measure is likely to affect SMEs in
particular as most SMEs are unrated and as they receive more credits from smaller banks
that apply the standard approach to credit risk. If the analysis assumes that a substantial
part of SMEs will use the transition period to obtain a credit rating, it should incorporate
the cost of doing this. The possible positive effects of the SME supporting factor should
also be developed.
(11)The report should better justify why it proposes to maintain the existing supporting
factors for SMEs and for infrastructure investment. It should integrate stakeholder views,
including the recommendation of the EBA to abandon these supporting factors. The
performance of the existing supporting factors should be at the basis for the proposed
introduction of a new green supporting factor. The report should bring more convincing
evidence that the two types of exposure that would benefit from it have unique features
that justify their preferential treatment.
(12)The impact assessment should be more transparent about data and model limitations. For
example, inferences from the EBA sample of banks on the sector as a whole may be
more reliable for large banks than for small ones. Estimates of the negative impact on
growth in the short and medium term are more robust than estimates of long-term
benefits that are based on decreased risk of full-blown banking crises over longer time
horizons. The report appears to overplay analytical support for the hypothesis that
‘green’ investments are relatively lower risk, and that lower capital requirements on
certain loan types are an effective way to stimulate more lending. The report should
discuss the EBA calculations’ robustness and relevance for assessing the impacts of the
preferred options, given the modifications introduced after the calculations.
(13)Some options need further clarification or explanation why they have been discarded.
For instance, the report should better explain why supervisory bodies cannot be
strengthened and why this option has been discarded. This holds in particular for the
ECB, which is responsible for supervision of the larger banks and should have the
capacity to assess and control banks’ use of internal models to assess portfolio risks. On
credit valuation adjustment risks, the justification for discarding the option of postponing
the introduction of a revised framework until BCBS has finalised its ongoing review
should be strengthened.
Some more technical comments have been sent directly to the author DG.
(D) Conclusion
The DG must revise the report in accordance with the Board’s findings and resubmit it
for a final RSB opinion.
Full title Amendments to the Capital Requirements Regulation and the
Capital Requirements Directive
Reference number PLAN/2019/5320, PLAN/2019/5321
Submitted to RSB on 12/02/2020
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Date of RSB meeting 04/03/2020
Electronically signed on 22/07/2021 17:01 (UTC+02) in accordance with article 11 of Commission Decision C(2020) 4482