May 28 2018

EU Banking Package: EU Council adopts general approach

One of the aims of the general approach adopted by the EU Council today to what is referred to as the “Banking Package” (CRR II / CRD V) is to tighten the own funds requirements. Secondly, banking regulation is to be focused more strongly on the size and the complexity of credit institutions. Another module includes the amendments to the EU’s Bank Resolution and Recovery Directive (BRRD II) and to the Single Resolution Mechanism Regulation (SRMR II), which have also been adopted. What is at issue, in particular, is the implementation of the international recommendations on total loss-absorbing capacity (TLAC) and their harmonisation with minimum requirements for own funds and eligible liabilities (MREL).

In the view of the German Banking Industry Committee (GBIC), the implementation of the new Basel market risk rules (Fundamental Review of the Trading Book – FRTB), as provided for in CRR II, is not effective. The general approach stipulates a reporting obligation as of the beginning of 2020, which will drastically reduce the deadlines for implementation within the European Union. This leads to much tougher requirements: Reporting will also require full implementation of all the requirements and will entail extensive IT adjustments. Precisely because of the emerging adjustments and shifts at the level of Basel, the GBIC suggests that the FRTB requirements and the directly and inseparably reporting obligation linked to these requirements should not be implemented in the CRR II. As things stand today, the first-time application of these requirements will be as of 2022 at the earliest, in sync with the Basel adjustments.

Regrettably, the Council could not bring itself to strengthen the single internal market within the EU by allowing cross-border waivers. Instead, the Council falls considerably behind the rules proposed by the EU Commission.

With the limit of EUR 5 billion now laid down in CRR II for the balance sheet total to define “small and less complex institutions”, the Council fortunately goes considerably beyond the EU Commission’s original proposals of November 2016. The Commission’s proposal still provided for a limit of EUR 1.5 billion.

Furthermore, institutions have to cumulatively satisfy various additional criteria to qualify as “small and less complex”, including low utilisation of derivatives and trading book activities and no internal models. Depending on the risk content of transactions, a large number of co-operative banks, Savings Banks and smaller private banks can be relieved of administrative burdens in the fields of disclosure and reporting. The GBIC has always advocated more proportionality in banking regulation. The compromise is therefore a good starting point for the trilogue negotiations pending in the second half of 2018. However, there is no reason to sit back and relax – the goal of proportional banking regulation has not yet been achieved.

In the field of bank resolution, the concept of proportionality was generally heeded with regard to small and medium-sized institutions which were wound up within the framework of a standard insolvency proceeding. On the other hand, the GBIC is critical of the growing complexity due to the co-existence of various calculation methods and thresholds. For larger institutions, the requirements for holding bail-in liabilities within the context of MREL-TLAC harmonisation were significantly tightened. These institutions are generally expected to maintain an MREL loss absorption buffer of at least 8 percent of their total liabilities and own funds (TLOF). A comparable requirement is not stipulated in the international TLAC recommendations. The GBIC is opposed to such ‘goldplating’.

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