The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards, which authorities expect to publish in the Official Journal of the European Union in 2024. Meanwhile, the UK Prudential Regulation Authority (PRA) also published the first of two near-final policy statements (PS17/23) on the implementation of the Basel 3.1 standards for market risk, credit valuation adjustment risk, counterparty credit risk, and operational risk.
Final elements on Basel III in EU
The Banking Package consists of amendments to the Capital Requirements Directive, or CRD (2013/36/EU) and Capital Requirements Regulation, or CRR (2013/575), with the proposed application date of January 01, 2025. The Banking Package includes certain innovations to the prudential framework for credit institutions, with certain mandates for the European Banking Authority (EBA); new rules requiring banks to systematically identify, disclose, and manage risks arising from the environmental, social, and governance (ESG) factors, and stronger enforcement tools for supervisors overseeing EU banks. With this endorsement, the European Banking Authority (EBA) also published its roadmap and has started consulting on key technical standards for the practical implementation of this Banking Package, particularly with regard to the new reporting requirements. The EBA roadmap confirms that sequencing in the development of the regulatory products will follow their legal deadlines, most of which will be consulted on and finalized within the two to three years after the entry into force of CRR3 and CRD VI.
Final policy statements on Basel 3.1 standards in UK
The near-final policy statement, PS17/23, on Basel rules considers feedback received to the PRA consultation paper CP16/22, which was published in November 2022. In addition to a range of other adjustments, PRA made the following material adjustments to the original proposals and these include:
- the removal of market risk internal modeling for the default risk of exposures to sovereigns, aligning the market risk and credit risk frameworks, and addressing capital requirements for some sovereigns put forward under the original proposals
- addition of flexibility in the credit valuation adjustment risk framework through the introduction of an additional, optional, transitional arrangement to reduce operational burden on firms
This publication also includes the Interim Capital Regime (ICR) rules relating to market risk and operational risk. PRA intends to publish the second near-final policy statement in the second quarter of 2024 on the remaining elements of the Basel 3.1 package, which include credit risk, output floor, reporting, and disclosure requirements. The Basel 3.1 standards in UK are expected to be implemented by July 01, 2025, with the transition period ending on January 01, 2030.
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