A&O Shearman | FinReg | EU Publishes Proposed Banking Package 2021
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  • EU Publishes Proposed Banking Package 2021

    The European Commission has published three legislative proposals to amend the EU Capital Requirements Regulation and the EU Capital Requirements Directive, referred to as the Banking Package 2021. The proposals are subject to consultation, responses to which may be submitted until January 14, 2022.

    The first legislative proposal is a proposed regulation to amend CRR to implement into EU laws the final Basel reforms (known as Basel 3.1) regarding credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor as well as other changes required to strengthen the risk-based capital framework and to increase the focus on environmental, social and governance risks. The EU implementation of the Basel 3.1 output floor delays the final requirement to January 1, 2030, whereas the Basel deadline is January 28, 2028. The EU is proposing transitional measures to alleviate the impact of the output floor for EU banks, including for exposures to unrated companies, low-risk mortgages and derivatives. The measures are mostly seen to address concerns about the impact of the Basel 3.1 output floor on the weaker of the EU banks.

    A second proposed regulation also includes amendments to CRR on the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities (MREL). The need for these amendments was identified by the European Banking Authority in a January 2021 letter to the European Commission. Without the main changes, the current CRR provisions are inconsistent with the resolution framework established under the Bank Recovery and Resolution Directive because CRR does not permit the deduction of internal MREL eligible instruments and then the application of a zero risk weight.

    The third is a proposed directive to amend CRD regarding supervisory powers, sanctions, third-country branches and ESG risks. The proposed changes include:
    • An explicit requirement for third-country firms to establish a branch in an EU member state before providing banking services in the EU, subject to a reverse solicitation exception. The revised third-country regime will mean third-country branches must be authorized in an EU member state, and will become subject to minimum capital, liquidity and governance requirements. National competent authorities will assess the systemic importance of the largest third-country branches and, if a branch is considered systemically important, will be able to require a firm to establish a subsidiary or restructure its capital or activities or subject the firm to additional Pillar 2 capital requirements. This would be a novel change, since third-country banks may presently operate cross-border on the different legal basis of "characteristic performance". It is unclear how and whether existing clients of third-country banks may continue to be serviced under these rules.
    • Introduction of a requirement for environmental, social and governance risks to be included in a credit institution's strategies, policies and processes, a requirement for firms to develop plans to manage the risks and provisions that incentivize allocation of bank funding across sustainable projects.
    • Clarifications to the fit and proper regime to provide further detail on the assessments to be made and clarification on whether the responsibility for assessment lies with the institution or the competent authority.
    • Clarification that where a firm is declared failing or likely to fail (FOLTF) by the competent authority or by the resolution authority, the competent authority has the power to withdraw the bank's authorization.

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