European Commission presenting new rules to strengthen banks' resilience

05 November 2021

The European Union has been working on a wide-ranging reforms of its banking rules ever since the financial crisis of 2008, which helped the EU banking sector to enter the COVID-19 crisis on a resilient footing. However, since some of the issues have not yet been addressed, the European Commission has adopted a review of banking rules on October 27, 2021, helping EU banks become more resilient to future economic shocks and contributing to Europe’s recovery from the COVID-19 pandemic.

New package significally impoves existing EU rules for banks in a number of areas:

1. The implementation of the Basel III agreement (international standard for strenghtening banks) is finalized, taking into the account the specific features of the EU's banking sector, ensuring that models used by banks to calculate their capital requirements do not underestimate risks, thereby ensuring that the capital, required to cover those risks, is sufficient. The proposal limits the overall impact on capital requirements to what is necessary, which will maintain the competitiveness of the EU banking sector.

The macroeconomic analysis carried out by the European Central Bank shows that the Basel reforms will have a positive effect on the EU economy over the long-term. They will further restore market confidence in the EU banking sector, which will contribute to its profitability and competitiveness.

In order to prevent potential distortions to the global level playing field, the implementation of the Basel III rules should therefore converge as much as possible across jurisdictions.

2. With the proposal the Commission is strenghtening the resilience of the banking sector to environmental, social and governance risks (ESG). Banks will be required to sistematically identify, disclose and manage ESG risks as part of their risk management. This includes regular climate stress testing by both supervisors and banks.

All banks will also have to disclose the degree to which they are exposed to ESG risks. To avoid undue administrative burdens for smaller banks, disclosure rules will be proportionate.

3. The proposal provides stronger tools for supervisors overseeing banks (helping them to assess whether senior staff have the skills and knowledge to manage a bank) as well as addresses the issue of establishing branches of third-country banks in the EU (allowing supervisors to better manage risks, related to these entities, which have significantly increased their activity in the EU in recent years).

The Commission proposes to start applying the new rules from January 1, 2025, giving EU banks and supervisors enough time to properly implement the reform in their processes, systems and practices. The extended implementation period will allow banks to focus on managing financial risks stemming from the COVID-19 crisis and on financing the recovery, and give them enough time to adjust before the reform reaches its full effect.