On 27 October 2021, the European Commission adopted the following package (the “Banking Package”) of legislative proposals:
The Banking Package aims to:
- contribute to sustainability and the transition to climate neutrality;
- ensure stronger resilience of EU banks by finalising the implementation of the Basel III rules; and
- provide stronger tools for supervisors overseeing EU banks.
Strengthening the resilience of the banking sector in relation to managing environmental, social and governance (“ESG”) risks is an important component of the Commission’s Sustainable Finance Strategy.
The Banking Package proposal will require banks to systematically identify, disclose and manage ESG risks as part of their risk management. Disclosure rules will be proportionate to size, so that smaller banks will not be unduly burdened.
The proposal provides specifically for:
- regular climate stress testing by both supervisors and banks.
- assessment of ESG risks as part of regular supervisory reviews.
- all banks to disclose the degree to which they are exposed to ESG risks.
Implementing Basel III
The Banking Package implements the Basel III agreement.
The proposal is designed to reduce compliance costs, especially for smaller banks, and to ensure that the internal models used by banks to calculate their capital requirements do not underestimate risks. This should strengthen resilience without requiring significant increases in capital requirements.
There is a recognition that banks will use different internal modelling systems to calculate capital requirements and an output floor (“OF”) has been included as a method to counter the risk of under-estimation of such requirements. The OF is set out in detail in the proposals and has the effect of setting a minimum limit on capital requirements.
The proposal includes a set of rules by which supervisors can assess whether senior staff have the necessary skills and knowledge to manage a bank. The proposal also requires member states to provide for sanctions in the event of breaches of CRR/CRD IV, including by setting certain minimum criteria for such senior staff and how compliance would be implemented by competent authorities.
In response to the WireCard case, supervisors will have better tools to oversee fintech groups (including bank subsidiaries).
The Banking Package also harmonises the rules regarding the establishment of branches of third-country banks in the EU.