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Putting the 2019 EU Banking Package into practice

in Austria

Putting the 2019 EU Banking Package into practice

The 2019 EU Banking Package represents an important step towards completing the reforms of the regulatory framework that were set in motion in the wake of the global financial crisis of 2007/2008. New EU regulations and EU directives have led to extensive changes to existing regulations, which need to be transposed into national law by the individual member states. A guest article by FMA Executive Director Helmut Ettl

The 2019 Banking Package (or Risk Reduction/RRM Package) entered into force on 27 June 2019. The banking package dates back to November 2015, when the EU Commission issued a communication identifying the need for further tangible measures on the legislative front to reduce risk in the financial sector. Hoping to eliminate regulatory gaps and weaknesses identified in the course of the financial crisis, the Commission therefore presented proposals for regulations and directives in November 2016 addressing these issues. 

The legislative package includes the Capital Requirements Regulation II (CRR II) and the Capital Requirements Directive V (CRD V), as well as the Bank Recovery and Resolution Directive II (BRRD II) and the Single Resolution Mechanism Regulation II (SRMR II). These new regulations lead to extensive changes being made to four pre-existing regulatory materials (CRR, CRD IV, BRRD, SRMR). In principle, the CRR II will apply from 28 June 2021 onwards, while the SRMR II has already been in force since 28 December 2020. The CRD V and the BRRD II needed to be transposed into national law by 28 December 2020. It is worth noting that the COVID-19 pandemic has led to some regulations already having been brought forward by the CRR Quick Fix (including the deduction of software assets from own funds). 

The new rules are based on internationally-agreed standards and put into practice some aspects of the changes to the supervisory framework agreed in the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). 

By extension, the package contains the initial content of the finalisation of Basel III. Furthermore, the package also represents a response to the conclusions relating to the Roadmap to Completing the Banking Union drawn up by the ECOFIN Council in June 2016. In this document, the ECOFIN Council emphasised the importance of implementing further risk-mitigation measures and risk-sharing measures in the right order. 

Targeted risk-reduction measures are defined under the auspices of the package, with these measures particularly intended to further strengthen the resilience of the European banking system and the confidence of the markets in this system, as well as to contribute to the completion of the Banking and Capital Markets Union. Key content of the package includes the introduction of a binding leverage ratio (LR), a binding structural liquidity ratio (Net Stable Funding Ratio, NSFR), a new market risk framework for reporting purposes, a revised Pillar II framework, an updated macroprudential toolkit and strengthened prudential rules to combat money laundering and terrorist financing. As far as requirements in terms of equity capital go, the package also simplifies the process for recognising and reducing instruments using own funds. 

The inclusion of environmental, social and governance risks (ESG risks) is explicitly anchored within the regulatory framework for banking supervision for the first time. In the future, large institutions will be obliged to publish information on the ESG risks they have assumed. Far-reaching changes and additions are also being made to bank resolution law, against the backdrop of strengthening resolvability. The adjustments made include the implementation of the total loss absorbing capacity (TLAC) standards developed by the FSB, which only apply to banks of global systemic importance. However, the adjustment of the minimum requirements for eligible own funds and liabilities (MREL) undertaken by the banking package for resolutions case for all European credit institutions are of direct relevance for the Austrian banking market. 

The proportionality principle, which places more nuanced requirements on the individual institutions depending on the size and complexity of their business model, was also taken into account in the banking package. As a result, the banking package simplifies the requirements in a targeted way for small and non-complex institutions in the fields of reporting, disclosure, liquidity and market risk. 

Status of implementation in Austria 

A draft law, including materials, for the implementation of CRD V and BRRD II in Austria was sent for review by the Federal Ministry of Finance on 12 October 2020. On 17 February 2021, the draft was passed by the Council of Ministers and has since been submitted to the National Council as a government bill. Depending on the next steps in the parliamentary process, a decision on the legislative package seems possible by the summer. In line with the objectives of the 2019 EU banking package, the draft law also mentions strengthening the resilience and resolution capacity of credit institutions as one of its key objectives. This is to be achieved through new stricter requirements that will increase the liable capital available in credit institutions in the event of resolution. As a result, this should prevent public funds from needing to be used for bank resolutions, which would endanger the stability of the financial market and burden taxpayers. 

In addition, the draft law aims to reduce administrative costs and improve legal certainty when it comes to applying the regulatory requirements. Furthermore, harmonising and closing regulatory loopholes is intended to improve the effectiveness of supervisory practice and reduce incentives for regulatory arbitrage. 

Key aspects of the draft law 

The main aspects of this draft law include the following points: 

  • Adjustment of the MREL requirements, including adjustments with regard to the scope of application, the reference base, its concrete determination, etc. 
  • Adaptation of the regulations concerning resolution planning and resolution powers 
  • Concretisation of the Pillar II requirements in banking supervisory law (Supervisory Review and Evaluation Process, SREP), especially the introduction of the distinction between the additional capital requirement (Pillar II Requirement, P2R) and the supervisory expectation (Pillar II Guidance, P2G) 
  • Adjustment of the legal framework for capital conservation buffers, capital conservation measures and macroprudential instruments, including aspects that were previously defined in more detail in an FMA regulation will be transferred to the Banking Act. Key provisions from the banking package will also be implemented, such as the additivity of the systemic risk buffer or the possibility to add nuance to it for different sectors or regions. 
  • Strengthening administrative cooperation in terms of combating money laundering and terrorist financing, in order to improve the prevention system. In particular collaboration is to be intensified and the mutual exchange of information is to be strengthened further. 
  • Licensing of parent financial holding companies and mixed parent financial holding companies to ensure that regulatory requirements are met on a consolidated basis across a group 
  • Increasing the attractiveness of SME growth markets (a separate category of Multilateral Trading Facilities (MTFs) specifically targeted at SMEs) by reducing compliance costs, reducing the administrative burden on issuers, etc. 

The 2019 banking package and the associated amendment of the relevant Austrian laws represent an important step towards strengthening the stability and resilience of the European banking system. From the perspective of the FMA, the fact that European legislators took the internationally agreed standards of the BCBS and the FSB into account when setting out the package is a particularly positive development. 

Furthermore, the FMA welcomes the fact that this banking package is taking into account the concept of proportionality. As a result, it substantially simplifies the administrative burden for small and non-complex institutions in the areas of reporting, disclosure, liquidity and market risk. Against the backdrop of the increasing complexity of banking regulation and the resulting rise in administrative costs, the package is an important step towards proportional regulation tailored to the target group, which should be developed further in the future. 

This marks the first time that the consideration of ESG risks has been explicitly anchored in the supervisory framework for banks, which should be welcomed. However, since the discussions in this area are still in their infancy, this anchoring should be advanced even further in the future.

The impact study on the 2019 banking package by the EU Commission sheds light on the possible effects of the banking package on credit institutions. One of the study’s most important findings is that the administrative costs resulting from the implementation of the entire package will be reduced for the institutions on an overall level, mainly due to fact that the proportionality principle is taken into account when it comes to reporting and disclosure. 

Even though the 2019 banking package represents important steps towards completing the reforms of the regulatory framework, it does not mark the end of the overhaul of European banking regulation. The EU Commission has begun work on CRR III and CRD VI, where further elements of the reform package adopted by the BCBS in December 2017 to finalise Basel III are to be transposed into European law. The FMA expects a Commission proposal on CRR III and CRD VI to be published over the course of the next few months. 


Helmut Ettl, Executive Board of the FMA and member of the Board of Supervision of the EBA, as well as the ESRB (Photo: FMA)

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