On the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor
A-9-2023-0030
Committee on Economic and Monetary Affairs · Rapporteur: Jonás Fernández
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Parliament's amended version of the Commission proposal to amend Regulation (EU) No 575/2013 on bank capital requirements. It revises credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor, and sets transitional arrangements.¶¶¶ It introduces an output floor limiting internal-model capital requirements to 72.5% of standardised requirements, calculated at the highest level of consolidation in the Union, with transitional factors from 50% in 2025 to 70% in 2029.¶¶¶ It revises the standardised approach for credit risk, including new treatments for specialised lending, real estate, retail and equity exposures, and restricts the use of internal models.¶¶¶ It implements binding capital requirements for market risk based on the final FRTB standards, with a simplified standardised approach for institutions with medium-sized trading books.¶¶¶ It replaces all operational risk approaches with a single non-model-based method and requires institutions to disregard historical operational loss data for minimum own funds requirements.¶¶¶ It sets transitional arrangements for the output floor, equity exposures, specialised lending, leasing and unconditionally cancellable commitments, and mandates EBA reports and technical standards.¶¶¶
Committee position. The Committee on Economic and Monetary Affairs proposes to adopt Parliament's position at first reading with amendments to the Commission proposal, revising credit risk, CVA risk, operational risk, market risk and the output floor, and introducing transitional arrangements and EBA mandates.¶¶¶
Key points
- Institutions calculate the total risk exposure amount as the higher of the un-floored amount and 72.5% of the standardised amount, applied at the highest level of consolidation in the Union.¶¶¶
- A competent authority may submit a capital redistribution proposal to the consolidating supervisor if the output floor leads to an inappropriate distribution of capital; EBA has binding mediation if no joint decision within three months.¶¶
- The standardised approach for credit risk is revised: more granular risk weights for rated and unrated institutions, subordinated debt and equity, and a new specialised lending exposure class with project, object and commodities finance sub-classes.¶¶¶
- For real estate, the loan splitting approach is kept with adjusted calibration; new treatments are set for income-producing real estate, ADC exposures and currency mismatch, and authorities may increase risk weights up to 150%.¶¶¶
- Institutions must use regulatory LGD values for low-default portfolios, calculate equity exposures under the standardised approach, and apply PD, LGD and CCF input floors.¶¶¶
- Binding capital requirements for market risk based on the final FRTB standards are introduced, with targeted adjustments; institutions with medium-sized trading books may use a simplified standardised approach.¶¶¶
- All existing operational risk approaches are replaced by a single non-model-based method; historical operational loss data are disregarded for minimum own funds requirements.¶¶¶
- Revised CVA risk standards are implemented, existing exemptions for certain transactions are maintained, and institutions must report CVA risk of exempted transactions.¶¶¶
- Institutions must disclose ESG risks, fossil fuel exposures, crypto-asset exposures and shadow banking exposures; EBA publishes disclosures on a centralised web platform.¶¶¶
- The Commission should propose a dedicated prudential treatment for crypto-assets by 30 June 2023; until 30 December 2024 institutions apply a 1250% risk weight to crypto-asset exposures.¶¶
- Transitional arrangements apply for the output floor (50% in 2025 rising to 70% in 2029), equity exposures, specialised lending LGD floors, leasing collateral and unconditionally cancellable commitments.¶¶¶
- EBA is mandated to develop numerous regulatory technical standards and reports, including on the output floor, securitisation, SFTs, agricultural financing and proportionality.¶¶¶
Who is affected
- EU credit institutions and investment firms, which must apply the revised capital requirements, transitional arrangements and disclosure obligations.¶¶¶
- Small and non-complex institutions, which benefit from reduced disclosure and reporting requirements.¶¶¶
- Institutions using internal models, which face restrictions and input floors on PD, LGD and CCF estimates.¶¶¶
- Institutions with trading activities, which must apply the new market risk framework and may use the simplified standardised approach if eligible.¶¶
- Institutions exposed to crypto-assets, which must apply a 1250% risk weight until 30 December 2024 and disclose exposures.¶¶
Figures and deadlines
- 72.5%: the output floor factor 'x' applied to standardised total risk exposure amount.¶
- 50% (2025), 55% (2026), 60% (2027), 65% (2028), 70% (2029): transitional output floor factors.¶¶¶
- EUR 50 000 000: annual turnover threshold for small and medium-sized enterprises.¶
- EUR 1 million: maximum total amount owed by a retail obligor for retail exposure classification.¶
- EUR 70 billion: total assets threshold for large regulated financial sector entity.¶
- EUR 500 million: consolidated annual sales threshold for large corporate.¶
- EUR 750 million: business indicator threshold above which institutions must calculate annual operational risk losses.¶
- EUR 20 000 and EUR 100 000: net loss thresholds for operational risk events in annual loss calculation.¶¶
Legal basis: Article 294(2) and Article 114 of the Treaty on the Functioning of the European Union.¶