European Commission adopted a new set of rules ensuring the resilience of banks to potential economic shocks
The European Commission today, i.e., Wednesday, October 27, 2021, adopted a review of European Union (E.U.) banking rules – the Capital Requirements Regulation and the Capital Requirements Directive to ensure that banks become more resilient to future economic shocks
This also finalises the implementation of the Basel III agreement in the E.U., which was reached by the E.U. and its G20 partners in the Basel Committee on Banking Supervision to make banks more resilient.
The review gains significance as E.U. is trying to recover from the economic crisis of Coronavirus (COVID-19). It includes a legislative proposal to amend both Capital Requirements Directive and Capital Requirements Regulation. It also includes a separate legislative proposal to amend the Capital Requirements Regulation in the area of resolution. The package comprises of 3 elements – Implementing Basel II, Switching to Sustainability and a Stronger Supervision.
Speaking on the occasion, the E.U. Commissioner responsible for Financial Services, Financial Stability and Capital Markets Union – Mairead McGuinness said, “Banks have an essential role to play in the recovery and it is in all our interests that EU banks are resilient going forward. Today’s package makes sure that the EU banking sector is fit for the future and can continue to be a reliable and sustainable source of finance for the EU economy. By incorporating ESG risk assessments, banks will be better prepared and protected to weather future challenges such as climate risks.”
Taking it to twitter, the European Commission tweeted,
💪 A resilient banking sector for a stronger economy.
— European Commission 🇪🇺 (@EU_Commission) October 27, 2021
Implementing the #Basel3 agreement will make the EU financial sector more stable while taking also into account important new developments, like #SustainableFinanceEU.
🙌 Today, we adopted a review of EU banking rules.
The implementing of Basel III ensures that internal 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. In turn, this will make it easier to compare risk-based capital ratios across banks, restoring confidence in those ratios and the soundness of the sector overall.
Talking about Basel III, European Commission tweeted,
🙏 Europe needs a strong banking sector to keep lending to the economy as we recover from the #Covid19 pandemic.
— European Commission 🇪🇺 (@EU_Commission) October 27, 2021
The EU implementation of the #Basel3 agreement will make the EU financial sector stronger while ensuring banks continue to finance economic activity and growth.
The second element focuses on resilience of the banking sector to Environmental, Social and Governance (ESG) risks. It is a key area of the European Commission’s Sustainable Finance Strategy. Improving the way banks measure and manage these risks is essential, as is ensuring that markets can monitor what banks are doing. The proposal requires banks to systematically identify, disclose and manage ESG risks as part of their risk management. This includes regular climate stress testing by both supervisors and banks.
The third element is Stronger Supervision which aims to ensuring sound management of E.U. banks and better protecting of financial stability. The package provides stronger tools for supervisors overseeing E.U. banks. This enhanced toolkit will ensure the sound and prudent management of EU banks.
All these 3 elements also address the issue of the establishment of branches of third-country banks in the E.U. At present, these branches are mainly subject to national legislation.
