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CRR 2 and BRRD 2 proposals

CRR 2 and BRRD 2 proposals

The European Commission proposed amendments to the Capital Requirements Regulation (CRR 2) and to the Bank Recovery and Resolution Directive (BRRD 2) in November 2016. The European Council has now agreed its response to these proposals.

However, the European Parliament has not yet finalised its negotiating position (although the Economic and Monetary Affairs Committee put forward its proposed amendments to CRR 2 on 19 June), so we do not yet have a final version of CRR 2 and BRRD 2 agreed among the Commission, Council and Parliament.

CRR 2

The Commission's November 2016 proposed amendments focused primarily on implementing the Basel Committee's revised market risk framework, the FSB's total loss absorbing capacity (TLAC) “term sheet” for G-SIBs, exposures to central clearing houses, counterparty credit risk, equity exposures to collective investment schemes, the net stable funding ratio, and public disclosures by banks.

Market risk

Now that the Basel Committee has put back the implementation date of the revised market risk framework from 2019 to 2022, the European Council has proposed that:

  1. The EBA should report, by end-September 2019, on the impact of the revised market risk framework on banks. Then, by end-June 2020, the Commission should if necessary put forward a legislative proposal to refine further the European implementation of the market risk framework.
  2. Banks should begin reporting their revised standardised approach market risk calculations to their supervisors no later than one year after the Commission adopts (prospectively by December 2019) a delegated act to fully operationalise the calculation of reporting requirements (so from end 2020).
  3. Banks that obtain approval to use the revised internal model approach for market risk should also report their IMA calculations from three years after the Commission delegated act (so from end 2022).
  4. The revised capital requirements for market risk (and the revised standardised approach to counterparty credit risk) should apply from four years after the date of entry into force of CRR 2 (so probably not until 2023).

Net stable funding ratio

The gross derivative liabilities add-on should be set at 5 percent, subject to the Basel Committee agreeing any new standards for this. This should avoid possible unintended consequences on the functioning of European financial markets and the provision of risk hedging tools to end-users.

Risk weight adjustments

The Council response confirms the lower risk weight for SMEs (a 23.81% reduction in the risk weighted exposure amount for SME exposures of up to EUR 1.5 million, and a 15% reductions for SME exposures beyond that). In addition, the Commission should review the treatment of high quality infrastructure projects three years after the CRR 2 enters into force, in order to assess its impact on the volume of infrastructure investments and the quality of investments.

BRRD 2

The Council's response focuses on:

  1. Breaches of MREL requirements (including TLAC for G-SIBs) - to be addressed and remedied by resolution authorities, who should be able to prohibit certain distributions, and to require banks to restore the level of eligible instruments.
  2. Suspending payment or delivery obligations in resolution - the Commission's original proposal is reduced from five days to two days, and obligations owed to CCP systems and central banks are excluded.
  3. Minimum MREL requirements - to be set on a bank-by-bank basis as the higher of some percentage of risk weighted exposures, or 8 percent of total liabilities. But there is scope for resolution authorities to apply a requirement of less than 8 percent of total liabilities, and to allow a long transition period, to 2024 or potentially even later.
  4. The functioning of European resolution colleges for subsidiaries and branches of third country banks, including the read-across to intermediate parent undertakings.

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