Regulation (EU) 2019/876 modifies the regulatory framework for financial services in response to ongoing challenges following the 2007-2008 financial crisis. It aims to enhance the resilience of financial institutions by incorporating revised international standards, particularly regarding leverage ratio and counterparty risk. This text is part of a broader effort to complete the banking union and promote economic…
The document is Regulation (EU) 2019/876 of the European Parliament and of the Council, adopted on 20 May 2019, amending Regulation (EU) No 575/2013 (CRR) on prudential requirements applicable to credit institutions and investment firms. It covers the following topics: leverage ratio, net stable funding ratio (NSFR), capital requirements and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, large exposures, reporting and disclosure requirements. The scope concerns financial institutions subject to Directive 2013/36/EU, including global systemically important institutions (G-SIIs) and their significant subsidiaries. The document is based on the international Basel III and TLAC standards and covers the post-financial crisis period from 2007-2008 to 2019, focusing on recent and upcoming regulatory adaptations (p. 1-18).
Regulation (EU) 2019/876 aims to strengthen and refine the European prudential framework for financial institutions, integrating recent international developments from the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). This text is essential to improve the resilience of the European banking system against risks of excessive leverage, liquidity, market, and counterparty credit risk, while promoting financial stability and economic growth. The main findings are:
- The initial Basel III framework, transposed in 2013, enhanced stability but did not resolve all issues, notably regarding leverage, liquidity, and market risk (p. 1-2).
- The leverage ratio is set at 3% in Tier 1 capital, with specific adjustments for public development banks, publicly supported export credits, and initial margins on centrally cleared derivatives (p. 2-4).
- Introduction of a leverage ratio buffer for global systemically important institutions (G-SIIs), in line with the TLAC standard, to ensure sufficient loss-absorbing capacity in resolution (p. 3-4).
- Adoption of a new standardized approach for counterparty credit risk (SA-CCR) replacing previous methods, with a simplified version for eligible institutions (p. 5-6).
- Gradual implementation of the revised market risk framework (FRTB), with mandatory reporting requirements and an impact analysis planned before full adoption (p. 6-7).
- Establishment of the net stable funding ratio (NSFR) set at 100%, with specific adjustments for the European context to avoid hindering real economy financing, and a simplified version for small and non-complex institutions (p. 7-10).
- Reduction of capital requirements for exposures to SMEs up to EUR 2.5 million, and for high-quality infrastructure projects, to support growth and employment (p. 10).
- Relief of disclosure obligations for small and non-complex institutions, while ensuring comparability and quality of published information (p. 9-11).
The conclusions emphasize the need for harmonized and proportionate application of the rules, with regular monitoring by the European Banking Authority (EBA) and the European Commission. Recommendations include progressive implementation of new requirements, stakeholder consultation, and preparation of IT tools to facilitate compliance. The Commission is empowered to adopt delegated acts to adjust technical standards according to international developments and European specificities (p. 11-18).
The regulation was developed in the post-financial crisis context of 2007-2008, where the European Union strengthened its prudential framework via Basel III, notably through Regulation (EU) No 575/2013 and Directive 2013/36/EU. Despite these advances, some issues remain, notably related to excessive leverage, long-term liquidity, counterparty risk, and market risk. Additional international work by the BCBS and FSB has resulted in new standards that the Union must integrate to preserve financial stability and promote economic growth. The objective is to adopt harmonized, proportionate legislative measures compatible with European initiatives such as the banking union, the investment plan for Europe, and the capital markets union. The regulation also aims to reduce burdens for small and non-complex institutions while maintaining a high level of protection (p. 1-3, 10-12).
- Leverage ratio: set at 3% in Tier 1 capital, it acts as a supplementary safety net to risk-based requirements. Adaptations are planned for public development banks, publicly supported export credits, and initial margins on centrally cleared derivatives. Exposures to central banks may be temporarily excluded under conditions. A leverage buffer is established for G-SIIs (p. 2-4).
- Capital and eligible liabilities: alignment of eligibility criteria with the TLAC standard, excluding instruments not fully paid or likely to impair loss absorption. Clear approval procedure for common equity Tier 1 instruments, including EBA consultation (p. 3-5).
- Counterparty credit risk: replacement of the standard (SM) and mark-to-market (MtM) methods by SA-CCR, more risk-sensitive and adapted to central clearing. A simplified SA-CCR version is planned for eligible institutions. The original exposure method (OEM) is retained as a fallback with revision (p. 5-6).
- Market risk: gradual implementation of the revised FRTB framework, with reporting requirements from 2020, followed by a legislative proposal for full application. Proportionate treatment for small or medium-sized trading portfolios (p. 6-7).
- Net stable funding ratio (NSFR): binding requirement set at 100%, calculated via factors reflecting funding reliability and asset liquidity over a one-year horizon. Specific adjustments for the European context regarding pass-through models, covered bonds, trade credits, regulated savings, residential mortgage loans, credit unions, CCPs, and CSDs. A simplified version is planned for small and non-complex institutions. Transitional measures are established for short-term operations and sovereign bonds to preserve market liquidity (p. 7-10).
- Exposures to collective investment undertakings (CIUs): rules aligned with international standards, with a hierarchy of calculation methods depending on transparency of underlying exposures. Reduction of the conversion factor for minimum value commitments (p. 5-6).
- Large exposures: strengthening of limits, notably reduction of maximum exposure between G-SIIs, and application of SA-CCR for credit derivatives (p. 7).
- Reporting and disclosure requirements: adaptation to reduce administrative burden, notably for small and non-complex institutions. Clarification of remuneration disclosure obligations. The EBA is tasked with developing technical standards to harmonize and simplify reporting, and to develop an IT compliance tool (p. 9-12).
- Support to SMEs and infrastructure investments: reduction of capital requirements for exposures to SMEs up to EUR 2.5 million, and for high-quality infrastructure projects, to foster growth and employment (p. 10).
- Specific exemptions: CCPs exempted from the leverage ratio due to their essential role and banking authorization. Exclusion of CSD exposures related to cash accounts to avoid excessive leverage risk (p. 10-11).
- Established facts:
- The leverage ratio is set at 3% in Tier 1 capital, in line with international standards (p. 2-3).
- The SA-CCR replaces previous methods for calculating counterparty credit risk, with a simplified version for certain institutions (p. 5-6).
- The NSFR is introduced as a binding requirement at 100%, with specific adaptations for the European context (p. 7-10).
- The FRTB framework for market risk is being implemented gradually, with reporting requirements from 2020 (p. 6-7).
- Capital requirements for SMEs are eased up to a threshold of EUR 2.5 million (p. 10).
- Assumptions:
- Specific adjustments to the leverage ratio and NSFR will not hinder economic growth or market liquidity (p. 2-10).
- The simplified versions of SA-CCR and NSFR will be sufficiently prudent to avoid underestimating risks (p. 5-10).
- Interpretations:
- Integration of international standards into European law will strengthen banking system resilience while maintaining competitiveness (p. 1-3).
- Differentiation of requirements according to institution size and complexity allows proportionate application (p. 9-11).
- Uncertainties:
- The full impact of FRTB framework changes on European institutions remains to be analyzed (p. 6-7).
- Future adjustments to the required stable funding factor for short-term derivatives may evolve depending on international consultations (p. 8-9).
Regulation (EU) 2019/876 concludes on the need to adopt a strengthened European prudential framework, harmonized with international standards, to improve financial stability and support the real economy. It recommends:
- Progressive implementation of new requirements, notably the leverage ratio, SA-CCR, NSFR, and the FRTB framework, with adapted transitional periods (p. 2-10).
- Application of proportionate rules according to institution size and complexity, with simplified versions for smaller ones (p. 9-10).
- Adoption by the Commission of delegated acts to adjust technical standards according to international developments and European specificities, with transparent stakeholder consultation (p. 11-12).
- Strengthening reporting and disclosure capacities, reducing administrative burden for small institutions, and improving data comparability (p. 9-12).
- Targeted support to SMEs and high-quality infrastructure investments through adapted capital requirements (p. 10).
- Development by the EBA of IT tools to facilitate institution compliance (p. 11).
- Preparation of a feasibility report on a harmonized system for collecting statistical, prudential, and resolution data, with a possible legislative proposal (p. 11-12).
These measures aim to ensure a resilient, competitive European banking system capable of supporting economic growth while managing systemic risks.
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