The Final Implementation of the Basel III Banking rules in the EU: End of the Game?

Pier Mario Lupinu (University of Luxembourg–Roma Tre University)

The European Union (EU) legislators announced on 27 June 2023 that the Council (under the Swedish Presidency) and the European Parliament reached an interim agreement on the finalisation of the implementation of the ‘remaining’ Basel III rules at the level of the EU, which will translate in the amendments to the Capital Requirements Regulation and the Capital Requirements Directive.

This legislation, which was enacted as a response to the financial turmoil that occurred around 15 years ago, follows the same main purpose, that of making the EU banking sector stronger and more resilient against a series of internal and external shocks that are becoming increasingly diverse and more impactful. The strong regulatory effort undertaken over the last decade and beyond is so far showing its benefits, as the EU banking sector passed from the cause of crisis (the financial crash of 2008 and after) to a means of countering it, as it was visible during the COVID-19 pandemic. Moreover, this sector showed a strong resilience (unexpected by some) during the peak of the impact of the war in Ukraine, in the face of skyrocketing energy prices and inflationary pressures, and the recent banking turmoil that occurred in the United States (US) and Switzerland in spring 2023. However, the EU legislator understood that it was not the time to rest on its laurels since risks are still present and mounting, such as those stemming from the exposure of the banking sector to the ‘shadow’ banking system as recently reiterated by the Financial Stability Board.

Under the provisional agreement there are several measures targeting various risk areas, such as credit, market and operational risk. However, EU legislators also inserted proportionality principles in order to scale the regulatory effort to the size of the bank, thus protecting smaller banks. Nevertheless, the key measure is the introduction of the so-called ‘output floor’, a central feature of Basel III standards constituting a requirement that bars banks from reducing their capital requirements calculated via internal models. In this way regulators avoid banks undervaluing certain risks while pursuing their internal models by including this additional safeguard. Since the banks expressed concerns for the compliance costs arising from this measure, the amendments should foresee a transitional period allowing banks to comply with the output floor without significant disruptions.

Other measures concern the harmonisation of the so-called ‘fit and proper’ assessments that the European Central Bank and the National Competent Authorities (NCAs) undertake with respect to the members of the management bodies and key function holders of supervised banks. These assessments are gaining more attention over time as they are crucial for the achievement of fundamental objectives such as gender equality on boards and the alignment with corporate governance standards that should result in a sounder management of banks also in terms of prevention of anti-money laundering or the respect for environmental concerns. In addition, a minimum cooling-off period will be foreseen for preventing or minimising the ‘revolving doors’ phenomenon between public authorities and private companies, meaning between NCAs and banks, a measure that should strengthen NCAs’ independence. With regards to governance and the environment but, more broadly, of Environmental, Social and Governance (ESG) risks, the package foresees rules that aim at enhancing the management of those risks by banks.

The package also includes measures that do not belong to the implementation of the Basel III standards. This is the case of the harmonisation of certain minimum requirements targeting third-country branches (TCBs) based in the EU and the modalities for their supervision. While the objective of such harmonisation is to minimise the home-host problem and to ensure a level playing field by avoiding different NCAs within the EU applying a laxer or more stringent supervision of TCBs; the key component of these measures is the possibility for NCAs to require a third-country group to turn its EU-based branches into subsidiaries. It is widely known that subsidiaries are supervised more closely and are subject to more stringent requirements. However, introducing this possibility could be perceived as a sort of regulatory retaliation in a similar way to the rules requiring the establishment of Intermediate Parent Undertakings (IPUs). In fact, the establishment of IPUs is not only required by third-country groups operating in the EU but also by EU-based banks operating outside of the EU, as for example in the US or in the United Kingdom. Concerning the latter country, the regulatory retaliation could be considered as a legacy reaction to Brexit but also covering the need to ensure that foreign banks based in the UK would keep their main operations there while maintaining only their less-severely supervised branches all over the EU and, especially, in those Member States (MS) with a less stringent supervision, a dynamic which fuels the existing unlevel playing field. It must be highlighted that these requirements will not apply to all TCBs based in the EU as there are certain thresholds, based for example on size, which have been subject to strong criticism both from the point of view of the banking sector and from some EU MS.


Pier Mario Lupinu holds a PhD in Banking and Finance Law at the University of Luxembourg and the Roma Tre University (Italy) and is a Young Researcher at the European Banking Institute. His research focus includes banking supervision and resolution, payment systems, digital currencies and sustainability issues. He is the author, most recently, of the book chapter, “From Branches to Subsidiaries: Post-brexit Enforcement of Subsidiarisation in the European Union.”


Credits: © European Union 2023 – Source : EP


The views expressed in this blog reflect the position of the author and not necessarily that of the REBUILD Centre Blog.

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The views expressed in this blog reflect the position of the author and not necessarily that of the REBUILD Centre Blog.