New EU rules to strengthen banks' resilience

The European Commission on Wednesday adopted a review of EU banking rules, marking the final step in the implementation of the Basel III agreement. It’s designed to make banks more resilient to future economic shocks, while contributing to Europe’s recovery from the Covid-19 pandemic and the transition to climate neutrality.
In the aftermath of the 2008 financial crisis, regulators from 28 jurisdictions across the globe, within the Basel Committee on Banking Supervision (BCBS), agreed on a new international standard for strengthening banks, known as Basel III. The EU has already implemented the vast majority of these rules, which is why EU banks remained resilient during the Covid-19 crisis and continued lending.
Wednesday’s reforms complete the post-financial crisis agenda with a view to substantially boosting the competitiveness and sustainability of the EU’s banking sector.
“Banks have an essential role to play in the recovery and it is in all our interests that EU banks are resilient going forward,” said Mairead McGuinness, EU Commissioner responsible for Financial Services, Financial Stability and Capital Markets Union. “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.”
The proposal aims to ensure 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. It limits the overall impact on capital requirements to what is necessary, which is expected to maintain the competitiveness of the EU banking sector.
Wednesday’s proposal will also require banks to systematically identify, disclose and manage ESG risks as part of their risk management, including regular climate stress testing by both supervisors and banks. All banks will have to disclose the degree to which they are exposed to ESG risks.
In addition, the package establishes a set of rules for supervisors to assess whether senior staff have the requisite skills and knowledge for managing a bank. As a response to the WireCard scandal, for example, supervisors will be equipped with better tools to oversee fintech groups, including bank subsidiaries.
“Harmonised rules were necessary to assess whether board members and key function holders are suitable for their duties,” said Didier Reynders, Commissioner for Justice. “Today’s adopted rules will clarify the respective obligations of credit institutions and competent authorities. They will then ensure consistency at EU level and will ultimately contribute to the increased robustness of banks.”
The legislative package will now be discussed by the European Parliament and Council.
Photo by Guillaume Périgois on Unsplash