COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal amending: - Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms; - Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms; - Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms; - Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund
Date: 2016-11-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: company in difficulties, credit institution, economic stabilisation, financial aid, financial intervention, financial services, financial solvency, investment company, monetary crisis

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 24.11.2016  SWD(2016) 377 final/2   CORRIGENDUM This document replaces SWD(2016) 377 final of 23.11.2016. Insertion of cross-references COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal amending: - Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms; - Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms; - Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms; - Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain  investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund {COM(2016) 850 final} {COM(2016) 851 final} {COM(2016) 852 final} {COM(2016) 853 final} {COM(2016) 854 final} {SWD(2016) 378 final}  
 
 
Table of contents 

1. 

INTRODUCTION ....................................................................................................... 4 

2.  PROBLEM DEFINITION .......................................................................................... 8 

2.1.  Excessive reliance on short-term funding ....................................................... 10 
2.2.  Excessive leverage ........................................................................................... 11 
2.3. 
Inadequate calibration of risk weights for exposures to SMEs ....................... 13 
2.4.  Weaknesses  to  the  regulatory  framework  for  loss  absorption  and 

recapitalisation capacity .................................................................................. 15 
2.5. 
Inappropriate level of capital requirements against trading activities ............. 17 
2.6.  Problems on remuneration rules ...................................................................... 18 
2.7.  Problems on insolvency ranking of unsecured bank debt instruments ............ 20 
2.8.  Lack of effectiveness of the current rules on moratorium ............................... 21 
2.9. 
Insufficient proportionality of the current rules .............................................. 24 
2.10.  Consequences from the baseline scenario ....................................................... 25 

3.  OBJECTIVES ........................................................................................................... 30 

3.1.  General, specific and operational objectives ................................................... 30 
3.2.  Consistency of the objectives with other EU policies ..................................... 33 
3.3.  Consistency of the objectives with fundamental rights ................................... 33 
3.4.  Subsidiarity ...................................................................................................... 34 

4.  POLICY OPTIONS AND ANALYSIS OF IMPACTS ............................................ 35 

4.1.  On excessive reliance on short-term funding .................................................. 35 
4.2.  On excessive leverage ..................................................................................... 40 
4.3.  On inadequate calibration of risk weights on SME exposures ........................ 42 
4.4.  On  weaknesses  to  the  regulatory  framework  for  loss  absorption  and 

recapitalisation capacity .................................................................................. 45 

4.5.  On  inappropriate  level  of  capital  requirements  against  trading 

activities ........................................................................................................... 51 
4.6.  On problems on remuneration rules ................................................................ 60 
4.7.  On problems on insolvency ranking ................................................................ 64 
4.8.  On lack of effectiveness of the current rules on moratorium .......................... 67 
4.9.  On insufficient proportionality of the current rules ......................................... 69 
4.10.  The choice of the instrument ........................................................................... 71 

5.  THE CUMULATIVE IMPACTS OF THE ENTIRE PACKAGE ........................... 72 

Introduction ..................................................................................................... 72 

5.1. 
5.2.  Quantitative assessment of benefits and costs related to FRTB and the 

LR .................................................................................................................... 73 

2 

 
 
 
 
5.3. 
Impact of the preferred options on administrative costs ................................. 76 
5.4.  The impact on SMEs ....................................................................................... 77 
Impact on third countries ................................................................................. 78 
5.5. 

6.  MONITORING AND EVALUATION ..................................................................... 78 

GLOSSARY ...................................................................................................................... 81 

ANNEX 

1.  PROCEDURAL 

ISSUES  AND  CONSULTATION  OF 

INTERESTED PARTIES .......................................................................................... 83 

Possible  impact  of  the  CRR/CRD  IV  on  financing  of  the  economy  ("CRR 

consultation") ................................................................................................... 83 
Call for Evidence ....................................................................................................... 86 
Targeted consultations ............................................................................................... 89 

ANNEX  2.  PARTIAL  EVALUATION  OF  THE  EXISTING  POLICY 

FRAMEWORK ......................................................................................................... 95 

Annex 2.1. Evaluation of rules on remuneration ....................................................... 96 
Annex 2.2. Impact on the bank financing of the economy, including SMEs ............ 98 

ANNEX  3.  ASSESSMENT  OF  OTHER  PROPOSED  AMENDMENTS  TO 

CRR/CRD IV/BRRD .............................................................................................. 104 

Annex  3.1.  Calculation  of  derivative  exposures  in  the  counterparty  credit 

risk framework ............................................................................................... 105 
Annex 3.2. Disclosure ............................................................................................. 110 
Annex 3.3. Supervisory reporting ........................................................................... 112 
Annex 3.4. Pillar 2 additional capital ...................................................................... 114 
Annex 3.5. Equity investments into funds .............................................................. 116 
Annex 3.6. Bank financing of infrastructure projects ............................................. 118 
Annex 3.7. Large exposure framework (alignment with Basel rules) ..................... 121 
Annex 3.8. Exemptions on large exposures ............................................................ 124 
Annex 3.9. Rules on exposures to CCPs ................................................................. 126 
Annex 3.10. Contractual recognition of bail-in (article 55 BRRD) ........................ 129 
Annex 3.11. Changes to MREL .............................................................................. 132 
Annex 3.12. Application of IFRS 9 by the EU banks ............................................. 134 
Annex  3.13.  Comparative  analysis  of  characteristics  of  EU  G-SIIs  and  O-

SIIs ................................................................................................................. 137 

Annex 3.14. Analysis of a leverage ratio requirement for different business 

models and exposure types ............................................................................ 139 

ANNEX 4. ESTIMATED IMPACT OF POLICY OPTIONS ........................................ 142 

ANNEX 5. BACKGROUND TO CUMULATIVE IMPACT ASSESSMENT ............. 151 

Annex 5.1. Estimation of costs of FRTB and LR using the QUEST model ........... 151 
Annex  5.2.  Estimation  of  benefits  of  FRTB  and  LR  using  the  SYMBOL 

model ............................................................................................................. 154 

ANNEX 6. IMPLEMENTATION OF PROPOSED MEASURES ................................ 168 

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1. 

INTRODUCTION 

Financial crises, particularly when they involve the banking sector, can result in huge costs, both 
in terms of direct fiscal costs and associated costs for the real economy. The 2007-2008 financial 
crisis was a case in point. Between the years 2008 and 2014 EU governments used almost €2 
trillion in State aid (an amount equal to almost 14% of the 2014 EU GDP) to rescue the financial 
sector1. The losses to economic activity due to the crisis were also significant. Some estimates2 
show that the present value of cumulative output losses across the EU may amount to 50-100 % 
of annual pre-crisis EU GDP (about €6-12.5 trillion), if not more. For the euro area alone, output 
is now 20% below the level it would have achieved had the trend growth in the previous 15 years 
continued after 2007. Furthermore, according to some estimates, the present value of the total 
loss of output until 2030 would represent more than three times the whole economic output of the 
euro area in 20083.  

In response to the crisis the EU implemented a substantial reform of the financial services 
regulatory framework in order to enhance the resilience of EU institutions (the term institution is 
used to refer to both credit institutions (i.e. banks) and investment firms, as both are subject to the 
requirements of the CRR and the CRD IV) and thus increase EU financial stability. Two 
legislative initiatives targeted institutions, in particular: 

  Regulation (EU) No 575/2013, also known as the Capital Requirements Regulation (CRR)4 
and  Directive  2013/36/EU,  also  known  as  the  fourth  revision  of  the  Capital  Requirements 
Directive  (CRD  IV)5  enhanced  prudential  requirements  for  institutions  by  implementing 
global  standards  adopted  by  the  Basel  Committee  on  Banking  Supervision  (BCBS)6  in 
December 2010; 

  Directive 2014/59/EU, also known as the Bank Recovery and Resolution Directive (BRRD)7 
and  Regulation  (EU)  No 806/20148  on the  Single  Resolution  Mechanism  introduced  a  new 
recovery  and  resolution  framework  for  dealing  with  institutions  that  are  failing  or  likely  to 
fail,  including  a  minimum  requirement  for  own  funds  and  eligible  liabilities  (MREL).  The 
main  objectives  of  the  Directive  are  to  maintain  financial  stability  and  minimise  losses  for 
society in general and tax payers in particular in case an institution fails. 

1   See http://ec.europa.eu/competition/state_aid/scoreboard/financial_economic_crisis_aid_en.html. 
2   Economic Review of the Financial Regulation Agenda, Commission Staff Working Document, 2014, p. 

42.  

3   Lecture  by  Vítor  Constâncio,  Vice-President  of  the  ECB,  at  the  Conference  on  “European  Banking 

Industry: what’s next?”, organised by the University of Navarra, Madrid, 7 July 2016 

4   Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 
648/2012 (OJ L 321, 26.6.2013, p. 6)   

5   Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the 
activity of credit institutions and the prudential supervision of credit institutions and investment firms, 
amending  Directive  2002/87/EC  and  repealing  Directives  2006/48/EC  and  2006/49/EC  (OJ  L  176, 
27.6.2013, p. 338). 

6  Those standards are known as the Basel III framework or Basel III. 
7   Directive 2014/59/EU  of  the European  Parliament  and  of  the  Council of 15  May 2014 establishing  a 
framework  for  the  recovery  and  resolution  of  credit  institutions  and  investment  firms  and  amending 
Council  Directive  82/891/EEC,  and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC, 
2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) 
No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190) 

8  Regulation  (EU)  No  806/2014  of  the  European  Parliament  and  of  the  Council  of  15  July  2014 
establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain 
investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund 
and amending Regulation (EU) No 1093/2010 

4 

 
 
                                                            
The new EU regulatory framework has contributed to reinforcing financial stability, restoring 
investor confidence and allowing institutions to play their fundamental role in supporting 
economic recovery. The adoption of the Basel III framework at international level, and of the 
legislative initiatives mentioned above at EU level, did not mark the end of the post-crisis reform. 
Work continued on several elements which were left outstanding at the time. For example, while 
Basel III introduced a requirement to calculate and disclose a leverage ratio, it did not introduce a 
capital requirement based on that leverage ratio; that was to be introduced in 2018. Similarly, 
although the BCBS had agreed on the necessity of introducing liquidity requirements, the Basel 
III framework actually did not provide detailed rules for those requirements; those were 
published later. Moreover, the BCBS has carried out a fundamental review of the trading book 
framework to address the flaws of the existing rules unveiled by the financial crisis. 

The BCBS was not the only international body involved in the post-crisis reform. Following a 
call from G20 Leaders, the Financial Stability Board (FSB) in November 2015 issued standards9 
aimed at ensuring that global systemically important banks (G-SIBs) have sufficient loss-
absorbing capacity to be recapitalised in case they fail. This work has led to the introduction of 
standards on total loss-absorbing capacity (TLAC). 

At EU level, the Commission carried out various initiatives in order to assess whether the 
existing prudential framework and the upcoming reviews of global standards were the most 
adequate instruments to ensure that EU institutions would continue to provide the necessary 
funding to the EU economy.  

In particular, the Commission launched in July 2015 a public consultation on the possible impact 
of the CRR and the CRD IV on bank financing of the EU economy with a particular focus on the 
financing of micro, small and medium-sized enterprises (SMEs) and of infrastructure and in 
September 2015 a Call for Evidence (CfE)10 covering EU financial legislation as a whole. The 
two initiatives sought empirical evidence and concrete feedback on i) rules affecting the ability of 
the economy to finance itself and growth, ii) unnecessary regulatory burdens, iii) interactions, 
inconsistencies and gaps in the rules, and iv) rules giving rise to unintended consequences. In 
addition, the Commission carried out specific analysis on rules relating to remuneration11 and on 
the proportionality of the rules contained in the CRR and the CRD IV.12 Finally, the Commission 
contracted a study to assess the impact of CRR on the bank financing of the economy13. 

All the initiatives mentioned above have provided clear evidence of the need to update and 
complete the current rules in order i) to reduce further the risks in the banking sector and thereby 
reduce the reliance on State aid and taxpayers' money in case of a crisis, and ii) to enhance the 

9   November  2015  by  the  Financial  Stability  Board:  http://www.fsb.org/wp-content/uploads/20151106-

TLAC-Press-Release.pdf 

10   See 

http://ec.europa.eu/finance/consultations/2015/long-term-finance/docs/consultation-
document_en.pdf  and  http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-
review/docs/consultation-document_en.pdf.  

11   Commission Report COM(2016)510 Report from the Commission to the European Parliament and the 
Council  of  28  July  2016  –  Assessment  of  the  remuneration  rules  under  Directive  2013/36/EU  and 
Regulation (EU) No 575/2013. 

12   The  Call  for  Evidence  was  intended  to  cover  the  entire  spectrum  of  the  financial  services  regulation. 
The impact assessment address issues limited to the areas of banking only. Other issues involving other 
segments of the EU financial legislation will be dealt with separately. 

13   Insert the link to the study 

5 

 
 
 
                                                            
ability of institutions to channel adequate funding to the economy. More specifically, the 
evidence that was collected demonstrates that the existing EU rules:14 

  are not able to cover all risks that institutions face; 

  are not always sufficiently risk-sensitive and able to take into account adequately all relevant 

risk drivers; 

  are  too  complex  or  too  burdensome  and  create  excessive  compliance  costs  for  smaller 

institutions; 

  are not always formulated in a sufficiently clear way and can give rise, in places, to different 

interpretations and applications; and 

  do not always support economic growth. 

In order to enhance the resilience of EU institutions and thereby increase financial stability, this 
impact assessment considers various options for incorporating the remaining elements of the 
regulatory framework recently agreed by the BCBS and for enhancing legal certainty, especially 
in the area of resolution. The options considered in this impact assessment aim at: 

  better addressing the long-term funding risk; 

 

 

reducing excessive leverage; 

increasing the loss absorption and recapitalisation capacity of global systemically important 
institutions (G-SIIs); 

  better addressing market risks by increasing the risk sensitivity of the existing rules; and 

 

increasing legal certainty and enhancing convergence among Member States (MS) in the area 
of insolvency law and restructuring proceedings, particularly in the area of creditor hierarchy 
and the use of the moratorium tool. 

Many of the measures considered in this impact assessment are included in the roadmap 
developed by the Commission in response to a request from the Council to complete the Banking 
Union. These measures are seen as flanking measures in the context of the establishment of the 
European Deposit Insurance Scheme (EDIS).15 

When contemplating the introduction of the above measures, a number of options contained in 
this impact assessment explore the possibility of adjusting the calibration of some of the 
new/revised Basel standards (e.g. the leverage ratio, the market risk rules) to reflect better the 
specificities of EU institutions and the EU economy. The aim of those adjustments is to avoid 
situations in which the strengthening of prudential requirements could lead to insufficient lending 
to the economy. 

Furthermore, some of the other options related to the above measures explore potential 
adjustment aimed at mitigating potential disincentives for certain activities carried out by 
institutions which are important for the efficient functioning of capital markets. This is necessary 
because, in addition to their fundamental role of providing finance to the economy, institutions 
are also important actors on capital markets, as issuers of or investors in securities and other 

14   Respondents to the CfE also argued that rules agreed by the BCBS but not yet included in the CRR and 

the CRD IV would have a disproportionate impact on certain activities and business models. 

15   Communication from the Commission to the European Parliament, the Council, the European Central 
Bank, the European Economic and Social Committee and the Committee of the Regions "Towards the 
completion  of  the  Banking  Union",  COM/2015/0587  final.  See  also  the  Council  conclusions  on  a 
roadmap to complete the Banking Union of 17/6/2016. 
6 

 
 
 
                                                            
financial instruments (e.g. covered bonds, securitisations). They also play an important role in 
facilitating the efficient functioning of those markets by providing essential services, such as 
underwriting or market making. The Commission has already tabled a proposal16 to increase the 
efficiency and soundness of the EU securitisation market including measures to enhance the role 
of institutions in this market, both as investors and as issuers. The abovementioned options 
consider additional ways in which to foster the creation of a Capital Markets Union (CMU). 
Specifically, they are looking at how the measures would need to be adjusted in order to: 

 

 

 

avoid  disproportionate  capital  requirements  for  trading  book  positions,  including  those 
related to market making activities; 

reduce  the  costs  of  issuing/holding  certain  instruments  (covered  bonds,  high  quality 
securitisation instruments, sovereign debt instruments, derivatives for hedging purposes); 

avoid  an  increase  in  the  costs  of  providing  services  to  clients  for  trades  cleared  by  central 
counterparties (CCPs).  

Lastly, some of the options related to the abovementioned measures contemplate adjustments 
aimed at preventing any potential unfavourable treatment for business areas which are 
particularly important for cross-border trade. Specifically, they explore the possibility of 
introducing a more risk-sensitive treatment for trade finance instruments within the contemplated 
rules on the net stable funding ratio (NSFR) and on the leverage ratio. 

In addition to the abovementioned measures aimed at enhancing the resilience of EU institutions, 
this impact assessment also contemplates measures aimed at: 

 

 

enhancing the risk-sensitivity of capital requirements for exposures to SMEs; 

reducing  the  administrative  costs  linked  to  some  rules  in  the  area  of  remuneration  (namely 
those on deferral and pay-out in instruments); and 

  making  the  rules  contained  in  the  CRR  and  CRD  IV  more  proportionate  and  hence  less 

burdensome for smaller and less complex institutions. 

Finally, in addition to all the measures described above, which would constitute the main 
building blocks of a potential proposal by the Commission and which are expected to have the 
largest impact on EU institutions in case they would be introduced, this impact assessment also 
considers the possibility of introducing several other measures. These measures are included in 
the impact assessment for reasons of completeness, as their introduction is seen as largely 
uncontroversial and straightforward and would generally have a limited impact. These measures 
would: 

 

 

 

implement a number of changes, most of them agreed at international level, to better specify 
the technical aspects of certain existing rules (calculation of the exposure value of derivatives 
in the counterparty credit risk  framework, disclosure requirements, capital requirements for 
equity investments in funds, large exposures limits, rules on exposures to CCPs, changes to 
MREL, application of International Financial Reporting Standard 9 (IFRS 9)); 

clarify  existing  rules  on  the  basis  of  the  outcomes  of  the  CfE  or  other  consultations  with 
stakeholders  (Pillar  2  requirements,  exemptions  from  large  exposures  limits,  supervisory 
reporting, contractual recognition of bail-in); or 

enhance  the  overall  consistency  of  the  treatment  of  investments  in  infrastructure  projects 
between the CRR and CRD IV on one side and Solvency II on the other. This would increase 

16   See http://ec.europa.eu/finance/securities/securitisation/index_en.htm for more details. 

7 

 
 
 
                                                            
the contribution of the banking sector to the goal of mobilising additional private finance in 
the context of the Commission's Investment Plan for Europe17.  

For all the measures listed above the review at global or EU level has been already completed. In 
addition, there is widespread acceptance among stakeholders about the need to introduce those 
measures. In view of this, it is imperative to introduce these measures now in the interest of legal 
certainty and for the creation of a robust financial sector. This would allow the EU to meet the 
deadline agreed at global level for certain standards (e.g. on TLAC18, leverage ratio19, NSFR20) 
and fulfil the timeline requested by the Council for the risk-reduction measures included in the 
roadmap for the completion of the Banking Union21. Continuing work on risk-reduction in the 
Banking Union remains a top priority for the Commission22. 

In order to give institutions sufficient time to adapt to the new regulatory framework it is of the 
outmost importance to provide them with the necessary legal certainty regarding the exact shape 
of the new rules as quickly as possible. Institutions should also benefit without delay from the 
alleviations of the compliance burden envisaged by some of the measures, especially given the 
current economic context in the EU. 

The list of preferred options responding to the problems analysed in the impact assessment as 
well as the indicative list of legislative amendments is presented in annex 6. 

This impact assessment does not include measures stemming from a strategic review of Basel III 
on the methods used to calculate the risk-based capital requirements for credit risk and 
operational risk as those changes are still under discussion at the BCBS level. The review is 
expected to be completed by the end of 2016. The Commission will consider whether and how to 
implement those measures once they are adopted at international level. 

2.  PROBLEM DEFINITION 

Given the limited time elapsed since its entry into force, a fully-fledged evaluation of the CRR, 
the CRD IV and the BRRD could not be carried out yet. Nevertheless, the need of amending 
these instruments in order either to introduce new provisions or to review the existing ones has 
emerged as a result of the work carried out by the BCBS, obtaining evidence on the national 
implementation of the Directives or as an outcome of specific consultations and studies, solicited 
by the Commission (for more details see annexes 2 and 6). 

The following issues have been identified in relation to the existing rules contained in the CRR 
and the CRD IV: 

 

they do not cover all risks that institutions face (e.g. the CRR currently does not 
foresee  specific  capital  requirements  to  limit  the  leverage  of  institutions  or 

17   Communication "An Investment Plan for Europe", COM(2014) 903 final 
18   1  January  2019,  agreed  in  November  2015  by  the  Financial  Stability  Board:  http://www.fsb.org/wp-

content/uploads/20151106-TLAC-Press-Release.pdf  

19   1  January  2018,  agreed  in  January  2016  by  members  of  the  Basel  Committee’s  oversight  body,  the 

Group of Governors and Heads of Supervision (GHOS): http://www.bis.org/press/p160111.htm 

20   1 

January  2018,  agreed 

in  October  2016  by  members  of 

the  Basel  Committee: 

http://www.bis.org/bcbs/publ/d295.pdf  

21   Council  conclusions  of  17  June  2016  on  a  roadmap 

to  complete 

the  Banking  Union: 

http://www.consilium.europa.eu/press-releases-pdf/2016/6/47244642837_en.pdf    

22   State of the Union 2016, page 28, priority 5. 

8 

 
 
 
                                                            
specific  funding  requirements  to  limit  the  maturity  mismatches  between  assets 
and liabilities); 

 

they are not always sufficiently risk sensitive (e.g. one of the simpler approaches 
used  by  institutions  to  calculate  the  size  of  their  derivatives  exposures  does  not 
fully take into account the risk reduction benefits of netting agreements); 

  some of them are too complex or too burdensome for institutions (e.g. reporting 
and  calculation  methods),  create  in  some  cases  excessive  compliance  costs 
instruments),  or  may 
(remuneration  rules  on  deferral  and  pay-out 
disproportionately affect certain activities or business models (including for new 
measures introduced to cover existing risks such as the leverage ratio); 

in 

  some  of  them  are  not  formulated  in  a  sufficiently  clear  way  and  give  rise  to 
different  interpretations  (e.g.  there  are  different  interpretations  on  the  way  in 
which the capital requirements in the CRR and the institution-specific capital and 
buffer requirements in the CRD IV interact). 

As regards the BRRD existing rules, the following issues have been identified: 

 

 

 

certain MREL eligibility criteria are loosely defined, leaving room for interpretation (e.g. 
inclusion of large corporate deposits and certain types of structured notes); 
the  adoption  of  the  FSB's  TLAC  standard  for  global  systemically  important  banks  (G-
SIBs) would create a misalignment with the existing MREL calibration conditions and a 
parallel standard for G-SIBs in the EU; 
regarding the insolvency ranking of unsecured debt, the requirement for subordination of 
certain unsecured senior claims is missing from the current text;  

  Lack of clarity on supervisory reporting and public disclosure of items that meet MREL 

 

eligibility criteria; 
implementation issues with Article 55 BRRD on recognition of bail-in in third countries 
which  was  too  prescriptive  and  led  to  the  withdrawal  of  EU  banks  from  business 
contracts with certain third countries; 
on moratorium powers, BRRD already contains provisions allowing the suspension of 
payment obligations but these have been implemented in very different ways at national 
level and may not provide a sufficiently consistent application with respect to important 
elements such as the scope, phase of application, trigger conditions and duration of the 
suspension. 

Sections 2.1 to 2.9 present the most important problems addressed by this impact assessment and 
concern the following areas: 

  stable funding of institutions; 

  capital requirements for risk of excessive leverage; 

  capital requirements for exposures to SMEs; 

 

 

remuneration; 

insolvency ranking and moratorium in relation to the BRRD; 

  proportionality. 

For areas for which the solution to the identified problem is seen as largely straightforward and 
uncontroversial and as having limited impact, are presented in annex 3. They concern: 

  capital requirements for derivative exposures; 

9 

 
 
  disclosure and supervisory reporting to primarily address proportionality issues; 

 

institution-specific (Pillar 2) capital requirements; 

  equity investments into funds; 

  capital requirements for specialised lending exposures (infrastructure); 

 

large exposure limits; 

  capital requirements for exposures CCPs; 

  contractual recognition of bail-in and changes to MREL;  

  application of IFRS 9 by EU institutions. 

2.1.  Excessive reliance on short-term funding 

When an institution takes decision regarding its balance sheet structure, it does not take into 
account all the impacts of its choice on the rest of the economy. In addition, private incentives to 
limit excessive reliance on unstable funding of core (often illiquid) assets are weak. Institutions 
may have private incentives to expand their balance sheets, often very quickly, relying on 
relatively cheap and abundant short-term wholesale funding. Rapid balance sheet growth 
increases the likelihood that individual institutions will face funding problems in case of liquidity 
shocks, and weakens their ability to respond to these shocks when they occur. As shown by the 
examples below, this fragility can have systemic implications when institutions fail to internalise 
the costs associated with large funding gaps. This can have negative consequences on financial 
stability in case of economic shocks. 

During the financial crisis, institutions made use of excessive amounts of short-term wholesale 
funding to finance their long term activities. When short-term funding became unavailable, 
institutions were either forced to request emergency liquidity assistance from central banks or 
engage in 'fire sales' of assets, triggering a downward spiral in prices and eroding their liquidity 
positions, with the ultimate consequence of driving a number of them into insolvency. Some 
credit institutions also had to be bailed-out by their governments. For example Hypo Real Estate 
Holding AG (HRE) had - through a subsidiary (Depfa Bank Plc) - funded its long term public 
sector and infrastructure loans either on the interbank market or through other short-term 
wholesale funding. Following the Lehman Brothers bankruptcy, it was unable to refinance itself 
on the wholesale market and requested State support. Ultimately, the state guaranteed more than 
€120 billion of HRE's liabilities and had to inject around €10 billion of capital to nationalise it23. 
Similarly, Northern Rock faced in the second half of 2007 substantial outflows of wholesale 
funds as maturing short-term loans and deposits used to fund its long-term assets were not 
renewed. This combined with the inability to tap the securitisation and covered bond markets led 
to a request for liquidity support from the Bank of England. The public announcement of this 
request led to a run on Northern Rock. The full year net outflow of wholesale funding amounted 
to £11.7 billion and by end-2007 a loan from the Bank of England amounted to approximately 
£28.5 billion24. Ultimately, in 2008, Northern Rock was nationalised. In both cases these crisis 
periods were preceded by years of extensive long-term assets growth without a similar increase in 
stable funding sources. 

23 Source: European Commission 
24  See  Song  (2009):  Reflections  on  Northern  Rock:  The  Bank  Run  that  Heralded  the  Global  Financial 

Crisis, Journal of Economic Perspectives, Volume 23, Number 1,Winter 2009, Pages 101–119 

10 

 
 
                                                            
The CRR introduced a reporting requirement and a general requirement that long-term assets 
have to be adequately met with a diversity of stable funding instruments (liabilities) under both 
normal and stressed conditions. More detailed requirements to cover funding risk were not set at 
that time at EU level given that the BCBS was still in the process of completing its work to 
specify the NSFR requirement. Therefore, the current European regime does not provide an 
adequate framework to ensure that institutions’ assets are sufficiently stably funded by their 
liabilities. The BCBS completed its work and published the NSFR standard in October 2014. In 
December 2015, the EBA submitted a report to the Commission on whether and how it would be 
appropriate to ensure that institutions use stable sources of funding and on the impact of such a 
requirement. 

2.2.  Excessive leverage 

The financial crisis has shown that institutions' leverage can increase to unsustainable levels and 
have a pro-cyclical effect on the financial system. In the run up to the crisis, many investors, 
including institutions, actively sought higher yields as high levels of available liquidity resulted 
in risk premium falling to historically low levels. Low interest rates, combined with issues of 
moral hazard, pushed them to search for higher returns, whether through an increase in leverage 
or investment in more risky financial products. This caused a high level of financial fragility of 
individual institutions as well as the financial system as a whole. When prices of financial assets 
started to fall, institutions had to mark those assets to market thus recognising the losses incurred. 
This in turn forced institutions to de-leverage by selling assets in order to minimise regulatory 
capital requirements and meet margin calls from their counterparties. This prompted further 
decreases in asset prices. In short, institutions’ leverage showed a pro-cyclical pattern: significant 
increase of leverage in financial booms and strong de-leveraging in financial downturns25. 

Equally important, it was observed that institutions that were severely affected by this mechanism 
showed strong risk-based capital ratios before the crisis. This is due to the fact that risk-based 
capital requirements tend to vary over the economic cycle: they decrease as borrowers' 
creditworthiness improves during economic expansions and increase during economic downturns 
as borrowers' creditworthiness deteriorates. The combination of incentives for higher leverage 
before the crisis on one side and the irresponsiveness of regulatory capital requirements to the 
build-up of risk at the macro level on the other side enabled institutions to grow their balance 
sheets. While the countercyclical capital buffer introduced by the CRD IV aims at addressing this 
pro-cyclicality to a certain extent, it is not considered sufficient as it leaves certain discretion in 
setting the buffer rates. 

Moreover, as shown by the recent crisis it is difficult to quantify systemic risk as well as to model 
accurately the different types of risks, in particular at the micro-level (i.e. at the level of the single 
institution). This makes risk-based capital measures less reliable and calls for the introduction of 
a simpler and non-risk-sensitive back-stop measure. The misperception of risk may be 
exacerbated by a strong industry-wide drive for profit, bonuses and moral hazard due to implicit 
safety nets. Hence during favourable macro-economic conditions, institutions would be prone to 

25 See, for example, Haldane, A (2015): Multi-polar regulation, International Journal of Central Banking, 
Volume  11(3);  Kalemli-Ozcan,  Sorensen  and  Yesiltas  (2011):  Leverage  across  firms,  banks,  and 
countries, NBER working paper No. 17354; Altunbas, Manganelli and Marquez-Ibanez (2011): Bank 
risk during the financial crisis: Do business models matter?, ECB Working Paper No. 1394; Beltratti 
and Stulz (2012): The credit crisis around the globe: Why did some bank perform better?, Journal of 
Financial  Economics  105,  1-17;  Blundell-Wignall  and  Roulet  (2012):  Business  models  of  banks, 
leverage and the distance-to-default, OECD Journal: Financial Market Trends 2012/2 

11 

 
 
                                                            
engage in a rapid expansion of their balance sheets without due consideration about implications 
for system-wide financial stability. As the ex-ante identification of systemic risks and formation 
of asset-bubbles is a very complex exercise, the introduction of a 'hard' leverage ratio would also 
help alleviate an excessive expansion of leverage. 

Figures 1 and 2 provide an indication of how leverage has evolved for a selected number of credit 
institutions in the years prior to the financial crisis compared to risk based capital requirements. 
As can be seen the leverage of European credit institutions had increased roughly by half since 
1995. Had the leverage ratio requirement been in place before the onset of the financial crisis 
there would have been fewer failures during the crisis26. 

Figure 1. Total assets to total equity 

Figure 2. Risk weighted assets to Tier 1 capital 

Sources: CGFS (2009) 

Sources: CGFS (2009) 

The leverage ratio framework was introduced in December 2010 by the BCBS in order to: i) 
restrict the build-up of leverage in the banking sector (and hence avoid destabilising deleveraging 
processes that can damage the broader financial system and the economy) and ii) reinforce the 
risk-based requirements with a simple, non-risk based “backstop” measure. The framework did 
not foresee an immediate introduction of a capital requirement based on the leverage ratio. 
Instead, it set out an expectation that such requirement would enter into force in 2018. In the EU, 
the leverage ratio was introduced in the prudential framework in 2013. In line with the BCBS 
decision, it was not introduced as a capital requirement that institutions must meet. Rather, the 
CRD IV included it in the Pillar 2 framework, while the CRR introduced requirements to 
compute it, report it to supervisors and, from January 2015, to disclose it publicly. This has set 
regulatory expectations for institutions which has already had a positive impact on the evolution 
of the leverage ratio in the EU: the average level of the leverage ratio for Group 1 and Group 2 
credit institutions27 was above 5% and 4.5% respectively as of December 2015 (see figure 3). 

Figure 3. Evolution of the leverage ratio for Group 1 and Group 2 credit institutions 

26   See Haldane, A. G., & Madouros, V. (2012). The dog and the frisbee. Federal Reserve Bank of Kansas 

City’s 36th Economic Policy Symposium, p. 1–36. 

27   Group 1 banks are banks with Tier 1 capital in excess of EUR 3 billion and internationally active. All 

other banks are categorised as Group 2 banks. 

12 

 
 
 
 
 
 
 
 
                                                            
Source: CRD IV – CRR / Basel III monitoring exercise – results based on data as of 31 December 2015, EBA, p. 19, Figure 4. 

In January 2016, members of the Basel Committee’s oversight body, the Group of Governors and 
Heads of Supervision (GHOS)28 agreed on a Tier 1 definition of capital and a minimum level of 
3% for the leverage ratio with the view of making it a Pillar 1 requirement by 1 January 2018. 
This international agreement confirmed the market and industry expectations of a binding 3% 
leverage ratio. However, only when imposed as a hard capital requirement which must be met at 
all times the leverage ratio will be an effective measure requiring institutions to constantly 
manage their balance sheet in a way that will prevent excessive de-leveraging during downturns. 
A non-binding measure can simply not bring about the same prudential rigour. Furthermore, 
given the scope for discretion allowed by the current measures for Member States and 
supervisors in their application of the leverage ratio to institutions, the introduction of 
harmonised minimum binding requirements across the EU is deemed beneficial in terms of 
consistency, effectiveness and promoting coherence in the regulation of institutions as in 
principle all would have to meet the 3% requirement. 

2.3.  Inadequate calibration of risk weights for exposures to SMEs  

SMEs are the backbone of the EU economy and an important source of employment and growth 
for the EU economy. They remain largely reliant on bank lending (e.g., credit lines, leasing) to 
finance their activities. In fact, other sources of financing, such as equity finance and debt 
issuance (e.g. bonds), although available, are not as widely used, or are only used through special 
public support schemes.  

Following the financial crisis, bank lending to SMEs has suffered a significant drop in volumes, 
from a peak of €95 billion in mid-2008 to approximately €54 billion in 2013/2014 and currently 
hovers around €60 billion, which is still almost 20% below the level observed in 2003. Lending 
to larger corporates, on the other hand, after reaching a higher peak before the crisis and after 
experiencing a sharper drop thereafter, is roughly back to the volumes observed in 2003 – 2004 
(see figure 4). 

Figure 4. New bank lending to SMEs and larger corporates (EUR million; three-month moving 
average) 

28   Available at http://www.bis.org/press/p160111.htm. 

13 

 
 
 
 
                                                            
Note: SME loans proxied by loans up to and including €1 million; loans to large corporates proxied by 
loans over €1 million. 
Source: ECB MFI interest rate statistics. 

SME are more constrained in receiving external funding also because of their high sensitivity to 
economic cycles and shocks, which due to their greater sectorial and geographical specialisation. 
Moreover, the asymmetry of information which exists between SMEs and potential lenders, is 
particularly acute, and further limits SMEs' ability to switch sources of funding quickly. This 
disadvantage is reflected in higher interest rates on small loans when compared to large loans as 
well as in other forms of credit constraints. A comparison of the average cost of loans in the EU 
shows a significant gap between lending to SMEs and to large firms (see figure 5).  

In addition, unlike large corporations, small companies have limited access to capital markets and 
thus remain disproportionally reliant on banks. The smaller a firm, the more restricted the 
spectrum of potential non-bank funding options (see table 1). Alternative sources of financing are 
shown to be accessible only to larger firms, firms having high credit ratings, and firms located in 
countries with better developed financial markets. Ensuring that SMEs have adequate access to 
finance is therefore a main consideration when setting out policies.  

Figure 5. Yields of and spread between small and large loans, euro area 

Source: ECB  

14 

 
 
 
 
 
 
Table 1. Use of financing instruments by non-financial corporations (percentage averages out of 
total sample over 2009-2014) 

Sources: ECB and European Commission Survey on the access to finance of enterprises; European Central 
Bank (2015c), Non-bank financing for euro area NFCs during the crisis, Box 6 in Economic Bulletin, Issue 
4. 
In  the  light  of  the  overall  increase  in  capital  requirements  and  in  order  to  avoid 
disruptions to lending to SMEs in the aftermath of the financial crisis, Article 501 of the 
CRR introduced a 24% discount to capital requirements for exposures to SMEs, the so-
called  SME  supporting  factor,  but  also  included  a  review  clause  and  asked  EBA  to 
provide a report on the issue by June 2016. EBA published the report in March 201629. It 
provided  evidence  that  the  capital  requirements,  including  the  SME  supporting  factor, 
have  overall  been  consistent  with  the  riskiness of  SMEs.  The  report  also  indicated  that 
the €1.5 million exposure cap for the application of the SME supporting factor was not 
indicative  of  a  change  in  riskiness  of  SMEs.  This  implies  that  SME  exposures  beyond 
€1.5  million  exposure  threshold  have  been  subject  to  too  high  minimum  capital 
requirements  in  comparison  to  other  bank  exposures  classes  and  could  have  likely 
resulted  in  insufficient  lending  to  SMEs30.  The  issue  is  heightened  by  the  current 
environment  of  low  economic  growth  and  high  unemployment  and  thus  requires  to  be 
promptly addressed. 

The issue is also underpinned by the views expressed in the responses to the CRR consultation 
and the Call for Evidence. Some stakeholders, particularly banks, claimed that the overall 
increase in capital requirements had negatively affected their willingness to provide sustainable 
financing to the economy. They also claimed that the systematic risk stemming from exposures to 
SMEs was lower than for exposures to larger corporates, and asked that the SME supporting 
factor should be at least maintained, if not expanded. 

2.4.  Weaknesses  to  the  regulatory  framework  for  loss  absorption  and 

recapitalisation capacity 

The absence of adequate crisis management and resolution frameworks forced governments 
around the world to rescue banks following the financial crisis. The subsequent impacts on public 
finances as well as the undesirable incentive effects of socialising the costs of bank failures have 

29 EBA report on SMEs, March 2016 
30   The main estimate of the transitional effect, taken from the study of May 2016 conducted by London 
Economics using data for the period 1985-2014, shows that for a one percentage point increase in the 
Total Capital Ratio the impact on lending by credit institutions in the EU is -0.8% over one year with 
the implied impact over a three-year period being -1.5%. 

15 

 
 
 
                                                            
underscored the need for a different approach. The G20 leaders have publicly committed not to 
use public funds anymore to bail out banks31.  

Significant steps have been taken in international fora and at the EU level in order to reduce the 
systemic risks of failing banks, through – among others – effective resolution frameworks. A 
cornerstone tool of a robust resolution framework is the “bail-in”: a system which consists of, 
writing down debt or converting debt claims or other liabilities into equity according to a pre-
defined hierarchy. The tool can be used to internally recapitalise an institution that is failing or 
likely to fail, so that its viability is restored. Therefore, shareholders and certain creditors, rather 
than taxpayers, will have to bear the burden of an institution's failure.  

In the EU, these objectives are already covered by the BRRD. The latter harmonises and 
improves the tools for dealing with financial crises across the EU and requires all EU institutions 
to meet a Minimum Requirement for own funds and Eligible Liabilities (MREL). The policy 
objective of MREL is to ensure that institutions have a sufficient amount of bail in-able liabilities 
to allow for smooth and quick absorption of losses and recapitalisation in resolution. After the 
agreement of the BRRD in the EU, the Financial Stability Board (FSB) has developed, in 
consultation with the Basel Committee on Banking Supervision (BCBS), a new international 
standard for G-SIBs32. The standard is intended to end "too-big-to-fail" problem by ensuring the 
adequacy of G-SIBs' total loss-absorbency capacity (TLAC), should they fail. Indeed, absent 
sufficient amounts of readily bail-in-able liabilities, a failure of a G-SIB may either impose large 
costs on the global financial system or necessitate fiscal intervention, which is to be avoided. The 
possible systemic effects, in particular the possible large costs to other market players and the 
economy at large through the contagious effects of interbank exposures, asset fire-sales and 
uncertainty among holders of operating liabilities (e.g. derivative counterparties) are illustrated 
by the Lehman Brothers case. The MREL requirement and TLAC share the objective of ensuring 
that banks have sufficient loss absorption and recapitalisation capacity. TLAC addresses the 
particular global systemic problems posed by G-SIBs worldwide, whereas MREL is part of an 
EU framework to promote an orderly and feasible resolution or winding down for every bank. 
The BRRD framework cannot protect the EU from contagion of the collapse of a third country G-
SIB. The particular global contagion risk and world-wide social costs of a G-SIB's failure by 
contrast require a backstop33 on the minimum requirement on loss absorption and recapitalisation 
capacity to ensure that these G-SIBs hold a sufficient amount of bail in-able liabilities so that 
they can absorb losses internally without worldwide societal implications or a fiscal intervention 
in their favour. As the MREL was designed to be applicable for all types of institutions regardless 
of the global systemic implications of their failure, there is no harmonised minimum requirement 
but the requirement is to be tailored to each institution by the resolution authority.  

31  1  January  2019,  agreed  in  November  2015  by  the  Financial  Stability  Board:  http://www.fsb.org/wp-

content/uploads/20151106-TLAC-Press-Release.pdf 

32   Basel Committee's methodology for assessing and identifying global systemically important banks (G-

SIBs) 

33   In  the  context  of  the  development  of  the  TLAC  standard,  the  FSB  conducted  an  analysis  of  the 
historical  losses  and  recapitalisation  needs  for  13  large  banks  that  failed  or  received  official  support. 
This  report  shows  that  losses  and  recapitalisation  needs  vary  significantly  across  banks.  Total  losses 
and recapitalisation needs in terms of total assets are mostly in the range of 4-6 percent, with outliers 
around 9 percent. In terms of RWAs total losses and recapitalisation needs are mainly in the range of 5-
15  percent  with  outliers  around  25  percent.  Moreover  the  report  concludes  that  the  full  extent  of  the 
losses would have even been higher since a number of banks ceased to report separately either because 
they failed or were taken over. The FSB used these results as an input for the TLAC standard, including 
the calibration of a minimum requirement. 

16 

 
 
                                                            
As the failure of a third country G-SIB would impose significant costs on the EU economy 
through contagion effects, a global minimum standard is very much in the EU's interest. Other 
jurisdictions have not implemented frameworks ensuring minimum requirements for bail-in-able 
liabilities like the EU did in the BRRD. Even if this were the case, it would be difficult for the 
EU to have confidence in the practical application of a framework comparable to the MREL 
requirement in third countries absent a clearly quantified minimum standard. Finally, as third 
country G-SIBs are by definition active worldwide and compete with EU banks, from a level 
playing field perspective it is also desirable to hold them to a clearly quantified minimum 
standard in order to avoid competitive disadvantages that could result from the unilateral 
introduction of the EU's sound MREL requirement. However, the EU can only credibly expect 
third countries to implement the TLAC standard if it holds its own G-SIBs to the same 
requirements.  

2.5. 

 Inappropriate level of capital requirements against trading activities 

Financial  instruments  held  by  institutions  for  trading  purposes  (e.g.  shares,  bonds, 
derivatives),  are  subject  to  the  risk  of  movements  in  their  market  prices,  which  has  a 
daily  impact  on  institutions'  profits  and  losses.  These  market  price  movements  can  be 
large and sudden; sudden large drops in market prices can damage the solvency position 
of  institutions.  Because  of  the  idiosyncrasy  of  this  risk,  the  prudential  framework 
embedded in Council Directive 93/6/EEC34 contains a specific regime for these financial 
instruments  (they  are  often  referred  to  as  trading  book  exposures),  which  is  different 
from that applicable to other types of exposures, such as loans (those are usually referred 
to as banking book exposures). 

During  the  financial  crisis,  the  level  of  capital  required  against  trading  book  exposures 
proved  insufficient  to  absorb  losses.  Trading  book  losses  in  EU  institutions  were  very 
substantial and some of those institutions had to be injected State aid and/or resolved as a 
result (e.g. Dexia, Royal Bank of Scotland). This revealed a number of weaknesses in the 
design of the prudential framework for the trading book, which needed to be addressed.  

In 2009, a first set of reforms were finalised at international level (known as the 'Basel 2.5' 
package of reforms) and transposed in the EU via Directive 2010/76/EU (CRD III).35 These 
reforms, subsequently retained under the CRR, sought as a main objective to increase the overall 
market risk capital requirements to addresses the most pressing deficiencies of the standards on 
market risk. However, the 2009 reform did not address the design flaws present in those 
standards, such as: 

  a  scope  of  application  of  the  market  risk  capital  requirements  which  is  not 
sufficiently  clearly  defined.  This  allows  institutions  to  engage  in  regulatory 
arbitrage, i.e. they can allocate some of their instruments to the regulatory book 
that generates the lower capital requirements. As an example, prior to the crisis, 
securitisation  instruments  were  usually  allocated  to  the  trading  book  because  of 
the  low  volatility  of  the  securitisation  markets  (leading  to  low  capital 
requirements under the market risk rules) even if there was no evidence of regular 
trading in these instruments (implying that they had little chances to be traded); 

34   Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit 

institutions (OJ L 141, 11.6.1993, p. 1). 

35   Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 amending 
Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-
securitisations, and the supervisory review of remuneration policies. 

17 

 
 
                                                            
 

lack  of  risk-capture.  Many  features  of  market  risk  are  not  reflected  in  the  capital 
requirements. As a consequence, the amount of capital required for certain instruments is 
not aligned with the real risks that institutions face for these instruments. As an example, 
the risk  of holding more  illiquid instruments is not recognised since the current market 
risk capital requirements assume that all trading positions can be extinguished within two 
weeks; 

  high  variation  of  modelling  outcomes.  Internal  models  used  by  institutions  to  calculate 
capital requirements for market risk may generate very different estimates of the amount 
of capital required for similar portfolios. A comparative study performed by the BCBS36 
across a sample of 15 large banks worldwide (half of them Europeans) with permission 
to  use  internal  model  showed  that,  for  the  same  hypothetical  diversified  portfolio  of 
trading assets, the bank with the highest capital requirements generated for this portfolio 
had capital requirements that were roughly three times higher than those of the bank with 
the lowest capital requirements. 

Consequently, the BCBS initiated the fundamental review of the trading book (FRTB) to tackle 
those flaws. This work was concluded in January 2016, following three public consultations in 
May 201237, October 201338 and December 201439. 

A  more  comprehensive  overview  of  what  went  wrong  during  the  2007-2008  financial 
crisis  with  the  trading  book  framework  and  of  why  the  Basel  2.5  reforms  did  not 
sufficiently improve the capture of market risk was provided in  the BCBS consultation 
paper of May 2012. 

2.6.  Problems on remuneration rules 

CRD  IV  contains  a  number  of  detailed  rules  on  how  institutions  should  determine  and 
pay  out  variable  remuneration  of  staff  whose  activities  have  a  material  impact  on  the 
institutions’ risk profile.  

Problem 1: Excessive compliance costs arising from the rules on deferral and pay-out in 
instruments 

Under CRD IV rules, institutions are not allowed to immediately pay out the full amount 
of  variable  remuneration  or  to  pay  it  entirely  in  cash.  Instead,  CRD  IV  requires  that  at 
least 40% (or in some cases at least 60% of the variable remuneration) be paid out only 
after  a  number  of  years40.  It  moreover  requires  that  at  least  50%  of  the  variable 
remuneration be paid out in instruments instead of cash41. These rules are applicable to 
all  institutions,  regardless  of  their  size  and  complexity,  and  to  all  identified  staff, 
regardless of the level of their variable remuneration.  

Because  of  this  broad  scope  of  application,  compliance  with  the  above  requirements 
entails high costs outweighing prudential benefits in the following cases: 

36   Available at http://www.bis.org/publ/bcbs240.pdf. 
37   Available at http://www.bis.org/publ/bcbs219.htm. 
38   Available at http://www.bis.org/publ/bcbs265.htm.  
39   Available at http://www.bis.org/bcbs/publ/d305.htm. 
40   “Deferral”, see Article 94(1)(m) of the CRD. 
41   “Pay-out in  instruments”,  see  Article  94(1)(l)  and  the  second  subparagraph of  Article  94(1)(o)  of  the 

CRD. 

18 

 
 
 
                                                            
(i)  small  and  non-complex  institutions42  (for  instance  local  cooperative  and  savings 
banks)  need  to  make  considerable  investments  in  human  resources  (HR),  information 
technology  (IT)  and  advisory  services  and  are  faced  with  difficulties  in  creating 
instruments  appropriate  for  remuneration  purposes.  According  to  EBA  estimates43,  the 
average one-off costs for these institutions would range from €100 000 to €500 000 per 
institution, and ongoing costs from €50 000 to €200 000.  

(ii) other institutions also incur important costs resulting from the fact that they need to 
apply the rules to all of their identified staff, which will often include a high number of 
individuals  with  only  non-material  levels  of  variable  remuneration.  For  instance, 
according  to  EBA  estimates44,  a  full  compliance  by  large  institutions  with  the  above 
requirements  in  respect  of  all  staff,  even  that  with  non-material  levels  of  variable 
remuneration, would imply one-off costs ranging from €1 to 5 million, and ongoing costs 
ranging from €400 000 to €1.5 million.  

At  the  same  time,  the  prudential  benefits  of  applying  the  requirements  on  deferral  and 
pay-out in instruments in the above cases are low. If a staff member receives only a non-
material  level  of  variable  remuneration,  then  such  variable  remuneration  is  unlikely  to 
provide him/her with incentives to engage in excessively risky behaviour, which would 
need correction through deferral and pay-out in instruments. Given that small and non-
complex institutions are typically not among the institutions paying the larger portions of 
variable  remuneration,  and  mostly  pose  lesser  risks  to  financial  stability,  the  prudential 
benefit of deferral and pay-out in instruments in their case would be limited.  

Problem  2:  Excessive  compliance  costs  arising  from  the  requirement  for  listed 
institutions to pay out part of the variable remuneration in shares 

Under  the  CRD  IV  rules,  listed  institutions  are  always  required  to  pay  out  part  of  the 
variable  remuneration  in  shares;  on  the  other  hand,  non-listed  institutions  have  the 
possibility  to  use,  in  addition  to  or  instead  of  shares,  share-linked  instruments  (Article 
94(1)(l)(i)). 

Compliance  with  the  pay-out  in  shares  requirement  entails  important  difficulties  and 
burdens for the approximately 200 institutions that are listed. They would need to either 
create new shares or buy them on the market. Both are cumbersome procedures for the 
institution. The creation of new shares  would risk negatively affecting the shareholders 
by diluting their voting rights. The purchase of shares could trigger speculation and force 
the institution to pay a premium. Acquiring shares would moreover lead to reducing the 
own funds of the institution. 

Furthermore,  staff  remunerated  in  shares  may  not  be  able  to  sell  them  because  of 
problems of insider dealing which is criminally sanctioned, lowering the perceived value 
of such remuneration for staff. Moreover, payment in shares in different countries can be 
subject  to  legal,  accounting  or  tax  constrains.  For  example,  some  institutions  with 

42 By way of illustration, based on a sample of about 3,200 credit institutions in the EU extracted from the 
SNL  database,  there  are  around  2,722  credit  institutions  with  total  assets  of  no  more  than  €5bn, 
compared  to  around  303  credit  institutions  with  total  assets  between  €5  and  €30bn,  and  156  credit 
institutions with total assets above €30bn. At EU level, the  around 2,722 credit institutions with total 
assets below €5bn represent 5.12% of total assets of credit institutions in the sample (however, when 
calculated at country level, this percentage differs significantly between Member States). 

43 EBA Opinion on proportionality 
44 EBA Opinion on proportionality 

19 

 
 
                                                            
subsidiaries in non-EU jurisdictions (Russia, US) have signalled problems they encounter 
with  shares  to  remunerate  staff  in  their  non-EU  subsidiaries.  While  these  are  arguably 
significant  difficulties  and  burdens,  it  is  not  possible  to  precisely  quantify  the  absolute 
costs resulting from them for listed institutions.  

At the same time,  an  equally  effective  yet  less difficult and burdensome alternative for 
shares exists, namely share-linked instruments. 

This means that, in the case of listed institutions, the requirement to pay out part of the 
variable  remuneration  exclusively  in  shares  entails  unnecessary  compliance  costs 
compared to other available alternatives with similar prudential benefits. 

2.7.  Problems on insolvency ranking of unsecured bank debt instruments 

One of the key objectives of the BRRD is to facilitate private sector loss absorbency in the event 
of a bank crisis. To achieve this objective, all banks are required to meet a Minimum 
Requirement for Own Funds and Eligible Liabilities (MREL) to ensure that sufficient financial 
resources are available for write down or conversion into equity. Under the BRRD, MREL does 
not generally require mandatory subordination of eligible instruments for MREL. This means, in 
practical terms, that a liability eligible for MREL may rank in insolvency at the same level (pari 
passu) with certain other liabilities which are not bail-inable in accordance with the BRRD (e.g. 
operational liabilities, such as short-term inter-bank loans), or certain other liabilities which are 
bail-inable, but could be excluded from bail-in on a discretionary basis (as allowed under the 
BRRD) if the resolution authority can justify they are difficult to bail-in for reasons of 
operational execution or systemic contagion risk (e.g. derivatives, structured notes). This could 
lead to situations where bailed-in bondholders may claim they have been treated worse under 
resolution than under a hypothetical insolvency. In such case, they would need to be compensated 
by financial means of the resolution fund. To avoid this risk, resolution authorities may decide 
that the MREL requirement should be met with instruments that rank in insolvency or resolution 
below other liabilities that are either not bail-inable by law or difficult to bail-in (“subordination 
requirement”). Harmonising the ranking of unsecured bank debt holders in insolvency and 
resolution would provide the means to ensure an effective and transparent bail-in, especially in 
cross-border cases and would provide certainty and clarity to investors and resolution authorities. 

In addition to the MREL standard for which subordination of debt instruments could be required 
by resolution authorities to the extent it is needed to facilitate the application of the bail-in tool in 
a given case, the minimum TLAC requirement for G-SIBs, as clearly stated by the FSB Term 
Sheet45, should be met using a certain amount of subordinated debt instruments. 

The results of international negotiations and the consensus among Member States indicate that 
the future EU TLAC standard applicable to G-SIIs will stay aligned with the FSB TLAC Term 
Sheet as regards the subordination condition. This means that G-SIIs will have to satisfy the 
TLAC level with instruments that are subordinated to other excluded TLAC instruments (e.g. 
operational liabilities) with the aim to enhance the operational execution and robustness of bail-in 
powers and to avoid legal uncertainty. 

45 Total Loss-Absorbing Capacity (TLAC) Principles and Term Sheet, FSB, 9 November 2015 

20 

 
 
                                                            
The TLAC requirement to hold subordinated instruments combined with the potential 
discretionary request by the resolution authority to meet MREL also with subordinated 
instruments have driven some Member States to re-assess national insolvency ranking. 

A number of Member States have amended (or are in the process of amending) the insolvency 
ranking of certain banks’ creditors under their national insolvency law to operationalise the 
possible application of the bail-in tool and to ensure that banks comply with the “subordination 
requirement” of the international FSB standards on TLAC for G-SIBs.  

As the national rules adopted so far diverge significantly, they can create competitive distortions 
in the single market and complicate the operationalization of the bail-in tool, in particular for 
cross-border banks. Moreover, the national approaches have very different effects on G-SIIs’ 
ability to address potential shortfalls in meeting TLAC standards. Under some approaches TLAC 
shortfalls were addressed with immediate effect through statutory retroactive subordination of the 
existing stock of unsecured senior debt, possibly without the issuance of new debt instruments, 
meaning a limited additional cost of funding was incurred to become TLAC compliant. Under 
other approaches banks would likely need to issue new debt, which meets the subordination 
criterion, at a higher marginal cost than senior debt for the period running to and after the TLAC 
compliance date. The effects ultimately depend on a bank’s shortfall of TLAC eligible 
instruments and its liability structure, but two banks with comparable shortfalls and liability 
structures could face significantly different treatment depending on the insolvency ranking of 
unsecured debt in their respective jurisdictions. Additionally, the creditors of banks under such 
divergent national insolvency regimes would be treated very differently when buying the claims 
of banks falling under different national hierarchy of creditor regimes. 

There is a broad agreement among stakeholders that having divergent approaches to the statutory 
insolvency ranking of bank creditors provides uncertainty for issuers and investors alike and 
makes more difficult the application of the bail-in tool for cross-border institutions. This 
uncertainty could also result in competitive distortions in the sense that unsecured debt holders 
could be treated differently in different jurisdictions and the costs to comply with the TLAC and 
MREL requirement for banks may be different from jurisdiction to jurisdiction.  

In its conclusions of 17 June 201646, the Council invited the Commission to put forward a 
proposal on a common approach to the bank creditors' hierarchy. During the meeting of the 
experts of the European Parliament and of the Member States of 23 of June 2016, a large number 
of Member States communicated that they were clearly in favour of harmonisation and endorsed 
partially harmonised EU approach to subordination. They insisted, however, that any EU 
approach should provide sufficient flexibility to take account of different bank business models 
across the EU and reduce at minimum impacts on bank funding costs.  

2.8.  Lack of effectiveness of the current rules on moratorium 

A moratorium tool can be broadly defined as the power to temporarily suspend payments or 
performance of obligations and / or temporarily prohibit contracting new obligations.  

Use of moratorium in a supervisory/resolution context can be useful in several scenarios:  

46  Council  conclusions  of  17  June  2016  on  a  roadmap 

to  complete 

the  Banking  Union: 

http://www.consilium.europa.eu/press-releases-pdf/2016/6/47244642837_en.pdf 

21 

 
 
 
 
                                                            
 

 

 

 

for  liquidity  stabilisation:  in  case  of  severe  liquidity  outflows,  an  institution  could 
have to sell assets at a discount (“fire sale”). This creates losses which are bound to 
be borne by creditors and particularly those “left behind”. Even in the absence of fire 
sales, there might be a first mover advantage that sparks a bank run: the first creditors 
to redeem their claims would be repaid fully, while those who act late will face losses 
(due,  for  example,  to  asset  discounts  in  an  insolvency  procedure).  A  moratorium 
could ensure a stabilization of the liquidity position and equal treatment of creditors 
and foster financial stability by eliminating the first mover advantage. Potentially this 
may, depending on the circumstances, also address the contagion issue; 
to  ensure  stability  in  the  pre-resolution  phase:  a  moratorium  can  help  ensure  the 
stability of an institution in the days leading up to resolution, provide ample time for 
the  resolution  authority  to  conduct  a  prudent  valuation  and determine,  for  example, 
the appropriate amounts for bail-in;  
to  restore  the  capital  position  of  the  institution:  the  use  of  a  moratorium  tool  in  a 
supervisory context can be a useful tool to address temporary issues with respect to, 
for example, the composition of a bank's capital; 
to  prevent  increases  in  secured  funding:  an  institution  that  is  experiencing  distress 
may  not  be  able  to  issue  unsecured  (term)  debt.  Such  an  institution  would  need  to 
attract secured funding, which may require that in order to provide safety to the new 
secured  creditors  the  secured  claim  might  have  to  be  over-collateralised.  If  over-
collateralised  funding  increases  significantly,  this  effectively  increases  the  loss  rate 
for  unsecured  creditors  as  well  as  possibly  depositors  /  the  DGS  in  case  of  default. 
Stabilizing the liquidity situation through a moratorium could prevent such an effect, 
while ensuring the equal treatment of creditors. 

The issue of the harmonisation of moratorium tools was raised in the meetings of the Council Ad-
hoc Working Party on strengthening the Banking Union. In that context a questionnaire was 
submitted to the Member States and the ECB, and the Dutch Presidency produced two non-
papers on the topic, mainly summarising Member States replies to the survey. The Council 
conclusions of 17 June 2016 invited the Commission to conduct further work on whether and 
how further harmonisation of the rules and application of moratorium tools can contribute to the 
stabilisation of an institution in the period before, and possibly after, an intervention. Further to 
that, DG FISMA carried out internal analysis and consultations – including a questionnaire – 
with national experts to assess the most appropriate way forward. 

An uneven playing field resulting from the identified differences listed below would lead to 
detrimental consequences and could hamper the effectiveness of resolution tools in a cross-border 
scenario. For example, the very different duration of the suspension from one Member State 
would make it more difficult for a resolution authority to devise a consistent resolution strategy 
cross-border. Also, it would in certain cases impair the effectiveness of the moratorium tool 
altogether because it would create an incentive for creditors to move their investments in the 
bank to countries where the duration of the suspension is shorter. 

Similarly, the possibility allowed by certain national legislations to use the moratorium as an 
early intervention tool, which would allow supervisors/resolution authorities to intervene more 
effectively at an earlier stage when the specific situation of the bank requires, may be impaired 
by the different approaches at national level in this respect. An effective application of the tool in 
a cross-border scenario would be greatly reduced if supervisors / resolution authorities were not 
in a position to apply the same tools across the board at the same time.  

22 

 
 
Existing provisions in CRD IV and BRRD already provide some basis for competent authorities 
to exercise certain moratorium powers. In particular, Member States transposed provisions on 
moratorium in very different manners47. This can negatively impact the practical application of a 
moratorium and create an uneven level playing field. Therefore these provisions may be 
improved and further harmonised to make existing tools more effective by enhancing legal clarity 
and providing further certainty in a cross-border scenario. 

All Member States have some type of moratorium tools available in their jurisdiction. Most 
introduced these tools in their legislative framework as a result of the transposition of BRRD or 
CRD IV48. The relevant national provisions however vary in terms of scope of the liabilities 
covered (particularly with respect to covered deposits and payment systems), means of activation 
(supervisory / resolution / both), and duration.  

With respect to the scope, in several Member States moratorium powers extend also to covered 
deposits (12 MS). In most Member States a moratorium intervention on covered deposits would 
be considered as a pay-out event and would therefore trigger the application of the Deposit 
Guarantee Scheme.49 Payment obligations to CCPs or payment settlement systems are on the 
other hand excluded from the scope of moratorium powers in most MS (9).50  

Marked differences in transposition can be encountered also with respect to the duration of the 
payment suspension in case of moratorium. Most national legislations (16 MS) provide a 
predetermined maximum duration. The duration can however range widely (from one working 
day to twelve months). Some Member States have comparatively short durations of twenty days 
or one month, while the most frequent indicated maximum duration is six months. Several 
Member States indicated that an extension of the suspension period would be possible (although 
these extensions are sometimes also subject to a predetermined maximum).51  

47   Information  provided  below  on  existing  moratorium  tools  at  national  level  was  provided  by  Member 
States'  experts  in  response  to  a  questionnaire  circulated  by  the  Dutch  Presidency  in  the  context  of 
technical  meetings  with  Member  States.  These  were  followed-up  by  the  Commission  with  direct 
exchanges with the relevant MS on specific issues. 

48   24 MSs responded to the questionnaire (EE, DK, BG, ES, FI, SE, HR, LU, FR, PT, SK, BE, PL, AT, 
IE, EL, CZ, RO, LV, HU, LT, DE, UK, MT).  The only ones who indicated that they do not have any 
type of moratorium tool are DK and SE (while MT indicated that the concept of a moratorium tool does 
not  exist  in  national  law  but  underlined  the  general  scope  of  the  powers  of  national  competent 
authorities).  BE  does  not have  a  full-fledged  moratorium  in  place but  a  similar  tool  to  be  used  as  an 
extraordinary recovery measure. 

49   The Deposit Guarantee Scheme Directive (Directive 2014/49/EU) provides the rules and principles for 
the  protection  of  covered  deposits  (deposits  below  100.000  Euros).  According  to  the  Directive,  in 
presence  of  a  pay-ut  event  –  an  event  which  indicates  that  the  bank  is  not  in  a  position  to  repay  the 
deposit for reasons connected to its financial circumstances activates the use of the DGS to protect such 
deposits. EE, BG, FI, LU, SK, BE, AT, IE, EL, HU, LT, DE indicated that covered deposits fall in the 
scope  while  ES,  HR,  PL,  CZ,  LV,  FR  and  UK  indicated  that  such  deposits  are  not  subject  to 
moratorium powers. PT indicated that while the national provision transposing Article 63 BRRD does 
not  apply  to  covered  deposits,  for  other  moratorium  tools  existing  at  national  level  an  exemption  of 
such liabilities is not foreseen. Out of those MSs who include covered deposits in the scope, BG, LU, 
PT, BE and AT indicated that this would constitute a pay-out event under DGSD transposition laws. 
50   BG, FI, LU, SK, BE, AT, IE, LV, DE provided a positive answer to the question. EE, ES, HR, FR, PT, 
PL, EL, CZ, HU, LT,UK and MT do not apply moratorium tool to payment obligations owed to CCP or 
payment settlement systems  

51   EE, BG, ES, FI, HR, LU, PT, SK, PL, AT, IE, EL, CZ, HU, LT, UK indicated that the suspension has a 
maximum  duration.  The  most  common  indicated  maximum  duration  is  six  months  (EE,  LU,  AT,  IE, 
CZ, LT). Others indicated one month (BG), 20 working days (EL), 90 days (HU) or a longer period of 
12 months (SK). Finally, some referred to the very short duration indicated in Art. 69 BRRD (midnight 

23 

 
 
                                                            
Moreover, with respect to the intervention phase for moratorium tools, legislative provisions at 
national level do not appear consistent. While more consistency can be observed with regards to 
moratorium powers applied under resolution, national legislative frameworks seem to follow 
different approaches with respect to the use of such tools in the early intervention phase. In 
several countries moratorium powers can be activated during the early intervention phase and in 
this context the precautionary powers provided by the CRD IV framework can usually be 
exercised. In other countries, however, a moratorium power seems to be considered eminently a 
resolution-related tool and can only be activated once a bank is deemed to be failing or likely to 
fail or put under resolution.52  

Finally, some of the consulted stakeholders highlighted possible means to improve this tool, such 
as on the duration of the suspension and its scope. 

2.9.  Insufficient proportionality of the current rules 

It can be argued that the CRR and the CRD IV are already "proportionate" to a large extent, 
insofar as they take into account the size, complexity and business model of institutions for 
various purposes. The framework as a whole is formulated in a modular manner, such that 
institutions must only apply those requirements which are relevant to the risks they incur. 
Furthermore, the framework provides for specific exemptions and preferential treatments for 
various purposes (e.g. own funds, liquidity, covered bonds), thus reflecting the relative 
complexity and riskiness of institutions and the activities they undertake. 

Nevertheless, several Member States and Members of the European Parliament have raised the 
concern that the current EU regulatory framework does not sufficiently differentiate between the 
very large systemic institutions and very small local institutions. Moreover a sizable number of 
respondents to the CRR consultation and the Call for Evidence submitted that, in their view, 
some of the prudential requirements in the CRR and CRD IV may impose a disproportionate 
burden on smaller and less complex institutions.  

Respondents to the Call for Evidence singled out complexity of rules, administrative burden and 
compliance costs as the most pressing concern for smaller institutions. They argued that costs 
resulting from complex prudential rules create a competitive advantange for larger institutions 
insofar as these can benefit from economies of scale to allocate more resources to compliance 
functions. In particular, respondents pointed to costs resulting from current CRR and CRD IV 
requirements on:  

of the following day - UK). It seems that most MSs were referring to the moratorium tool as per Article 
63 BRRD (since Article 69 contains a precise duration of the suspension). However, responses to the 
questionnaire were not very clear in this respect and of course the reading depends to an extent on how 
MSs transposed the relevant BRRD provisions in national law. 

52   12  MSs,  namely  EE,  ES,  FR,  PT,  BE,  EL,  LV,  HU,  LT,  UK,  MT  provided  positive  answer  to  the 
question and indicated that moratorium tools are or seem to be intended also as early intervention tools 
(or  in  the  case  of  LT,  simply  that  the  tool  is  not  attached  to  any  specific  phase  in  the 
supervision/resolution  process).  Out  of  these,  FR  and  ES  indicated  that  the  power  derives  from  the 
transposition  of  CRD  provisions.  Other  respondents,  an  particularly  IE  and  CZ,  gave  more  nuanced 
answers,  highlighting  that  the  criteria  to  apply  moratorium  tools  are  different  than  those  that  justify 
early intervention but that a moratorium could have effects also towards a bank that is subject to early 
intervention measures.  

24 

 
 
 
                                                                                                                                                                                 
  EU  harmonised  (Pillar  1)  reporting,  whose  volume  and  frequency  was  regarded  as 
disproportionate for smaller institutions, as well as reporting required by supervisors 
under Pillar 2 on an ad hoc basis, over and above Pillar 1 reporting;  

  disclosure  of  capital  and  liquidity  requirements,  which  applies  to  all  institutions  in 
largely  the  same  fashion,  as  a  result  of  which  it  was  regarded  as  too  detailed  and 
frequent  for  smaller  institutions  and  of  little  practical  use  for  institutions  with  no 
publicly traded securities; and 

 

the complexity and large volume of rules that respondents have to deal with and the 
inability to keep up with all the changes in the legislation.  

Section 4.9 below discusses various potential policy options to address undue burden on smaller 
institutions resulting from reporting and disclosure requirements.  

Whilst these measures address proportionality issues related to the size of a credit institution, 
other measures proposed in the impact assessment address proportionality concerns related to 
credit institutions' business model (e.g. the types of activities carried out). 

More precisely, where relevant, each section in this impact assessment discusses specific policy 
options and limited exceptions tailored to simpler or less risky business models or activities 
undertaken by any institution, including for these purposes smaller institutions (see sections on 
TLAC, lending to SMEs, trading book, leverage ratio, NSFR and remuneration).  

This approach has been chosen taking into account the specificities of the banking sector in the 
EU, where the market is highly polarised (i.e. there is a very large gap between the biggest and 
the smallest banks) and the composition (i.e. size and type of business models of banks) of the 
banking sector across Member States is highly different. The possibility of developing a 'lighter 
regime' across the board for small/less complex EU credit institutions would be very complex 
since solutions that could work for a certain type of credit institutions might not work for others. 
Instead, the introduction of tailored measures for different metrics (e.g. TLAC, lending to SMEs, 
trading book, leverage ratio, NSFR and remuneration) ensure a degree of flexibility able to cover 
credit institutions with different sizes and business models in all Member States. 

2.10.  Consequences from the baseline scenario 

Not dealing with the problems described above would have several broad potential consequences: 

 

 

 

from  the  safety  point  of  view  they  include  mispricing  of  risk,  inadequately 
capitalised or funded individual institutions and too-big-to-fail institutions. All of 
these would ultimately lead to a higher probability of financial crises in the future 
and to higher economic and social costs of those crises, both in terms of foregone 
output and unemployment; 

from  the  point  of  view  of  smaller  institutions,  they  include  a  continued  high 
level of administrative costs; 

from  the  point  of  view  of  the  services  provided  by  institutions  to  the  EU 
economy  -  to  the  extent  that  the  current  regulatory  framework  imposes  capital 
requirements  which  are  disproportionate  to  the  actual  risks  faced  by  those 
institutions - they include an insufficient supply of those services (e.g. lending to 
SMEs or client clearing services). 

Looking at the individual areas, more detailed consequences would likely materialise. 

25 

 
 
 
 
On stable funding of banks, while the LCR ensures that banks will be able to withstand a severe 
stress on a short-term basis it does not ensure that they will have a sustainable stable funding 
structure on a longer-term horizon. General requirements on stable funding and market discipline 
would likely mitigate some of risks related to insufficiently stable funding, but are unlikely to 
prevent banks from relying on too-high amounts of short-term funding. Banks would therefore be 
more prone to liquidity problems in situations where markets for short-term funding were 
disrupted. This would likely lead to the failure of those banks and potentially even to a new 
financial crisis. 

On the loss absorption of systemically important institutions, there would be no backstop on 
the minimum loss absorption and recapitalisation capacity in G-SIIs, the level playing field 
between G-SIIs could be difficult to assess and there would be no incentive for other jurisdictions 
to impose a similar framework on third country G-SII. Each of these elements would impose 
significant costs on the EU economy in case of failure of a G-SII.  

On the leverage ratio, not implementing a capital requirement based on this ratio would mean 
that the risk of excessive leverage would continue to be monitored by supervisors during the 
supervisory review process and institutions would have to calculate, report and disclose the 
leverage ratio. However, the combination of market discipline and supervisory review would not 
serve as an effective deterrent against excessive leverage of institutions compared to a binding 
leverage requirement and thus risks to financial stability would remain. Furthermore, there would 
be no backstop to risk-based capital requirements calculated using institutions' internal models 
(as the existing backstops expire will expire at the end of 2017). Finally, the effects of economic 
cycles would not be addressed properly as risk-based capital requirements alone are insufficient 
to deal with this issue. 

On market risks, the weaknesses and design flaws of the current prudential framework for 
trading book transactions will remain unaddressed. As the result, the allocation of capital 
requirements across those transactions may still be inadequate as compared to the true risks faced 
by the institutions. For certain transactions in the trading book, institutions subject to the CRR 
would therefore not have sufficient amounts of capital to absorb the potential losses that may 
arise from adverse changes to the market conditions for those transactions. Institutions with very 
concentrated portfolios in those transactions would suffer significant losses, potentially requiring 
State aid and/or be resolved as a result. Other transactions of the trading book may suffer from an 
excess of capital requirements which would continue negatively affecting the market liquidity 
and transactions costs.  

On the SME supporting factor, leaving the existing rules unchanged would ensure the 
continuity  of  the  current  regulatory  framework  with  no  new  compliance  burden. 
Maintaining  the  status  quo  would  be  also  in  line  with  EBA's  findings,  which 
demonstrated  that  the  SME  SF  had  been  found  to  be  consistent  with  actual  systematic 
riskiness of EU SMEs53, except for retail exposures of banks using the Internal Ratings-
Based (IRB) approach. This option would also address numerous calls from banks to the 
CRR consultation54 and the Call for Evidence for retaining the SME SF in the CRR. The 

53  EBA  report  shows  that  this  was  indeed  the  case  in  Germany,  France  and  Ireland,  whereby  additional 
capital  relief  banks  obtained from  the  SF  was  consistent  with  the  systematic  riskiness  of  SME loans, 
except for retail exposures (i.e. less than 1 million euros) of banks using IRB approach. See paragraph 
on Option 3 for further details. 

54 http://ec.europa.eu/finance/consultations/2015/long-term-finance/index_en.htm 

26 

 
 
 
 
 
                                                            
stability of the regulatory framework would ensure the consistency in monitoring of the 
use of the SME SF in accordance with Article 501(3).  

Moreover,  the  EBA  report  provides  evidence  showing  that  additional  capital  reduction 
for  SME  exposures  above  the  current  €1.5  million  exposure  threshold  could  still  be 
consistent with the riskiness of these exposures. Not providing further capital reduction 
for SME exposures above €1.5 million would thus likely result in a sub-optimal level of 
bank financing of these SMEs. 

On remuneration, the application of the rules on deferral and pay-out in instruments to 
small and non-complex institutions, as well as towards staff with low, non-material levels 
of  variable  remuneration  would  trigger  for  the  institutions  concerned  important 
compliance costs and burdens. This would also translate into non-negligible supervisory 
burden  for  competent  authorities.  At  the  same  time,  the  prudential  benefits  of  applying 
those  requirements  to  small  and  non-complex  institutions  and  towards  staff  with  non-
material levels of variable remuneration would be low.  

Moreover, listed institutions would have to sustain important compliance difficulties resulting 
from the requirement to use shares in fulfilment of the requirement under Article 94(1)(l)(i) of 
the CRD IV, while the prudential benefit would not be any higher than in case of the use of 
share-linked instruments.  

On insolvency ranking, the current heterogeneity of approaches would lead to a confusing and 
unclear situation for investors and create an uneven playing field for both banks and investors 
which could be detrimental for the European debt market or even lead to regulatory arbitrage. 
This fragmentation would likely lead in some countries, to a less liquid and more expensive 
market for European TLAC eligible debt which could have a negative impact on banks’ funding 
costs and their ability to roll-over debt. This could arise for instance in cases where creditors, 
who have been statutorily subordinated by law, could be incentivised to limit their exposures to 
that particular market potentially impacting liquidity and driving funding costs up. Along a 
similar line, banks whose unsecured debt has been statutorily subordinated would be potentially 
incentivised to move into riskier funding (e.g. derivatives, structured products) rather than roll-
over subordinated debt that is in excess of their TLAC holding. 

With regards to transparency and clarity, it is expected that investors would be able and willing to 
evaluate the insolvency laws of Member States with sizable capital markets, but might be 
reluctant to do so for 28 different regimes. This could be to the detriment of Member States with 
less developed capital markets.  

Furthermore, the heterogeneity of approaches would increase the complexity for resolution 
authorities to set the minimum requirements for bail-inable liabilities and might impede the 
effectiveness of the bail-in tool, especially for cross-border groups.  

Most Member States and stakeholder groups acknowledge these risks associated with divergent 
national insolvency regimes and are clearly in favour of a partial harmonisation of creditor claims 
on unsecured liabilities. 

On moratorium, the diversity of national approaches to the implementation of the tool as well as 
the lack of clarity of certain elements may reduce the effectiveness of this tool and result in 
undesired consequences such as bank runs or reduction of liquidity in a supervisory/resolution 
context. 

27 

 
 
 
On proportionality, costs resulting from complex prudential rules and high administrative 
burden would maintain the current competitive advantange of larger institutions insofar as these 
can benefit from economies of scale to allocate more resources to compliance functions. Failure 
to embed more proportionality in the prudential rules in an adequate fashion would result in 
excessive compliance costs for institutions, an uneven playing field for smaller institutions and 
barriers to entry for potential new market players. 

The transmission mechanism is shown in the problem tree below. 

28 

 
 
 
 
 
 
 
 
Figure 6. Problem tree 

Problem drivers 

Problems 

Consequences 

Shortcomings in banks' risk management on 
maturity matching between assets and liabilities 

Lack of explicit pan-EU regulatory measures 
mitigating the funding risks 

Banks' incentive to increase leverage in order 
to maximise their profits and return on equity 

Lack of explicit pan-EU regulatory limits to 
leverage of credit institutions 

Risk-based capital requirements cannot fully 
ensure that all risks are adequately captured 

 EUR 1.5 mio threshold for SME exposures is not 
indicative of a change in riskiness of an SME 

Lack of capacity in G-SIBs worldwide to 
absorb losses from major financial crisis 
without the taxpayer support 

MREL does not impose a minimum 
MREL does not impose a minimum 
requirement on the loss absorbing and 
requirement on the loss absorbing and 
recapitalisation capacity for SIFIs 
recapitalisation capacity for SIFIs 

G-SIBs worldwide are not subject to a clear 
minimum standard 

Rules are disproportionate for smaller and less 
complex institutions 

All institutions are required to apply the 
requirements on deferral and pay-out in 
instruments, and all listed institutions must 
use shares  

Lack of clarity with regard to the boundary 
between the trading and the banking book 

Lack of risk sensitivity to address certain 
market risks (e.g. tail risk or liquidity risk) 

Lack of consistency between standardised and 
internal approaches for market risks 

Lack of rigour in the model approval by 
supervisors, of more consistent identification 
and capitalisation of material risk factors 
across banks 

Heterogeneous approaches to the insolvency 
ranking of senior bank debt as well as national 
differences in the implementation of 
moratorium tools 

Excessively 
reliance on short-
term wholesale 
funding to finance 
long term 
activities 
Excessive 
leverage of credit 
institutions 

Relatively too 
high capital 
requirements for 
some SME 
exposures  

Risk of disorderly 
failure of 
systemically 
important banks 

Insufficient 
proportionality of 
the current rules 
leading to 
excessive 
compliance 
and/or 
administrative 
costs 

Inappropriate 
level of capital 
requirements 
against trading 
activities 

Un-level playing 
field 

29 

Significant 
risks to 
financial 
stability 

Likely 
continuing 
taxpayer 
support in 
the failure of 
'too-big-to-
fail' 
institution 

Risk to 
sustainable 
bank 
financing of 
the economy 

 
 
 
 
 
 
 
 
 
 
3.  OBJECTIVES 

3.1.  General, specific and operational objectives 

There  are  three  broad  general  objectives  behind  the  initiative:  contributing  to  financial 
stability,  reducing  the  likelihood  and  the  extent  of  taxpayers'  support  in  bank 
resolution as well as contributing to sustainable financing of the economy. 

These can be broken down in the following, more specific objectives: 

  enhance risk-capturing (incl. risk-sensitivity) of the prudential framework so that 
it better reflects all the different risks embedded in the banking activity (S-1);  

 

increase  proportionality  of  rules  that  lead  to  unnecessary  administrative  burden 
and compliance costs (S-2); 

  enhance the level playing field and reduce risk arbitrage opportunities (S-3); 

  enhance capacity of loss-absorption and recapitalisation of G-SIBs worldwide (S-

4); 

  enhance legal certainty and coherence (S-5). 

Table 2. Mapping of problems and objectives 

d
l
e
i
F

k
s
i
r

g
n
i
d
n
u
F

Problems 

Problem Drivers 

Operational 
Objectives 

Specific Objectives 

S-1 

S-2 

S-3 

S-4 

S-5 

Shortcomings in banks' risk 
management on maturity 
matching between assets and 
liabilities 

Introduce regulatory 
measures ensuring a more 
stable funding structure for 
EU banks 

√ 

√ 

√ 

√ 

Fragility of banks which 
excessively use short-term 
wholesale funding to finance 
long term activities 

Un-level playing field  

Lack of explicit pan-EU 
regulatory measures mitigating 
the funding risks 

Inadequacy of the current 
regulatory framework to 
address funding risks over the 
long term and to ensure that 
banks finance their long term 
activities with stable sources of 
funding 

Develop and implement 
appropriate 
methodology/metrics to 
measure the degree of 
stability of liabilities and 
of liquidity of assets over a 
one-year horizon 

√ 

√ 

√ 

√ 

30 

 
 
 
 
 
 
 
 
 
 
 
 
d
l
e
i
F

e
g
a
r
e
v
e
l

e
v
i
s
s
e
c
x
E

s
e
r
u
s
o
p
x
e
E
M
S

d
n
a
n
o
i
t
p
r
o
s
b
a
s
s
o
L

k
s
i
R

t
e
k
r
a
M

Operational 
Objectives 

Specific Objectives 

S-1 

S-2 

S-3 

S-4 

S-5 

Provide a backstop to the 
risk sensitive capital 
requirement 

√ 

√ 

√ 

√ 

Problems 

Problem Drivers 

Overextension of credit in 
the economic upturn 
resulting in excessive de-
leveraging spiral during the 
economic downturn  

Generous discretionary 
distributions during periods 
of stress, when capital should 
be conserved 

A too favourable picture of 
the financial robustness of 
the financial institutions 
leading to further leverage 
and reduced the resilience of 
the financial sector to future 
shocks 

Banks' incentive to increase 
leverage in order to maximise 
their return on equity without 
taking into account externalities  

Limitations in risk 
measurement, information 
asymmetries and inappropriate 
responses to risk and changes 
in economic conditions 

Risk-based capital 
requirements cannot fully 
ensure that all risks are 
adequately captured.  

Lack of explicit regulatory 
limits to leverage of credit 
institutions 

Banks' ability to provide 
adequate funding to EU 
SMEs could be hampered, 
particularly by the most 
capital-constrained banks 

  Distress or disorderly failure 
y
of a G-SIB anywhere in the 
t
i
c
world would create 
a
p
significant disruption to the 
a
wider financial system and 
c
n
economic activity 
o
i
t
a
s
i
l
a
t
i
p
a
c
e
r

Un-level playing field 

Possible bank failures 
resulting from: 
-inadequately captured risks 
inherent to banks' trading 
book resulting from: 
-regulatory arbitrage between 
banking and trading books  
-high risk of a sudden and 
severe impairment of market 
liquidity across asset markets  

Lack of consistency and 
comparability among banks 
using models to calculate 
their capital requirements for 
some trading book positions 

Capital requirements for SME 
exposures beyond €1.5 mio 
threshold do not reflect 
sufficiently systematic risk 
stemming from SMEs and 
consequently are too high in 
comparison to other exposures 
classes 

Lack of G-SIBs' capacity to 
absorb losses from major 
financial crisis without the 
taxpayer support 

G-SIBs worldwide are not 
subject to a clear minimum 
standard 

Lack of clarity with regard to 
the boundary between the 
trading and the banking book 

Lack of risk sensitivity of the 
whole framework to addressee 
certain risks (e.g. tail risk or 
liquidity risk) 

Lack of consistency between 
standardised and internal 
approaches 

Re-calibrate Risk Weights 
for exposures to SME 
loans so that they better 
reflect risks of SME 
exposures 

Introduce a minimum 
requirement on the loss 
absorbing and 
recapitalisation capacity of 
systemically important 
institutions 

Introduce a minimum 
requirement on the loss 
absorbing and 
recapitalisation capacity of 
systemically important 
institutions 

Establish a more objective 
boundary between the 
trading and the banking 
book 
Provide a more prudent 
capture of “tail risk” and 
capital adequacy;  
Incorporate varying 
liquidity horizons into the 
revised SA and IMA 
Make a standardised 
approach more risk-
sensitive to serve as a 
credible fall-back for, as 
well as a floor to, the 
Internal Models Approach 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
d
l
e
i
F

g
n
i
k
n
a
r
y
c
n
e
v
l
o
s
n
I

m
u
i
r
o
t
a
r
o
M

n
o
i
t
a
r
e
n
u
m
e
R

Problems 

Problem Drivers 

Operational 
Objectives 

Specific Objectives 

S-1 

S-2 

S-3 

S-4 

S-5 

Lack of rigour in the model 
approval by supervisors, of 
more consistent identification 
and capitalisation of material 
risk factors across banks 

Constraints on the capital-
reducing effects of hedging and 
diversification 

Divergent approaches for 
ranking unsecured debt holders 
in insolvency creating debt 
market fragmentation and 
uneven playing field. 
Different investor treatment 
and cost of funding impact for 
banks which need to issue 
TLAC eligible instruments to 
satisfy shortfalls. 

Pari passu ranking of unsecured 
bank debt with liabilities that 
are more likely to be excluded 
from bail-in for operational 
reasons, increasing the risk of 
legal challenge and likely to 
hinder the operational 
execution of bail-in. 

Variety of approaches at 
national level 

The existing CRD IV rules on 
deferral and pay-out in 
instruments are applicable to all 
institutions, regardless of their 
size or complexity, and to all of 
their identified staff, regardless 
of the level of their individual 
variable remuneration  
The existing CRD IV rules 
require listed institutions to pay 
out a part of the variable 
remuneration in shares 

32 

Fragmented framework for 
insolvency ranking for 
unsecured bank debt: 
Possible competitive 
distortions due to differences 
in cost of funding and 
different treatment for 
investors, as well as investor 
uncertainty and asymmetry 
of information costs. 

Probability that claims arise 
due to a breach of the no-
creditor-worse off principle 
differs from MS to MS. 
Bank's ability to use 
unsecured debt to meet 
TLAC and MREL may also 
differ. This could lead to 
possible competitive 
distortions in the EU debt 
markets. 

Lack of a level playing field 
in the application and 
implementation of 
moratorium tools 

Potential lack of clarity with 
respect to important issues 
such as duration, intervention 
phase, scope 

Excessive compliance costs 
arising from the rules on 
deferral and pay-out in 
instruments 

Excessive compliance costs 
arising from the requirement 
for listed institutions to pay 
out part of the variable 
remuneration in shares  

Introduce a revised internal 
models-approach (IMA) 

√ 

√ 

√ 

√ 

Enhance clarity for 
investors and issuers, by 
partially harmonising the 
hierarchy of unsecured 
claims in insolvency. 

Enable banks to meet 
TLAC/MREL shortfalls in 
due time, with a tailor-
made solution and more 
clarity on costs, under 
fairer competitive 
conditions, 

Enable banks to maintain 
flexibility in adequately 
choosing the funding mix.  

Avoid competitive 
distortions that result from 
different treatment of 
unsecured bank debt 
holders under various 
national insolvency laws. 

Increase the robustness of 
the bail-in tool. 

Enhance consistency 
across EU Member States 
and improve clarity for 
supervisors and resolutions 
authorities as well as 
creditors and provide an 
effective tool to be used 
when assessing banks' 
liquidity in a 
supervisory/resolution tool  

Eliminate excessive costs 
related to compliance with 
the rules on deferral and 
pay-out in instruments, 
without posing risks to 
financial stability 

Eliminate excessive costs 
for listed institutions 
related to compliance with 
the rules on payment in 
shares, without posing 
risks to financial stability 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
d
l
e
i
F

y
t
i
l
a
n
o
i
t
r
o
p
o
r
P

Problems 

Problem Drivers 

Operational 
Objectives 

Specific Objectives 

S-1 

S-2 

S-3 

S-4 

S-5 

Disproportionate compliance 
and administrative costs  

Overall framework too 
complex and burdensome  

Disclosure and reporting 
requirements are burdensome 
and disproportionate for 
smaller institutions 

Prudential requirements need to 
take into account the risk 
profile and complexity of 
institutions and the activitities 
they undertake  

Reduce administrative 
burden and compliance 
costs for smaller 
institutions 

Enhance the modular 
approach of the CRR/CRD 
IV to take into account risk 
profile and complexity of 
institutions and the 
activitities they undertake  

Maintain overall 
consistency of the 
prudential framework for 
all institutions 

√ 

√ 

√ 

√ 

3.2.  Consistency of the objectives with other EU policies 

Four years after the European Heads of State and Governments agreed to create a Banking 
Union, two pillars of the Banking Union – single supervision and resolution – are in place, 
resting on the solid foundation of a single rulebook for all EU banks. While important progress 
has been made, further steps are needed to complete the Banking Union.  

The CRR/CRD IV review is part of this effort and the overall objective of this initiative, as 
described above, are fully consistent and coherent with the EU's fundamental goals of promoting 
financial stability, reducing the likelihood and the extent of taxpayers' support in bank 
resolution as well as contributing to a harmonious and sustainable financing of economic 
activity, which is conducive to a high level of competitiveness and consumer protection (Article 
169 TFEU). 

These overall objectives are also in line with the objectives set by major EU initiatives such as 
the Juncker investment plan (EFSI), a proposal for European Deposit Insurance Scheme (EDIS) 
and its focus on risk reduction as well as with the objective of moving towards a Financial Union, 
with the completion of the Economic and Monetary Union and the creation of a Capital Markets 
Union. Some of the proposed provisions on leverage, liquidity and loss-absorbance capacity in 
particular are also consistent with internationally agreed standards (Basel Committee and FSB) to 
which the EU has actively contributed and committed to implement. 

3.3.  Consistency of the objectives with fundamental rights 

The  EU  is  committed  to  high  standards  of  protection  of  fundamental  rights  and  is 
signatory  to  a  broad  set  of  conventions  on  human  rights.  In  this  context,  the  proposed 
measures  as  discussed  above  are  not  likely  to  have  a  direct  impact  on  these  rights,  as 
listed in the main UN conventions on human rights, the Charter of Fundamental Rights 
of  the  European  Union  which  is  an  integral  part  of  the  EU  Treaties,  and  the  European 
Convention on Human Rights (ECHR). 

33 

 
 
 
 
 
 
 
 
 
 
 
3.4.  Subsidiarity 

Following the liberalisation of international capital flows in the 1970s and 1980s, banks 
have  provided  an  increasing  amount  of  cross-border  services.  To  ensure  that  banking 
regulation remains effective, regulators have developed internationally agreed principles 
and standards that large cross-border banks have to respect irrespective of their location. 
Those standards are developed by the Basel Committee on Banking Supervision (BCBS). 
Several EU Member States and the European Commission take part in those discussions 
and the Basel standards form the backbone of the prudential requirements set out in EU 
banking legislation. Following the financial crisis, the BCBS fundamentally revised the 
international  standards  leading  to  the  Basel  III  regulatory  framework,  which  sought  to 
improve banks' ability to absorb shocks, improve risk management and governance; and, 
strengthen transparency and disclosures. These were incorporated into EU law by means 
of the CRR and the CRD IV. 

The  prudential  requirements  for  institutions  are  accordingly  already  dealt  with  at  EU 
level. The legal bases are Article 114 TFEU for the CRR, BRRD and SRMR, and Article 
53(1) TFEU for the CRD IV.  

The  BCBS  has  since  the  adoption  of  the  CRRIV  and  CRD  IV  finalised  a  number  of 
additional  standards,  including  a  binding  leverage  ratio;  a  NSFR  requirement  to  ensure 
that  banks  have  adequate  funding  structures  on  a  long-term  horizon;  and  following  a 
fundamental review, revised capital requirements for the trading book. 

The objectives pursued by these measures as discussed above can be better achieved at 
EU  level  rather  than  by  different  national  initiatives.  National  measures  aimed  at  e.g. 
reducing  bank’s  leverage,  strengthening  bank’s  stable  funding  and  trading  book  capital 
requirements would not be as effective in ensuring financial stability as EU rules, given 
the freedom of banks  to establish and provide services in other  Member States and the 
resulting degree of cross-border service provision, capital flows and market integration. 
On  the  contrary,  national  measures  could  distort  competition  and  affect  capital  flows. 
Moreover, adopting national measures would be legally challenging, given that the CRR 
already regulates banking matters, including leverage requirements (reporting), liquidity 
(LCR) and trading book requirements. 

The amendment of existing CRR and CRDIV legal instruments is thus considered to be 
the  best  alternative  striking  the  right  balance  between  the  single  rules  for  banks  and 
maintaining  national  flexibility,  such  as  on  some  macro  prudential  measures,  for 
competent authorities to address risks to financial stability55. Therefore the amendments 
would  further  promote  a  uniform  application  of  banking  regulatory  standards,  the 
convergence of supervisory practices and ensure a level playing field throughout the EU 
banking system (see annex 6 for the indicative list of parts of legislation to be amended). 
These  objectives  cannot  be  sufficiently  achieved  by  Member  States  alone.  This  is 
particularly  important  in  the  banking  sector  where  many  banks  operate  across  the  EU 
single market. Full cooperation and trust within the single supervisory mechanism (SSM) 
but also within the colleges of supervisors and competent authorities outside the SSM is 
essential  for  banks  to  be  effectively  supervised  on  a  consolidated  basis.  National  rules 
would not achieve these objectives. 

55  National  flexibility,  such  as  in  the  field  of  macro-prudential  policy,  has  not  been 
reviewed and is out of scope of this impact assessment. 

34 

 
 
                                                            
4.  POLICY OPTIONS AND ANALYSIS OF IMPACTS 

4.1.  On excessive reliance on short-term funding 

1. No policy change 

2. A single NSFR requirement as per Basel for all banks 

 Policy options 

3. A single NSFR requirement as per Basel with some adjustments for all banks 

Option 1: No policy change 

The Basel III framework, implemented through the CRR and the CRD IV, already comprises 
minimum capital requirements and a liquidity requirement, the LCR. As mentioned in the 
problem definition, capital requirements are useful to ensure the solvency of banks but they do 
not capture the liquidity and maturity of off- and on-balance sheet items. Furthermore, the LCR 
takes account of the liquidity of assets, liabilities and off-balance sheet items but focuses on a 30 
days horizon in stressed conditions. As such, the LCR increases the resilience of banks in case of 
severe short-term liquidity stresses but does not capture the risk of excessive maturity 
mismatches on a longer term horizon. As a consequence, the LCR ensures that banks will be able 
to withstand a severe stress on a short-term basis but does not ensure that banks will have a 
sustainable stable funding structure on a longer term horizon. Banks would then continue to be 
prone to funding risks and, if short-term bank funding dries-up, they will not be able to maintain 
their funding structure on a longer term horizon, which could lead to a new banking crisis.  

A fast-growing body of literature56 has developed in the past few years, which assesses for a 
sample of banks considered in various countries and time periods, whether the existence of a 
stable funding requirement would have significantly diminished the number of failures relative to 
what happened in the absence of such a requirement. E.g. the IMF working paper “Bank Funding 
Structures and Risk: Evidence from the Global Financial Crisis” finds a significant impact of the 
stable funding ratio: higher levels of the stable funding ratio decrease the probability that a bank 
will subsequently fail.  

The most recent EBA Basel III monitoring exercise report of 13 September 2016, based on a 
different sample of EU banks than the sample of the EBA NSFR report, shows that during 2015 
these banks in aggregate terms have already reduced their NSFR shortfall57. This is likely to be a 
result of supervisory monitoring, market discipline, implementation of other prudential 
requirements that help improving the NSFR and anticipation of EU implementation of 
international rules. However, only when imposed as hard requirements which shall be met at all 
times, stable funding requirements will be effective in preventing excessive maturity mismatches 
between assets and liabilities and overreliance on short-term wholesale funding. This would 
advocate for the introduction of a detailed stable funding requirement at EU level. 

56   See for example, International Monetary Fund (IMF) - Francisco Vazquez and Pablo Federico: Bank 
Funding Structures and Risk: Evidence from the Global Financial Crisis (2012); Huang and Ratnovski 
(2011); Bologna (2011), Dagher and Kazimov (2013); Haman et al.; (2013), Lallour and Mio (2015); 
Hahm et al. (2011). 

57   CRD IV – CRR / Basel III monitoring exercise – results based on data as of 31 December 2015, EBA, 

p. 40, figure 19 

35 

 
 
 
                                                            
Option 2: A single NSFR requirement as per Basel for all banks 

A complementary binding detailed NSFR would ensure that banks adequatly fund their activities 
with more stable sources of funding on an ongoing structural basis. It would provide an effective 
requirement of more stable longer term funding sources for banks’ obligations on a one-year 
horizon in normal and stressed conditions compared to the current situation where banks have to 
ensure that long term obligations are adequately met with a diversity of stable funding 
instruments without it being a detailed requirement. The advantage of this option would also be 
the full compliance with the Basel NSFR for all banks established in the EU.  

However, this approach may unduly penalize some activities or specific business models that are 
not or not adequately recognised by the Basel NSFR framework. This could lead to difficult 
adjustments for some banks that could have important unintended consequences on the European 
economy.  

Indeed, as of end-December 2014, 30% of the banks participating in the data collection for the 
EBA Report on NSFR, representing 75% of total assets in the EU, did not meet the Basel NSFR 
requirements. The stable funding shortfall58 for these non-compliant banks was estimated at 595 
billion EUR, representing 3,5% of the available stable funding amount for all the banks in the 
sample. As the way to comply with the NSFR requires deep restructuration of the balance sheet’s 
structure, the adjustments to the shortfall could be difficult to implement for non-compliant 
banks. This NSFR shortfall could mean that non-compliant banks have to find additional stable 
funding (equity, medium/long term bonds/loans or retail deposits), which would typically incur 
some compliance costs59, or to restructure their activities (the exact amount would depend on the 
RSF factor applied to the banks' assets) or to undertake a combination of both. 

Table 3. NSFR shortfalls 

NSFR shortfall (as of 
end-December 2014): 

No. of 
banks 

NSFR 

Number of 
compliant 
banks 

NSFR 
shortfall 
(bn. Euro) 

NSFR 
shortfall 
(% 
available 
funding) 
3.5  

103.6  

594.7  

103.6  

522.7  

3.2  

234  

279  

Total banks in the 
sample  
Consolidated results 
(removing identified 
subsidiaries of banks 
included in the 
sample)  
Source: EBA report on the NSFR, data as of end-December 2014 

196  
(70%)  
169  
(72%)  

Option 3: A single NSFR requirement as per Basel with some adjustments for all banks  

58 The NSFR funding shortfall corresponds to the difference between weighted assets and off-balance sheet 
items after application of the corresponding required stable funding - RSF - factors (denominator) and 
weighted  liabilities  after  application  of  the  corresponding  available  stable  funding  -  ASF  -  factor 
(numerator) 

59 Under current market condition replacement of 3m debt with 5y debt could results in marginal costs of 

around 30bps. 

36 

 
 
                                                    
                                                            
Using the Basel framework as a basis for the definition of a European NSFR would ensure a level 
playing field for European banks, especially for the ones undertaking cross-border activities. 
Moreover, as the Basel NSFR has been subject to an extensive observation period and public 
consultation (apart from the treatment of derivative transactions) and has been thoroughly 
discussed, its calibration is broadly satisfactory. 

However, the necessity to take specific account of some European specificities in order to ensure 
that the NSFR does not hinder the financing of the European real economy would justify 
adopting some adjustments to the Basel NSFR for the definition of the European NSFR.  

This mirrors the feedbacks received from the industry through the NSFR targeted public 
consultation and the call for evidence. The industry indeed widely accepts the introduction of the 
NSFR which is deemed as being a useful complementary supervisory measure but criticizes the 
miscalibration of some specific banking activities that could have an important impact on these 
activities and on the real economy. 

These adjustments to the European context are recommended by the EBA NSFR report and relate 
mainly to specific treatments for: 

  pass-through models in general and covered bonds issuance in particular, whose 
funding  risk  can  be  considered  as  low  when  assets  and  liabilities  are  matched 
funded; 
trade finance and factoring activities, whose short-term transactions are less likely 
to be rolled-over than other type of loans to non-financial counterparties; 

 

  centralised regulated savings, whose scheme of transfer renders the client deposits 

 

(liabilities) and claims on the state-controlled fund (assets) interdependent;  
residential guaranteed loans, whose specific characteristics make them similar to 
mortgage loans; 

  credit  unions,  whose  statutory  constraints  on  investment  of  their  excess  of 
liquidity entail a funding risk similar to that of non-financial institutions for the 
institution receiving the deposits. 

These proposed specific treatments reflect the preferential treatment granted to these activities in 
the European LCR compared to the Basel LCR. Such treatment was widely supported by 
Member States during the expert group meeting and by the industry during the NSFR targeted 
consultation. 

Beyond these European specificities, the EBA NSFR report does not advocate for other 
adjustments to the Basel NSFR for its implementation at EU level. However, the conclusions of 
the EBA NSFR report should be taken with caution, mainly because of the limitation of data 
underlined in the report (data only cover a single point in time (data as of end-December 2014) 
representing 75% of total assets held by credit institutions in the EU; 40% of credit institutions in 
the sample are from DE and IT).  

The stringent treatment of derivative transactions in the Basel NSFR could have an important 
impact on banks’ derivatives activities and on the access to some operations (e.g. hedging of 
currency risk, interest risk, exposure to a commodity etc.) for end-users (e.g. corporates, pension 
funds, public sector entities, insurance companies, retail banks etc.).  

Additional data gathered from the EBA show that the stable funding requirement linked to 
derivatives transactions for banks included in the sample of the EBA NSFR report amounts to 

37 

 
 
more than €615bn (data as of end-December 2014), with €260 billion due only to the 20% stable 
funding requirement on gross derivatives liabilities.  

The disproportionate impact the NSFR could have on derivatives activities and, consequently, on 
European financial markets and on the European economy is one of the main concern expressed 
quite unanimously by the industry, including end-users, through the call for evidence and the 
NSFR targeted consultation.. The treatment of derivative transactions and of some interlinked 
transactions (e.g. clearing activities) could be unduly and disproportionately impacted by the 
introduction of the NSFR without having been subject to extensive quantitative impact studies 
and public consultation. The additional requirement to hold 20% of stable funding against gross 
derivatives liabilities is very widely seen as a rough measure that overestimates additional 
funding risks related to the potential increase of derivative liabilities over a one year horizon. The 
rules underpinning the calculation of NSFR derivative assets and liabilities and in particular the 
asymmetric treatment between variation/ initial margins received and posted is also cited as 
detrimental to derivatives markets. According to a first impact study of the industry, the treatment 
of derivatives liabilities and variation and initial margins in the NSFR could lead to an additional 
funding requirement of €750 billion for the entire world-wide industry (not limited to the 
European industry).  

On the basis of available data and of Member States’ opinions expressed during the expert group 
meeting, it seems reasonable to slightly adjust the Basel treatment of derivatives, in particular the 
20% RSF factor that applies to gross derivatives liabilities, not to hinder the good functioning of 
EU financial markets and the provision of risk hedging tools to credit institutions and end-users, 
including corporates, to ensure their financing as an objective of the Capital Market Union.  

Furthermore, regarding short term transactions with financial institutions, a Sub-Committee of 
the Economic and Financial Committee on EU Sovereign Debt Markets (ESDM) raised concerns 
that the asymmetric treatment of short term (less than 6 months) transactions with financial 
counterparties60 may further affect the market-making ability of financial institutions on EU 
sovereign debt bonds.  

During the expert group meeting, some Member States also raised the issue of the potential 
impact of this asymmetry on sovereign debt’s market making.  

According to the EBA NSFR report, the estimated impact of this asymmetric treatment in terms 
of additional required stable funding is of more than €250 billion61 for EU banks participating in 
the sample of the EBA NSFR report.  

Finally, the vast majority of respondents to the call for evidence and the NSFR targeted 
consultation expressed concerns on this asymmetry that could be very detrimental to market 
making activities and, as a consequence, to the liquidity of repo market and of the underlying 
collateral. Repo markets are presented as essential for the smooth functioning of both banks’ 
liquidity management and market makers' inventory management. This treatment also raises 
some concerns regarding the impact on the interbank markets, in particular for liquidity 

60 The treatment of short term (less than 6 months) transactions with financial counterparties is asymmetric 
as the funding, including repos, received from a financial counterparty is not recognised as a source of 
stable funding (0% available stable funding - ASF) while the lending, including reverse repos, granted 
to  a  financial  counterparty  is  subject  to  a  stable  funding  requirement  (10%  or  15%  required  stable 
funding - RSF - depending on the quality of the underlying collateral for secured transactions).  

61 Data as of 31 December 2014 on the sample of 279 banks (representing 75% of total assets in the EU) 

included in the EBA NSFR report 

38 

 
 
                                                            
management purposes. It may then affect the liquidity of interbank markets, of the securities 
(including sovereign bonds) and undermine market-making activities, thereby contradicting the 
objectives of the CMU. The estimated impact of this asymmetric treatment in terms of additional 
required stable funding is of €300 billion62 in Europe according to the industry.  

The ESDM also expressed concerns on the 5% RSF factor which applies to Level 1 high quality 
liquid assets - HQLA - as defined in the LCR, including sovereign bonds, and that would imply 
that banks would need to hold ready available long-term unsecured funding in such percentage 
regardless of the time during which they expect to hold such EU sovereign debt bonds. This 
could potentially further incentivise credit institutions to deposit cash at central banks rather than 
to act as primary dealers and provide liquidity in sovereign bond markets.  

During the expert group meeting, several Member States favoured the alignment of the RSF 
applied to HQLA Level 1 for the calculation of the NSFR with the haircut applied for the LCR 
(0%) to ensure consistency between the LCR and NSFR.  

The banking industry also expressed its concerns regarding the 5% RSF factor applied to Level 1 
HQLA through the call for evidence and the NSFR targeted consultation. This RSF factor is 
deemed as being too high and not consistent with the LCR that recognizes the full liquidity of 
these assets even in time of severe stress. 

On the basis of available data and of Member States’ opinions expressed during the expert group 
meeting, it seems reasonable to bring limited changes to the treatment of both short-term 
transactions with financial institutions, and of HQLA Level 1 not to hinder the good functioning 
of EU financial and repo markets. 

The possible minor changes of some limited Basel provisions to take into account the 
specificities of the EU economy as well as to limit disproportionate and unjustified impact on 
certain activities will apply to all banks.  

The analysis performed in the EBA NSFR report does not show any correlation between the size 
of the bank and its compliance with the NSFR or the impact of lending to the economy and 
underlines the issue of the “too many to fail” which could impact financial stability if small banks 
were exempted from the NSFR requirement. Therefore, the EBA report does not recommend 
introducing a different stable funding requirement for small banks but recommends applying the 
same requirement to all banks on individual and consolidated basis. Answering to a call for 
advice of the Commission, the EBA issued a report on the assessment of the introduction of a 
possible core funding ratio for banks having a low funding risk profile in the EU. The EBA 
defined the core funding ratio as followed: (retail deposits + wholesale funding>1 year + equity 
instruments)/ (total liabilities + equity instruments) and used the sample of the EBA NSFR 
report. They do not support the introduction of a core funding ratio for a subset of European 
banks because of the weaknesses of this metric and because of the significant and costly 
reporting burden for supervisors triggered by the potential implementation of two different 
metrics for different banks. 

The Member States through the expert group meeting and the industry through the NSFR 
targeted consultation supported the analysis of the EBA report not to introduce an alternative 
funding requirement for a subset of European credit institutions, in particular due to the implicit 

62 European Banking Federation estimate on a sample of 65 EU banks, February 2016. 

39 

 
 
                                                            
proportionality of the NSFR which is simple to calculate for banks having simple funding 
structures.  

There is hence lack of support and evidence to introduce a differentiated NSFR requirement for 
small banks. Simpler reporting and disclosure requirements could however be introduced for a 
subset of European banks to alleviate the administrative costs related to the implementation of the 
NSFR. 

Comparison of policy options 

The summary of the analysis of different options to achieve the specific objective of providing a 
requirement promoting funding stability and limiting over-reliance on short-term funding at a 
reasonable cost is presented in the table below. This analysis leads to the conclusion that option 3 
is the preferred option. 

Table 4. Comparison of policy options against effectiveness and efficiency criteria 

    Objectives 

EFFECTIVENESS 

EFFICIENCY (cost-
effectiveness) 

Specific objectives 

Policy options 

Option 1: No policy change 

Option 2: A single NSFR 
requirement as per Basel for all 
banks 
Option 
single  NSFR 
requirement as per Basel with some 
adjustments for all banks  

3:  A 

S-1 

S-2 

S-3 

S-4 

S-5 

0 

+ 

0 

- 

0 

+ 

++ 

++ 

++ 

0 

0 

0 

0 

+ 

++ 

Table 5. Comparison of the impact of policy options on stakeholders 

0 

+ 

++ 

Policy options  

Option 1: No policy change 

  Stakeholders 

Banks  

Companies 
and 
households 

Supervisors 

Option 2: A single NSFR requirement as per Basel for all 
banks 

Option 3: A single NSFR requirement as per Basel with 
some adjustments for all banks  

0 

+ 

++ 

0 

+ 

++ 

0 

+ 

+ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

4.2.  On excessive leverage 

Policy options 

1. No policy change 

2. A single leverage ratio requirement as per Basel for all institutions  

3. A leverage ratio requirement differentiated for business models or adjusted for exposure types  

Option 1: No policy change 

40 

 
 
 
 
 
 
As mentioned in the problem definition risk sensitive capital requirements do not dampen the 
cyclical effects of economic upswings and are good as they deliver capital requirements 
proportionate to risks but they may not always capture the risk fully. Under current Union law the 
risk of excessive leverage is monitored by supervisors during the supervisory review process and 
institutions have to calculate report and disclose the leverage ratio. The approach so far based on 
supervisory monitoring, market discipline and anticipation of EU implementation of international 
rules has led to a situation where most European banks currently have a leverage ratio of more 
than 3%. However, only when imposed as a hard capital requirement which must be met at all 
times the leverage ratio will be effective in requiring banks to constantly manage their balance 
sheet in a way that will prevent distortive de-leveraging during economic downturns. A non-
binding capital measure can simply not bring about the same prudential rigour to prevent the 
building up of excessive leverage.  

Option 2: A single leverage ratio requirement as per Basel for all institutions 

A binding requirement would add trust in the overall financial stability of the institutions 
established in the EU. A complementary binding leverage ratio requirement of 3% of Tier1 
capital could provide an effective backstop compared to the current situation in Union law where 
banks have to calculate, report and disclose the leverage ratio subject to supervisory review. The 
advantage of this option would be to have in the Union a common measure against the building 
up of excessive leverage and as a hard backstop against model risk irrespective the type of 
business. This option would ensure also full compliance with the Basel leverage ratio for all 
banks established in the EU is so far as the international agreed calibration would apply.  

Option 3: A leverage ratio requirement differentiated for business models or adjusted for 
exposure types  

The one size fits all leverage ratio under option 2 has relatively more impact on banks which 
have business models with overall low risk sensitive capital requirements than banks with across 
the board higher risk weighted assets. In particular when banks with low risk weighted business 
models are subject to legal constraints on their business models such as public development 
banks' lending to the public sector, the leverage ratio may have an undesirable adverse impact on 
the availability or pricing of public sector lending. The leverage ratio requirement should 
therefore be adjusted by excluding from the leverage ratio exposure measure public development 
loans and pass-through promotional loans provided by public development banks set up by a 
Member State, central or regional government or municipality. 

Moreover, export credits, which are guaranteed by sovereigns or export credit agencies receive a 
considerably lower risk weight. In these instances the leverage ratio would be constraining capital 
requirement leading to higher capital charges. Since export credits are important for jobs and 
growth, guaranteed export credits deserve to be excluded from the leverage ratio exposure 
measure. 

More detailed analysis of the possible adjustment of the leverage ratio to a business model or 
exposure type is presented in annex 3.14. 

Based on the analysis, the options 2 and 3 score better than the baseline option. Option 3 would 
be more proportional and hence be beneficial for certain types of institutions but would arguably 
have reduced benefits for investors.  

Table 6. Comparison of policy options against effectiveness and efficiency criteria 

41 

 
 
 
Objectives 

EFFECTIVENESS 

EFFICIENCY 
 (cost-
effectiveness) 

Policy option 
Option 1: No policy change 

Option 2: A single leverage ratio 
requirement as per Basel for all 
institutions 
ratio 
Option 
requirement 
for 
business  models  or  adjusted  for 
exposure types  

leverage 
differentiated 

3:  A 

S-1 

S-2 

S-3 

S-4 

S-5 

0 

– – 

0 

+ 

+ 

++ 

0 

+ 

– 

0 

0 

– – 

++ 

+ 

+ 

0 

≈ 

– 

 Table 7. Comparison of the impact of policy options on stakeholders 
Stakeholder 

Institutions 
using SA 

Institutions 
using IRB 

Companies 
and 
households 

Regulators/ 
supervisors 

Policy option  

Option 1: No policy change 

0 

0 

0 

0 

Option 2: A single leverage ratio 
requirement as per Basel for all 
institutions 
Option  3:  A  leverage  ratio  requirement 
differentiated  for  business  models  or 
adjusted for exposure types  
Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

+ 

+ 

+ 

+ 

≈ 

– 

– 

– 

4.3.  On inadequate calibration of risk weights on SME exposures 

1. No policy change 

2. Removal of the SME Supporting Factor 

Policy options 

3. Introducing additional capital reduction for SME exposures above €1.5 million 

Option 1 – No policy change 

The continuity of the current regulatory framework would imply no compliance burden. 
The  current  framework  for  SME  exposures  would  largely  be  coherent  with  EBA 
findings,  which  demonstrated  that  the  SME  SF  had  been  found  to  be  consistent  with 
actual  systematic  riskiness  of  EU  SMEs63,  except  for  retail  exposures  of  banks  using 
Internal Rating-Based (IRB) approach (see also annex 2.2, which provides an overview 
of key conclusions from the EBA report on SMEs relevant for the SME SF). 

Table 8.  
Exposures: 
Approach: 

Retail (<=€1 mio)  Corporate (<=€1.5 mio)  Corporate (>€1.5 mio) 

63 EBA report on SMEs, p.88 

42 

 
 
 
 
 
 
 
 
                                                            
SA 

IRB 

SF of 24% 

SF of 24% 

SF of 24% 

SF of 24% 

N.A. 

N.A. 

This  option  would  respond  to  numerous  calls  from  banks  and  most  supervisors  and 
ministries  to  the  CRR  consultation64  and  the  Call  for  Evidence  for  retaining  the  SME 
Supporting  Factor  in  the  CRR.  Moreover,  the  stability  of  the  regulatory  framework 
would  facilitate  EBA's  continuing  monitoring  of  the  use  of  the  SME  Supporting.  No 
policy  change  in  the  use  of  the  SME  SF  might  also  increase  confidence  on  the 
sustainability of the measure and contribute to its more extensive use by banks. 

However, the application of the SME SF to SME exposures of up to €1.5 million would 
not be consistent with the findings of the EBA report stating that the threshold does not 
indicate  a  change  in  the  riskiness  of  SME  exposures  (see  annex  2.2).  This  means  that 
SME  exposures  above  €1.5  million  would  not  benefit  from  the  SME  SF.  Given  the 
negative association between the level of capital requirements and bank financing of the 
economy,  too  high  capital  requirements  for  SME  exposures  beyond  €1.5  million  is 
expected to result in a suboptimal level of bank financing of these SMEs65. 

Option 2: Alignment with the Basel rules 

This option would make the capital calibration for SME exposures internationally consistent. 
BCBS is currently reflecting on reducing capital charges for some SME exposures due their 
lower systematic risk. The second BCBS consultative document on the review of the 
Standardised Approach (SA) of 10 December 201566 includes a lower risk weight (85% instead 
of 100%) for all exposures of SMEs falling in the corporate exposure class (i.e. above 1 million 
euros) under the Basel SA. Capital charges applicable to retail exposures under the Basel SA 
would probably remain unchanged (75% risk weight), implying that SF of 24% currently applied 
for retail exposures of up to € 1 million under SA and all SME exposures under IRBA would be 
removed from the current CRR framework. 

Table 9.  
Exposures: 
Approach: 
SA 

Retail (<=€1 
mio) 
N.A. 

Corporate (<=€1.5 mio) 

Corporate (>1.5 € mio) 

Reducing baseline risk weight from 100% to 85% to all 
corporate exposures if BCBS adopts the approach 
currently consulted (equivalent to a SF of 15%)  

IRB 

N.A. 

N.A. 

N.A. 

Alignment with the Basel rules would imply that the average reported capital ratios of banks 
would diminish by up to 0.16% points on average67 with a significantly varying impact between 

64 http://ec.europa.eu/finance/consultations/2015/long-term-finance/index_en.htm 
65 Main estimate of the transitional effect, derived in from the study of May 2016 conducted by London 
Economics using data for the period 1985-2014, shows that for a one percentage point increase in the 
Total  Capital  Ratio  the  impact  on  lending  flows  of  banks  in  the  EU  is  -0.8%  over  one  year  with  the 
implied impact over a three-year period being -1.5%. 

66 http://www.bis.org/bcbs/publ/d347.htm 
67 EBA report on SMEs, March 2016, figure 37, page 69. 
43 

 
 
                                                            
individual banks and Member States68 (see annex 2.2). The decrease of capital ratios would at the 
same time lead to compliance costs, which on average would be marginal, but could however be 
significant for individual institutions depending on their capital position. Moreover, as observed 
by the EBA69, the increased capital requirements could lead to a reduction in lending, primarily 
by the most capital-constrained banks. 

Except a few think tanks, respondents to the CRR consultation overall did not support alignment 
with the Basel rules. Few supervisors and ministries to CRR consultation noted that the SME 
supporting factor might distort the risk-based framework for capital requirements, but invited the 
Commission not to change the current calibration of risk weights before more evidence on the 
effectiveness of the SME SF is obtained. EBA in its report on SMEs also underlined that it might 
be too early to draw conclusions on the effectiveness of SME SF, given the limitations of the data 
available and the relatively recent introduction of the SME SF70. 

Option  3:  Introducing  additional  capital  reduction  for  SME  exposures  above  €1.5 
million  

This  option  would  imply  maintaining  the  SF  for  exposures  in  its  current  form  as 
presented in option 1 (i.e. up to €1.5 million for SA and IRB banks) and complementing 
it with a discount of 15% in capital charges for loans to SMEs above €1.5 million euros. 
This  option  reflects  calls  from  banks,  corporate  buyers  and  SMEs  to  consider  further 
extension of the SME supporting factor to cover more SME loans. 

15% capital reduction for SME exposures above  €1.5 million would be consistent with 
the EBA findings, which state that "the limit of €1.5 million for the amount owed set in 
the Article 501 of the CRR does not seem to be indicative of any change in riskiness for 
firms".71  At  the  same  time,  the  EBA  analysis  suggests  that  the  systematic  risk  may 
increase for SME exposures above €2.5 million72. 

Based on the EBA analysis on the riskiness of SME exposures in France and Germany 
over the whole economic cycle, a 15% reduction would likely remain prudentially sound 
for  the  EU  banks.  Relatively  low  capital  requirements  currently  observed  for  the  retail 
asset  class  of  IRB  banks  would  likely  be  outweighed  by  relatively  more  prudent 
requirements in the corporate asset class for exposures above €1.5 million73.  

15% capital reduction for SME exposures above €1.5 million would also be aligned with the 
second BCBS consultative document on the review of the Standardised Approach (SA) of 10 
December 201574, which proposes 15% capital discount for all SME exposures falling in the 
corporate exposure class (i.e. above 1 million euros) under the SA. 

As compared to the current CRR framework, this option would provide additional capital relief 
for banks and thus would provide incentives for banks to increase lending to the economy as a 

68 EBA report on SMEs, March 2016, figure 41, p. 73 
69 EBA report on SMEs, March 2016, figure 23, p. 55 
70 EBA report on SMEs, March 2016, p. 11 
71 EBA report on SMEs, March 2016, p. 92 
72 EBA report on SMEs, March 2016, figure 50, p. 93 
73 EBA report on SMEs, March 2016, figures 47-48, p. 90-91 
74 http://www.bis.org/bcbs/publ/d347.htm 

44 

 
 
                                                            
whole, and SMEs particularly. The most effect is likely to be seen in the most capital-constraint 
banks. 

Table 10. 
Exposures: 
Approach: 
SA 

Retail (<=€1 mio)  Corporate (<=€1.5 mio) 

Corporate (>€1.5 mio) 

SF of 24% 

SF of 24% 

IRB 

SF of 24% 

SF of 24% 

Reducing baseline risk 
weight from 100% to 85% 
(equivalent to SF of 15%) 
SF of 15% 

Comparison of policy options 

Table 11. Comparison of policy options against effectiveness and efficiency criteria 

Objectives 

Policy option  

Option 1: No policy change 

Option 2: Alignment with the Basel rules 

Option  3:  Introducing  additional  capital 
reduction for SME exposures above €1.5 
million 

EFFECTIVENESS 

EFFICIENCY 

S-1 

S-2 

S-3 

S-4 

S-5 

 (cost-
effective-ness) 

0 

– 

+ 

0 

– 

++ 

0 

≈ 

≈ 

0 

0 

0 

0 

+ 

+ 

0 

- 

+ 

Table 12. Comparison of the impact of policy options on stakeholders 

Stakeholder 

Policy option  

Option 1: No policy change 

Banks using 
SA 

Banks using 
IRB 

Companies 
and 
households 

Regulators/ 
supervisors 

0 

0 

0 

0 

– 

Option 2: Alignment with the Basel rules 
Option  3:  Introducing  additional  capital 
reduction for SME exposures above €1.5 
million 
Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ 
strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; 
n.a. not applicable 

+/≈ 

– – 

+ 

+ 

≈ 

≈ 

≈ 

In a view of the analysis above, the option 3 would achieve the highest cost-effectiveness 
and would make most key stakeholders better-off.  

4.4.  On  weaknesses  to  the  regulatory  framework  for  loss  absorption  and 

recapitalisation capacity 

1. No policy change 

Policy options 

45 

 
 
 
 
 
                                         
2. Integrate TLAC standard in MREL for G-SIIs  

3. Integrate TLAC standard in MREL for G-SIIs and O-SIIs 

A potential option to implement TLAC for G-SIIs in parallel to existing MREL requirements is 
disregarded as it would result in duplicate regulatory frameworks, inconsistencies and an 
unnecessary regulatory burden.  

Option 1: No policy change 

Under this option, the BRRD would continue to apply in its current form. The BRRD already 
creates a framework according to which MREL is set by the resolution authority, on a case-by-
case basis for all institutions. 

In terms of benefits, this option will continue to materially reduce the risk that the failure of an 
EU G-SII would destabilise the broader financial system in turn lowering the probability of a 
financial crisis. In addition, it will continue to ensure a significantly reduced probability of 
taxpayers' support in case of such failure and the amount of such support should it still be deemed 
necessary (for example, when losses would be significantly higher than implicitly assumed in the 
calibration of the requirement). Indeed, as a direct consequence of this option the capacity for 
loss absorption and recapitalisation of EU G-SIIs will improve and as an indirect consequence, 
incentives for creditors and shareholders to scrutinise the EU G-SII's risk-taking (ex-ante, rather 
than just ex post absorbing the losses) will be enhanced. Furthermore, by removing the current 
implicit subsidy for EU G-SIIs provided by governments, this option could help avoid the build-
up of excessive risk and leverage within those institutions and consequently the EU banking 
system as a whole. It will also remove the competitive distortions created by the implicit 
guarantee.  

Nevertheless, this option also has several potential drawbacks. After the adoption of the BRRD, 
the FSB has developed an international standard on adequate loss absorbing capacity for G-SIIs. 
EU members of the FSB have committed to implementing those standards. If the EU now 
decided not to implement them it would be seen as reneging on its commitment, irrespective of 
the fact that the BRRD would still continue to apply. This could potentially lead other 
jurisdictions that are home to G-SIIs to decide not to implement the standards either, while the 
latter however may not dispose of a bank resolution framework like BRRD to make good for this. 
If so, this would lead to an outcome which is not in the EU's interest: a less safe global financial 
system. Moreover, G-SIIs being active worldwide, a level playing field among them is of crucial 
interest for the EU. A situation where the EU held its G-SIIs to stringent MREL requirements 
under BRRD and other jurisdictions did not implement the global standard and others did not 
implement TLAC would imply competitive distortions.  

Furthermore, while TLAC and MREL share the same policy objective - ensuring sufficient loss 
absorption and recapitalisation capacity - the features of MREL and TLAC contain important 
differences. Under this option there would be no minimum ('Pillar 1') requirement for loss 
absorption and recapitalisation capacity for G-SIIs. While it could be argued that resolution 
authorities could use the BRRD framework to impose an MREL that would match the amount of 
loss absorption and recapitalisation capacity under the TLAC framework, different Member 
States and resolution authorities could choose different approaches when implementing the 

46 

 
 
 
 
requirement, potentially creating an un-level playing field between the different EU G-SIIs. In 
addition, without transposing the TLAC requirement in EU law, there would be no legal 
guarantee that all G-SIIs would be subjected to it at all times as compliance would be dependent 
on discretional decisions of national resolution authorities. 

For example, each Member State could implement the eligibility criteria in a different manner 
which could create situations where a given type of a liability could be used to meet the 
requirement in one Member State but not in another. Since the BRRD does not provide any 
specific treatment for an institution's holdings of MREL-eligible liabilities, Member States could 
decide not to require that they be deducted or more generally implement inadequate75 or different 
approaches on how to deal with those holdings. In the former case the issue of potential 
contagion effect of a bail-in of an EU G-SII's liabilities would remain unresolved; in the latter 
case a plethora of different rules would unnecessarily increase the compliance burden of 
institutions. Furthermore, the BRRD currently does not prevent an EU G-SII from using CET1 
capital, which it uses to meet its MREL, to meet the combined buffer requirement in the CRD IV 
(i.e. it does not prevent dual use of capital). This, inter alia, impedes effectiveness of capital 
buffer requirement as a policy tool. Member States may decide to address this issue differently in 
their national law, leading to further divergence of rules and also to insufficient amounts of own 
funds available to absorb EU G-SIIs' losses.  

Not implementing TLAC could also lead to a situation where EU G-SIIs would be perceived as 
riskier (for example, if the resolution authority would not exercise its discretion to require the EU 
G-SII to meet its MREL requirement partially with subordinated liabilities, investors might have 
difficulties in establishing the insolvency ranking of those liabilities, and hence may shy away 
from purchasing them or require higher compensation to do so) by markets compared to their 
third-country peers subject to a TLAC requirement and therefore increase their funding costs, 
which could in turn reduce their international competitiveness. 

Option 2: Integrate TLAC standard in MREL rules for EU G-SIIs 

Under this option, the MREL rules would be amended to integrate the TLAC standard for EU G-
SIIs. This would mean that, compared to option 1, option 2 would include the following 
additional elements: 

  As of 1 January 2019 a Pillar 1 MREL would be set at the higher of either 16% of the risk-
weighted  assets  (RWAs)  or  6%  of  the  leverage  ratio  exposure  measure  (LREM).  After  1 
January 2022, the requirements would be increased to 18% and 6.75%, respectively; 

 

the Pillar 1 requirement could be met only with i) own funds and ii) eligible liabilities that 
would meet eligibility criteria that would be the same for all G-SIIs (as an exception, G-SIIs 
would be allowed to use non-subordinated liabilities up to an amount equivalent to 2.5% of 
RWAs (3.5% after 1 January 2022) to meet the requirement); 

  based  on  the  resolution  strategy  of  each  G-SII,  the  Pillar  1  requirement  could  be 
complemented with a firm-specific ('Pillar 2') additional requirement and with firm-specific 
guidance; 

 

a clearly spelt hierarchy of the different types of requirements (a G-SII would need to meet 
first  its  Pillar  1  requirement,  then  its  Pillar  2  requirement,  then  the  combined  buffer  as 
defined in the CRD IV and finally the guidance); 

75   Member  States  could  potentially  require  deductions  of  those  holdings  from  MREL,  but  could  not 
require deductions for own funds items. The reason is that the latter deductions are laid down in directly 
applicable Union law (the CRR), which cannot be changed by national law. 

47 

 
 
                                                            
 

a  GSII's  holdings  of  eligible  liabilities  issued  by  another  G-SII  would  need  to  be  deducted 
from the former's MREL or own funds. 

All other institutions would remain subject to the current BRRD requirement for MREL. Some of 
the elements listed above would however apply also to those institutions (e.g. the common set of 
eligibility criteria for the 'Pillar 2' requirement with the exception of the subordination criterion, 
which would not be mandatory for MREL required under BRRD, or the alignment of the 
hierarchy of the different requirements). 

Compared to option 1, this option would have several additional benefits. First and foremost, it 
would deliver on the EU's commitment to implement the TLAC standards into Union law. This 
would reinforce the expectation on other jurisdictions to follow suit and hence help ensuring that 
the TLAC standard is complied with world-wide so that also third-countries would have in place 
rules ensuring that their G-SIIs could be resolved in case of failure. Second, it would promote a 
level playing field amongst G-SIIs, both in the EU and internationally. Third, it would solve the 
issue of potential contagion effects stemming from holdings of eligible liabilities issued by G-
SIIs. Fourth, it would provide a higher degree of legal clarity on the regulatory framework 
applicable in the EU because of the presence of a single set of rules applicable to all EU G-SIIs 
(e.g. common eligibility criteria, common treatment of holdings of eligible liabilities and clearly 
spelt rules on interactions between different types of requirements). Finally, given the partial 
“subordination requirement” of the TLAC Term Sheet76, investors and resolution authorities 
would benefit from enhanced clarity on the ranking of instruments issued by G-SIIs in insolvency 
and in resolution, which, given the complexity and size of G-SIIs, is particularly desirable in their 
case. 

The marginal impact of this option compared to option 1 is difficult to estimate as an important 
element for the cost and benefit estimation would be to have a view on the level at which MREL 
will be set under option 1. The current BRRD requires resolution authorities to set an institution's 
specific MREL requirement. The exact level of these requirements as well as the decision on 
whether and, if so, extent to which the MREL eligible instruments need to be subordinated are 
discretionary decisions which have not yet been taken by resolution authorities. Depending on a 
series of assumptions on how resolution authorities would exercise their discretion, EBA 
estimated the shortfall for G-SIIs under current MREL between € 87 bn and 720 bn. The 
resolution authorities' decisions on requesting subordination or not will be a key driver of the 
shortfalls under the current MREL rules.  

Under option 2, TLAC is introduced into the MREL framework. The MREL framework would 
be complemented with a minimum on the level and quality of bail-inable liabilities for EU G-
SIIs, whilst resolution authorities can still require more. Based on the existing requirements of the 
RTS on the methodology for setting an MREL77, EU G-SIIs are unlikely to be required to meet 
an overall MREL lower than the minimum that would be introduced by TLAC. However, the 
mandatory subordination for the majority of the eligible debt can still have an impact. The extent 
to which there would be an impact from this mandatory subordination, depends on whether and 
to what extent the resolution authorities will require mandatory subordination for their G-SIIs – 

76 Total Loss-Absorbing Capacity (TLAC) Principles and Term Sheet, FSB, 9 November 2015 

77  COMMISSION  DELEGATED  REGULATION  (EU)  2016/1450  of  23  May  2016  supplementing 
Directive  2014/59/EU  of  the  European  Parliament  and  of  the  Council  with  regard  to  regulatory 
technical  standards  specifying  the  criteria  relating  to  the  methodology  for  setting  the  minimum 
requirement for own funds and eligible liabilities 

48 

 
 
                                                            
they have discretion to do so - under the current BRRD. The interaction between the shortfalls 
estimated under the option 1 and the 2022 calibration of the TLAC Term Sheet are:  

Table 13. 

 In € 
MREL scenario 1:  
- subordination of MREL instruments not 
required, 
- MREL set at twice the capital requirement 
(including Pillar 2 and capital buffer 
requirement78) 
MREL scenario 2:  
- subordination of MREL instruments 
required 
- MREL set at (i) twice the capital 
requirement (including Pillar 2 and capital 
buffer requirement) and (ii) 8% of total 
assets) 

Shortfall under 
option 1 (current 
BRRD) 

Additional shortfall 
under option 2 (MREL 
incl. TLAC minimum) 

34 bn non 
subordinated debt 

310 bn subordinated debt 
(34 bn non subordinated 
debt under option 1 is no 
longer needed) 

720 bn subordinated 
debt 

No additional shortfall 

Given the transition period until 2022, it can be expected that G-SIIs would act upon their 
shortfall by replacing their current stock of non-eligible senior debt, at maturity, with eligible 
subordinated debt. This would increase the funding cost for these instruments. FSB estimates on 
this increase range between 30 and 50 bps. Specifically for the EU, as an upper limit, the funding 
cost increase should not be higher than the spread difference observed between senior debt and 
subordinated tier II debt which is between 100 and 200 bps for EU G-SIIs. As a lower bound, the 
German law subordinating all senior debt (thereby achieving the required subordination), resulted 
in a minor increase in spreads bellow 30 bps. While in the short term it may be possible that the 
type of subordination EU G-SII's apply for their eligible liabilities could play a role in 
determining the impact on its funding costs (for example, it would appear that right now senior 
bonds issued by a parent holding company that would be subject to bail-in in case of structural 
subordination involve a lower risk premium than subordinated bonds issued by a parent which is 
an operating company although the risk premium should, in principle, be the same), in the 
medium to long term this impact is expected to fade. It is important to stress that the choice of the 
strategy to achieve statutory subordination (cfr. section 4.7.) could also influence the overall 
impact on the funding cost. Finally, the actual impact would vary depending on the current 
amount, maturity profile, corporate structure, perceived strength and type of liabilities of each EU 
G-SII. The more TLAC eligible liabilities an EU G-SII would already have, the less eligible 
liabilities it would have to 'create' (e.g. by issuing subordinated debt instruments) and the lower 
the impact on the funding costs (and vice versa). This impact could be partially offset by a 
reduction in the funding costs of senior liabilities (since there would be more loss absorbing 
capacity 'sitting' below senior liabilities, in case of insolvency or resolution of the G-SII the 
likelihood of senior liabilities bearing losses would be lower and hence the risk premium required 
from investors to buy them would be lower). However it is unlikely that this offset would be 
complete.  

78 Pillar 2 is assumed to be set at 2%. The capital buffer requirements assumed are a Capital Conservation 

Buffer of 2.5% and an institution specific G-SII buffer. 
49 

 
 
                                                            
Option 3: Integrate TLAC standard in MREL for G-SIIs and O-SIIs 

Under this option, the approach contained in option 2 would be extended to EU O-SIIs in order to 
ensure that those comply with the same minimum requirement as G-SIIs. While the failure of an 
O-SII may not have the same impact as the failure of a G-SII at global level, it can have a 
significant impact on the provision of critical functions at the local level (i.e. in the Member State 
where the institution was designated as a O-SII). Therefore, bail-in is likely to be part of the 
resolution strategy of a O-SII and sufficient amounts of MREL should underpin the resolution 
strategy. 

The main drawback of this option is that applying a regime designed for G-SIIs to O-SIIs may 
have disproportionate effects on the latter. One issue is related to the “subordination 
requirement”. EU O-SIIs that are not subsidiaries of G-SIIs may have a more restricted or even 
no access to markets when it comes to issuing subordinated debt instruments. Around 10% of 
such EU O-SII currently do not report any subordinated liabilities. This may mean that they may 
be unable to issue sufficient amounts of these instruments to meet the MREL in case of shortfalls 
and they may therefore be forced to issue more expensive instruments (shares). Assuming that 
resolution authorities would not exercise their discretion to impose the subordination of eligible 
liabilities under option 1, this would mean that option 3 could lead to an increase in the funding 
costs for EU O-SIIs compared to option 1. For the same reason it would also likely lead to higher 
increases for EU O-SIIs than would be the case for EU G-SIIs. It could be argued that imposing 
the same requirement on both may level the playing field to the extent the O-SIIs would in 
practice be subject to a lower requirement than the TLAC minimum. G-SIIs and O-SIIs are often 
competing in local markets. However, this level-playing field argument does not hold when the 
TLAC standard would be disproportionate for a smaller O-SII, thereby weighing on its ability to 
compete with both G-SIIs and non-O-SIIs.  

Another issue is related to applying TLAC minimal requirements to a heterogeneous group of 
institutions such as the O-SIIs. As recommended by EBA79, the calibration of MREL should be 
closely linked to, and justified by the institution’s resolution strategy. This resolution strategy 
should depend on factors such as the business model, size, interconnectedness, legal structure, 
and scope and complexity of activities80. The differences in characteristics between EU G-SIIs 
and O-SIIs have been analysed in annex 2.13. Both in terms of size compared to GDP and in 
terms of business model and activities there is a large heterogeneity between the different O-SIIs 
both within and across member states.  

Implementing the TLAC standards' harmonised minimum requirement, to such a heterogeneous 
group of institutions could overestimate the required bail-in capacity which would have to be 
met, for the most part, with subordinated liabilities. TLAC is calibrated to ensure that there is 
market confidence that each G-SII has a minimum amount of loss-absorbing capacity that is 
available to absorb losses and recapitalise the bank in resolution. As the resolution strategy for 
EU O-SIIs might vary depending on their size, business model and critical functions, it can be 
envisaged that the bail-in tool would not be suitable for certain O-SII or at least part of their 
activities. In cases where for example only the retail activities would need to be continued post 
resolution, it could be envisaged that the remaining activities would be liquidated. This would 
imply that there is no need for a recapitalisation amount for these non-critical activities. Hence 
setting a minimum MREL requirement at the levels required under the TLAC standard could 
overestimate the MREL required in accordance with the resolution strategy. Therefore the 

79 See Interim Report on MREL (2016) 
80 BoE on Resolution Planning 

50 

 
 
                                                            
framework where MREL is determined as a Pillar 2 requirement, based on the loss absorption 
amount, the recapitalisation amount (determined by taking into account potential divestments and 
other resolution actions under the preferred resolution strategy) and the DGS adjustment, is better 
suited then a Pillar 1 requirement.  

The impact of this option, in terms of shortfall of eligible instruments, compared to option 1 
cannot be quantified precisely as current MREL should be set by the resolution authorities on a 
case-by-case basis and at this point, the relevant decisions are not known. 

Comparison of policy options 

The summary of the analysis of different options to achieve the specific objective to enhance 
capacity for loss-absorption and recapitalisation of G-SIFIs is presented in the table below.  

Table 14. Comparison of policy options against effectiveness and efficiency criteria 

             Objectives 

Policy option 

Option 1: No policy change 

Option 2: Integrate TLAC 
standard in MREL for G-SIIs 

Option 3: Integrate TLAC 
standard in MREL for G-SIIs and 
O-SIIs 

EFFECTIVENESS 

Specific objectives 

EFFICIENCY 
 (cost-effectiveness) 

S-1 

S-2 

S-3  

S-4 

S-5  

0 

0 

0 

n.a. 

n.a. 

++ 

n.a. 

n.a. 

+ 

0 

++ 

++ 

0 

+ 

+ 

0 

++ 

≈ 

Table 15. Comparison of the impact of policy options on stakeholders 
Stakeholder 

Bank debt- and 
shareholders 

Policy option 

Option 1: No policy change 

Option 2: Integrate TLAC standard 
in MREL for EU G-SIIs 

Option 3: Integrate TLAC standard 
in MREL for EU G-SIIs and O-SIIs 

Banks 

0 

+ 

+/– 

Supervisors 

0 

+ 

+ 

Companies and 
households 

0 

+/– 

+/– 

0 

+ 

+ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ 
strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; 
n.a. not applicable 

4.5.  On  inappropriate  level  of  capital  requirements  against  trading 

activities  

1. No policy change 

Policy options 

51 

 
 
 
 
 
 
 
 
2. Adopt the FRTB standards for all the institutions subject to the CRR 

3. Adopt the FRTB standards with some adjustments to reflect European specificities and a revised regime for small 
trading book businesses 

Option 1: No policy change 

This option would consist in keeping unchanged the existing prudential framework for market 
risk, including the derogation for small trading books. 

Under the status quo, institutions would suffer no costs related to the implementation of new 
rules for trading book exposures. However, the weaknesses and design flaws of the current 
prudential framework for these transactions would remain unaddressed. As a result, the allocation 
of capital requirements across trading book transactions may still be inadequate as compared to 
the true risks faced by the institutions. On the one hand, for certain transactions in the trading 
book, institutions subject to the CRR would not have a sufficient amount of capital to absorb the 
potential losses that may arise from adverse changes to the market conditions for those 
transactions. Those losses could be particularly significant for institutions with very concentrated 
portfolios in those transactions, which could potentially require State intervention or resolution of 
those institutions as a result. On the other hand, certain transactions in the trading book may be 
subject to capital requirements which are too high compared to their inherent risk. This could 
translate in reduced liquidity and increased transactions costs for those transactions. 

Option 2: Adopt the FRTB standards for all the institutions subject to the CRR 

This option would consist in replacing the current framework for market risk capital requirements 
by the new BCBS standards (i.e. the FRTB standards) for all the institutions subject to the CRR. 
This would include the new standardised and internal-models approaches as well as new rules for 
allocating positions to the trading book (i.e the "boundary" between banking and trading books). 
The flexibility for institutions to choose between the internal models and the standardised 
approaches would be retained, consistently with the new rules. CRR elements which are not 
included in the FRTB, such as the derogation for small trading books, would be carved out from 
the CRR. 

The FRTB requirements would significantly improve the design of the prudential framework for 
market risks which was welcomed by both the supervisory authorities and the banking industry 
when the standards were developed: 

  more objective rules would be defined to allocate transactions to either the trading 
or banking books, therefore reducing the risks of regulatory arbitrage whereby a 
trading  position  would  be  subject  to  inappropriate  banking  book  capital 
requirements.  Stricter  limits  would  also  be  implemented  to  move  transactions 
between the two regulatory books; 

  capital  requirements  would  be  more  risk-sensitive  under  the  FRTB  standards 
which means that they would be more proportionate to the true market risk faced 
by the institutions. A number of technical improvements have been developed to 
make the measurement of market risk more risk-sensitive. First, the standardised 
reflect 
approach 
diversification  and  hedging  effects.  Second,  some  changes  would  affect  both 

formulas  have  been 

fundamentally 

to  better 

revised 

52 

 
 
 
 
 
standardised  and  internal-models  approaches:  (i)  replacement  of  the  Value-at-
Risk  by  the  Expected  Shortfall  risk  measure  to  better  capture  potential  extreme 
losses; (ii) calibration to stress conditions in order to reduce the pro-cyclicality of 
the  capital  requirements;  (iii)  the  introduction  of  variable  liquidity  horizons  to 
reflect the liquidity of the transactions; 

  The FRTB standards would reduce the likelihood that institutions would develop 
unrealistic  and  deliberately  lenient  modelling  assumptions.  First,  the  permission 
to use the revised internal-models approach would be conditional to fulfilling new 
quantitative criteria that measure the performance of models (P&L attribution and 
back-testing). Second, the revised standardised approach has been designed as a 
real  backstop  to  the  internal-models  approach  that  can  be  applied  at  a  more 
granular  level  ("trading  desk")  in  case  of  poor  internal-models  performances. 
Finally,  third,  certain  risk  factors  (non-modellable  risk  factors)  or  asset  class 
(securitisation)  would  be  restricted  to  specific  standardised  treatment  for  the 
calculation of their capital requirements. 

However, institutions subject to the CRR would also incur additional compliance costs related to 
the implementation of the FRTB standards, even the ones that intend to apply the standardised 
approach of the FRTB. At present, the FRTB standards do not contain any proportionality 
features which raise some questions about their appropriateness for the least sophisticated 
institutions or the ones with small trading activities (although the BCBS is currently considering 
the inclusion of an extra, simpler standardised approach for those institutions). Therefore, 
implementing the FRTB for all banks as it currently stands could be contradictory with the 
principle of proportionality and would therefore not address the concerns of the industry raised 
via responses to the targeted consultation paper on this topic. In fact, the industry unanimously 
recommended to include a simplified standardised approach for medium-sized institutions as well 
as to maintain the derogation for institutions with small trading activities 

Although the design of the prudential framework for market risks has been improved with the 
FRTB standards, it could have a potential detrimental impact on the functioning of the EU 
financial markets via an excessive level of capital required for certain product types that could 
lead to increased prices, reduced trading volumes and restricted access to capital market for 
certain actors of the economy. This concern was confirmed by a majority of respondents to the 
Call for Evidence on the impact of the FRTB standards on market-making activities and market 
liquidity who suggested to reconsider the calibration of the final Basel standards. Not only 
current market-making activities could be negatively affected by the excessive level of capital 
requirements of the FRTB standards but the CMU objectives, which aim to expand of capital 
market access for corporates in the EU, are also jeopardised. Once CMU is implemented, banks 
will play an essential role in providing liquidity in the trading of corporate securities. According 
to the industry, such market-making function could be dis-incentivised if the capital requirements 
for those products are too excessive.  

Finally, implementing the FRTB as it currently stands could lead to some inconsistencies with 
other parts of the CRR, in particular: 

  The  FRTB  standards  does  not  propose  any  beneficial  treatment  for  the  capital 
requirements of STS (simple, transparent and standardised) securitisations while 
the  Commission  proposed  to  extend  to  trading  book  positions  the  beneficial 
treatment for the capital requirements of STS securitisations in the banking book 
which is currently under negotiation. 

53 

 
 
 
  The FRTB establishes capital requirements for sovereigns which are higher than 
in  the  current  market  risk  framework.  This  may  introduce  a  disparity  between 
capital requirements  for this  type  of securities in  the  trading and  in  the  banking 
book, making them significantly higher in the former. 

Option 3: Adopt FRTB standards with adjustments to the calibration and to reflect 
European specificities and a revised regime for small trading book businesses 

This option would consist in the implementation of the FRTB standards with calibration 
adjustments to ensure that EU capital markets are not excessively affected by the introduction of 
the FRTB standards. It also aims to take into account certain EU specificities and ensure 
consistency with other parts of the CRR (e.g. STS securitisations and sovereign exposures) and 
with the objectives of CMU. Moreover, this option would allow a revised derogation for small 
trading book business to account for proportionality in the new regime. 

The  key  mechanics  of  the  FRTB  framework  would  be  maintained  but  its  calibration 
would  be  modified  to  address  the  concerns  about  the  conservativeness  of  the  FRTB 
framework in general, as expressed by Member States during the CEGBPI group meeting 
on 19th July 2016, by the responses of many EU institutions and banking associations to 
the Call for Evidence but also during a number of physical meetings scheduled but the 
Commission services on this topic since the beginning of the year.  

So  far,  two  limited  data  analyses  about  the  capital  impacts  of  the  FRTB  have  been 
performed  based  on  mid-2015  data:  (i)  an  impact  analysis81  from  the  Basel  Committee 
for  a  sample  of  banks  worldwide,  including  European  institutions;  this  sample  was 
mostly composed of banks with large trading books and (ii) an analysis from the Global 
Association  of  Risk  Professionals  (GARP),  initiated  by  the  banking  industry  which 
comprised 21 internationally active banks, 13 of which are designated G-SIBs, and 12 of 
which are European institutions.. The GARP analysis concentrated on the largest market 
dealers, which also participated in the Basel Committee analysis. 

The samples in both analyses are sufficiently diversified to draw some broad conclusions 
about  the  capital  impacts  of  the  FRTB  framework.  However,  both  analyses  contain  a 
number of caveats: 

-  The Basel Committee  analysis  does not  take into  account the final adjustments  that 
were  made  to  the  FRTB  framework  before  it  was  adopted.  It  is  not  technically 
possible to correct the results of the analysis to take into account the impacts of these 
adjustments,  the  analysis  would  have  to  be  reproduced  again  with  the  recalibrated 
parameters; 

-  The GARP analysis is based on a smaller sample of banks, with a high percentage of 

participating banks being large market dealers; 

-  The banks in both samples operate in different markets and jurisdictions and it is not 

possible to isolate the impacts of the FRTB for European institutions only. 

The global capital impact of the FRTB framework at bank level is broadly consistent in 
the two analyses: median impact at bank level of +22% in the Basel Committee analysis 
and,  assuming  full  approval  of  bank  internal  models  under  FRTB,  +20%  in  the  GARP 

81 http://www.bis.org/bcbs/publ/d352_note.pdf 

54 

 
 
                                                            
analysis;  weighted  average  impact  at  bank  level  of  +40%  in  the  Basel  Committee 
analysis and, assuming full approval of bank internal models under FRTB, non-weighted 
average impact at bank level of +50% in the GARP analysis. In light of these results, it 
seems that, even though the final adjustments made to the FRTB framework - taken into 
account in the GARP analysis - lowered capital requirements, a significant increase can 
be expected overall.  

More  recent  and  granular  estimates  by  the  EBA  shows  that  the  increase  in  capital 
requirements  resulting  from  the  implementation  of  the  FRTB  is  more  pronounced  for 
those banks that expect to be granted the permission to use the internal model approach 
as compared to those banks that will use only the standardised approach. 

Table 16. Capital requirements impacts of the FRTB framework at bank level split per 
approach used  

Percentage change from Current to 
Revised at Bank level  

Split per Approach used 

Banks using internal model 
approach fully or partially 
Banks using the standardised 
approach only 

25th 

Mean 

Percentile  Median 

75th 
Percentile 

Sample 
Size 

63% 

3% 

36% 

94% 

183% 

47% 

170% 

269% 

26 

17 

Source:  EBA report on SACCR and FRTB implementation, November 2016. 

Beyond these analyses of the overall impact of the introduction of the FRTB standards, the Basel 
Committee investigated the capital impacts at a more granular level for different asset classes. 
However, the analysis is limited to the banks using internal models and has not been performed 
under the standardised approach. It is hence very difficult to understand on that basis whether 
certain risk categories are more impacted than others due to the introduction of the FRTB in 
general, given that the most significant impact overall is observed under the Standardised 
approach.  

All in all, the above analyses suggest that the overall calibration of the FRTB framework 
could  be  too  conservative  and  possibly  undermine  the  good  functioning  of  financial 
markets  in  the  EU  by  setting  an  excessive  level  of  capital requirements.  The  following 
recalibrations could be envisaged: 

 (i) A general recalibration as we are concerned that the general calibration of the FRTB will 
significantly increase market risk capital requirements of EU banks. An overall multiplicative 
factor equal to 65% would be applied to the own fund requirements for market risks, irrespective 
of the approaches used to calculate it, to broadly offset the estimated average increase. This 
treatment would be in line with the expectation of the Basel committee that the remaining 
measures to complete the post crisis banking reforms should not result in a significant increase in 
capital requirements. It would also address concerns from both Member States and the industry 
about the potential significant increase in capital requirements for market risks that could 
undermine the market-making activities of European institutions and more broadly the market 
liquidity of the EU financial markets.  

55 

 
 
 
 
(ii) No targeted recalibrations per asset class. The analyses that have been performed so 
far do not give a sufficient level of understanding of the impact at the level of the various 
products  in  scope.  Moreover,  the  relative  impact  of  an  adjustment  at  asset  class  level 
would  be  much  more  difficult  to  assess,  which  risks  undermining  the  horizontal 
consistency of the framework. Both the overall multiplicative factor and the opportunity 
to  adjust  calibrations  at  asset  class  level  would  be  subject  to  revision  3  years  after  the 
entry into force of the new standard in the EU.  

In addition to the revision of the calibration of the FRTB framework, some adjustments 
to  the  Basel  standards  would  be  proposed  in  order  to  reflect  specificities  of  financial 
markets  in  the  EU  and  to  ensure  consistency  with  the  capital  requirements  for  banking 
book transactions under the CRR.  

Firstly,  granular  data  on  covered  bonds  have  been  received  from  the  industry,  which 
argues that the calibration of these products under the standardised approach of the FRTB 
(400bps  shock)  is  too  high  for  the  European  market,  as  highlighted  by  the  historical 
estimates  shown  below  for  different  European  jurisdictions.  According  to  these 
estimates,  most  European  covered  bonds  markets  experienced  a  maximum  shock 
between 50bps to 150bps in the period 2008-2016. Moreover, the risk weight assigned to 
covered bonds seems high in comparison with other asset classes and does not reflect the 
good performance of European covered bonds.  

Figure 7. Historical estimates of covered bonds volatility 

56 

 
 
 
 
 
 
 
 
 
Source: EBA report on SACCR and FRTB implementation, November 2016. 

These figures would support maintaining a beneficial treatment for covered bonds as it is 
currently the case for market risks capital requirements in the CRR. This market has been 
historically very important in the way certain European institutions obtain lower cost of funding 
in order to grant mortgage loans for housing and non-residential property and the supervisory 
authorities of those jurisdictions (e.g. Denmark) warned us about the potential detrimental impact 
that would have a significant increase in capital requirements for covered bonds. 

Secondly, we would introduce a beneficial treatment for STS securitisation exposures 
comparable to the one established for banking book positions in the Commission proposal on 
STS securitisation. First, the risk of arbitrage opportunities between the trading and banking 
books would be reduced if the capital requirements between the two books are more aligned 
(although the new boundary will make it more difficult to move an instrument between the two 
books). More importantly, the beneficial treatment would improve the secondary market liquidity 
of STS securitisation by keeping less costly inventories. 

Thirdly, we would adjust the capital requirements for domestic (i.e. EU) sovereigns. Since the 
FRTB introduces a new standardised capital charge (CSR) applicable to sovereigns, it would no 
longer be possible to hold EU sovereigns in the trading book with only a single, relatively thin 
capital charge, the one for interest rate risk, as it is now the case. Furthermore, the current 
underlying principle in the CRR that capital requirements for EU sovereigns are unrelated to their 
ratings would no longer be preserved, since the CSR is rating-dependent. Given the fact that the 
Basel is performing a comprehensive review of the treatment of sovereign exposures, it would 
seem reasonable to wait for its conclusions, and apply, in the meantime, a treatment for EU 
sovereigns in terms of the CSR charge that is in line with the current framework provided in the 
CRR. 

  The beneficial treatment offered to institutions with small trading book businesses 
under Article 94 of CRR would be maintained for institutions with gross market 
values of trading positions82, excluding FX and commodity trading positions for 
which the treatment under derogation has no effect, below €50 mio and for which 
these  positions  would  not  exceed  5%  of  total  assets.  Based  on  a  data  collection 
performed  by  the  EBA  who  tested different  levels  for  recalibrating  the absolute 
threshold  on  a  sample  of  EU  institutions  with  small  trading  activities  (277 
institutions with gross fair valued assets and liabilities below EUR 500 million), 
the  level  of  EUR  50  million  for  the  absolute  threshold  would  ensure  that  the 
beneficial  treatment  for  small  trading  book  businesses  under  Article  94  of  CRR 
would apply to 85% of the sample tested.  

Table 17. Gross market value of trading assets and liabilities (excluding FX & commodities) of 
banks with small and medium-sized trading book businesses 

82 As defined by all the fair-values assets plus all the fair-values assets held for trading. This definition is 
more prescribed than the current definition of the size of trading activities under CRR 94 which offers 
some discretion for banks to calculate it and lacks overall clarity. 

57 

 
 
 
                                                            
Absolute threshold based on 
the size of gross trading 
assets and liabilities 
(excluding FX and 
commodities) 

Number of 
institutions 
tested 

Number of institutions 
with relative size of gross 
trading assets  
below 5% (proposed 
threshold) 

< 20 m€ 
20 m€ < and < 50 m€ 

50 m€ < and < 150 m€ 
150 m€ < and < 300 m€ 
300 m€ < and < 500 m€ 
Total 

227 
17 

21 
8 
4 
277 

223 
13 

16 
5 
2 
259 

Source: EBA report on SACCR and FRTB implementation, November  2016 

 

In addition, to avoid the excessive burden associated with the introduction of the 
revised standardised approach for market risk, for some institutions with medium-
sized  trading  book  but  limited  trading  activities,  as  defined  by  institutions  with 
gross market values of trading positions below EUR 300 million, and for which 
trading positions would never exceed 10% of total assets, the current standardised 
approach for market risk would be used. This treatment would apply to all trading 
positions and also to FX and commodities positions held in the banking book and 
subject to own fund requirements for market risks under CRR. Based on a slightly 
broader  sample  of  EU  institutions  with  small  trading  activities  (997  institutions 
with gross fair valued assets and liabilities below EUR 500 million), at least 46 
institutions  will  be  targeted  by  this  measure  (a  large  majority  of  the  remaining 
ones would be eligible for the derogation of small trading book businesses). 

Table 18. Gross market value of trading assets and liabilities (including FX & commodities) of 
banks with small and medium-sized trading book businesses 

Absolute threshold based on 
the size of gross trading 
assets and liabilities 
(including FX and 
commodities) 

Number of 
institutions 
tested 

Number of institutions 
with relative size of gross 
trading assets  
below 10% (proposed 
threshold) 

< 20 m€ 
20 m€ < and < 50 m€ 

50 m€ < and < 150 m€ 
150 m€ < and < 300 m€ 

300 m€ < and < 500 m€ 
Total 

922 
16 

33 
16 

10 
997 

Source: EBA report on SACCR and FRTB implementation, November  2016 

920 
15 

31 
15 

9 
990 

58 

 
 
 
 
 
 
 
 
This option would make the FRTB standards proportionate to banks' involvement in the trading 
business. It would also address respondents' calls in the Call for Evidence for making it less 
difficult to apply the standardised approach. 

Table 19. Comparison of policy options against effectiveness and efficiency criteria 

EFFECTIVENESS 

EFFICIENCY 
 (cost-effecti-veness) 

Objectives 

Policy option 
Option 1: No 
policy change 

Option 2: Adopt 
the FRTB 
standards for all 
the institutions 
subject to the 
CRR 
Option  3:  Adopt 
FRTB  standards 
some 
with 
to 
adjustments 
reflect  European 
specificities and a 
revised 
regime 
for  small  trading 
book businesses 

S-1 

S-2 

S-3 

0 

0 

++ 

– – 

0 

+ 

0 

+ 

+  
(less risk 
senstitive if 
we 
introduce 
simpler 
approaches
) 

++ 
(This could 
even improve 
with respect to 
the baseline, if 
we decide to 
increase the 
scope of the 
derogation + a 
simplified 
approach) 

++ 
(With the 
implementation of 
STS in the Trading 
book we further 
reduce arbitrage 
opportunities with 
respect to the 
banking book). 

++ 
(With the 
implementation of 
STS in the Trading 
book we further 
reduce arbitrage 
opportunities with 
respect to the 
banking book). 

++ 

Table 20. Comparison of the impact of policy options on stakeholders 

Stakeholder 

Policy option  

Option 1: No policy change 

Option 2: Adopt the FRTB standards for 
all the institutions subject to the CRR 

Institutions 
using SA 

Institutions 
using IMA 

Companies 
and 
households 

Regulators
/ 
supervisor
s 

0 

– 

0 

– 

0 

? 

0 

+ 

Option  3:  Adopt  FRTB  standards  with 
some  adjustments  to  reflect  European 
specificities  and  a  revised  regime  for 
small trading book businesses 
Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

++ 

+ 

+ 

? 

In  light  of  the  above  analysis,  Option  3  has  the  best  overall  score.  Option  3  would 
introduce appropriate proportional capital requirements for market risks under the CRR 
taking into account some EU specificities that are not adequately reflected in the Basel 
standards. 

59 

 
 
 
 
             
 
 
 
 
4.6.  On problems on remuneration rules 

 Policy options for problem 1: : Deferral and pay-out in instruments 

1. No policy change 

2. Allow Member States or supervisory authorities to exempt some institutions and staff from the rules on deferral and 
pay-out in instruments 

3. Exempt small and non-complex institutions and staff with low variable remuneration in other institutions from the 
rules on deferral and pay-out in instruments, based on harmonised exemption criteria defined at EU level 

1. No policy change 

Policy options for Problem 2: Payment in shares 

2. Allow listed institutions to use share-linked instruments in addition to or instead of shares in fulfilment of the 
requirement under Article 94(1)(l)(i) CRD IV 

Problem 1: Deferral and pay-out in instruments  

Option 1: No policy change 

Under this option, the text of CRD IV would remain unchanged and leave no possibility for 
waiving the rules on deferral and pay-out in instruments in the specific circumstances where this 
would nevertheless be justified.  

This would significantly affect the efficiency of these rules with regard to certain institutions and 
staff. A full application of the rules on deferral and pay-out in instruments to small and non-
complex institutions, as well as towards staff with low, non-material levels of variable 
remuneration, would mean that these institutions have to sustain important compliance costs and 
burdens. Moreover, a full application of the rules to all institutions and all staff is likely to 
translate into non-negligible supervisory burden for competent authorities. At the same time, the 
prudential benefits of applying those requirements to staff with non-material levels of variable 
remuneration are low. 

In conclusion, under the current situation, the CRD IV text does not address the objective (S-2) of 
increasing the degree of proportionality in the application of the deferral and pay-out in 
instruments rules, which are too cumbersome and costly in case of certain categories of 
institutions and staff, without significant prudential benefits.  

Option 2: Allow Member States or supervisory authorities to exempt some institutions and 
staff from the rules on deferral and pay-out in instruments  

By exempting some institutions and staff from the application of the requirements on deferral and 
pay-out in instruments, this option would introduce a degree of proportionality, thereby meeting 
objective S-2. It would moreover positively influence these institutions’ competitiveness, by 
reducing their cost base. 

However, the possibility for Member States or supervisory authorities to set their own exemption 
criteria risks leading to a situation in which there are significant divergences in the way the rules 
are applied in the different Member States. Institutions of similar size and with similar activities 
and staff receiving similar levels of variable remuneration would be treated differently depending 
on where they are located. This would allow for regulatory arbitrage opportunities and lead to 
regulatory complexity and unwarranted compliance costs, in particular for institutions operating 

60 

 
 
 
cross-border. This would also be at odds with the broader objectives of the European single 
rulebook, which is to a set of truly unified and directly applicable rules for all banks operating in 
the EU83 and, with respect to institutions supervised by the SSM, could affect the SSM's ability to 
supervise banks efficiently and from a truly single perspective. 

Given this concern, the overall benefits of Option 2 would not outweigh its costs, and thus the 
efficiency of this option is assessed as negative. 

Option 3: Exempt small and non-complex institutions and staff with low variable 
remuneration from the rules on deferral and pay-out in instruments, based on harmonised 
exemption criteria defined at EU level 

By exempting small and non-complex institutions and staff with low variable remuneration, a 
much needed and appropriate degree of proportionality in the application of the rules on deferral 
and pay-out in instruments would be introduced, thereby meeting the objective S-2. This would 
be without an impact on financial stability, as all the prudentially-relevant institutions will 
continue to be captured by the rules.84  

Under this Option, there would be notable savings for institutions on the costs related to the full 
application of the requirements on deferral and pay-out in instruments for all identified staff. 
Based on EBA’s current estimates of on-going compliance costs, cost savings for “small 
institutions” could be in the range of €50 000 to €200 000 yearly. In the case of other institutions, 
the cost savings from exempting staff with low variable remuneration are more difficult to 
estimate. Currently, according to EBA estimates, ongoing costs from the application to all staff in 
the case of large institutions range from €400 000 to €1.5 million.  

The benefits of cost savings and reduced burden would be secured without the risk of other 
unintended consequences that can be associated with Option 2.  

Indeed, institutions of similar size and with similar activities and staff receiving similar levels of 
variable remuneration will in principle be subject to or exempted from the rules on deferral and 
pay-out in instruments in the same way independently of where they are located. The harmonised 
exemption criteria would reduce regulatory complexity and avoid unwarranted compliance costs, 
in particular for institutions operating cross-border activities. They would promote further 
integration in the EU market and contribute to the elimination of regulatory arbitrage 
opportunities.  

Therefore, the efficiency of Option 3 is assessed as positive. 

83 The term Single Rulebook was coined in 2009 by the European Council in order to refer to the aim of a 
unified  regulatory  framework  for  the  EU  financial  sector  that  would  complete  the  single  market  in 
financial  services  (see  European  Council  conclusions,  June  2009)..  The  key  objectives  of  the  Single 
Rulebook  are  to  eliminate  legislative  differences  among  Member  States;  ensure  the  same  level  of 
protection for consumers, and ensure a level playing field for banks across the EU. 

84 For example, estimates show that a threshold of EUR 5 billion in total asset value for "small" institutions 
would imply the exemption of institutions accounting for around 7% of the EU market size in terms of 
total assets.  In order to further ensure that in all the individual Member States all prudentially relevant 
institutions are covered, it can be considered to combine the EU harmonised exemption criteria with a 
possibility for supervisory authorities to adopt a stricter approach where they consider this prudentially 
relevant. 

61 

 
 
                                                            
Options 2 and 3 reflect the views expressed by the majority of stakeholders, including Member 
States, supervisors and industry. Option 3 is in line with the proposal put forward by EBA in its 
Opinion on proportionality. 

Table 21. Comparison of policy options for Problem 1 against effectiveness and efficiency 
criteria 

                                      Objectives 

Policy option  
Option 1: No policy change 

Option 2: Allow Member States or supervisory authorities to 
exempt some institutions and staff from the rules on deferral and 
pay-out in instruments 

Option 3: Exempt small and non-complex institutions and staff 
with low variable remuneration from the rules on deferral and 
pay-out in instruments, based on harmonised exemption criteria 
defined at EU level 

EFFECTIVENESS 

EFFICIENCY 

Objective S-2 

 (cost-effectiveness) 

0 

+ 

+ 

0 

– 

+ 

Table 22. Comparison of the impact of policy options on stakeholders for Problem 1 

Stakeholders/ 

Options 

Regulators / 
supervisory 
authorities 

Institutions / 
Shareholders 

Employees 

Tax-payers/ 
consumers 

Option 1: No policy change 

Option 2: Allow Member States or supervisory 
authorities to exempt some institutions and staff 
from the rules on deferral and pay-out in 
instruments 

Option 3: Exempt small and non-complex 
institutions and staff with low variable remuneration 
from the rules on deferral and pay-out in 
instruments, based on harmonised exemption 
criteria defined at EU level 

0 

+ 

+ 

0 

+ 

++ 

0 

+ 

+ 

0 

? 

≈  

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + 
positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

Problem 2: Payment in shares  

Option 1: No policy change 

Under this option, the text of CRD IV would remain unchanged and leave no possibility 
for listed institutions to use share-linked instruments instead of or in addition to shares in 
fulfilment of the requirement under Article 94(1)(l)(i) CRD IV. In the case of exclusive 
use of shares, these institutions would have to sustain important compliance difficulties, 
while  the  prudential  benefit  would  not  be  any  higher  than  in  case  of  the  use  of  share-
linked instruments.  

Option  2:  Allow  listed  institutions  to  use  share-linked  instruments  in  addition  or 
instead of shares in fulfilment of the requirement under Article 94(1)(l)(i) CRD IV 

62 

 
 
 
Under  Option  2,  listed  institutions  would  no  longer  need  to  face  the  unnecessary 
difficulties  and  burdens  associated  with  the  requirement  to  pay  out  part  of  the  variable 
remuneration  of  identified  staff  in  shares.  Institutions  could  create  share-linked 
instruments, without the need to purchase or create shares. As opposed to shares, share-
linked instruments moreover do not bring problems of insider dealing. 

At the same time, if it is ensured that they closely track the value of the underlying shares, that 
they have the same effect in terms of loss absorbency as shares and that they are presented in a 
transparent way to staff, share-linked instruments can be equally successful in achieving the 
prudential objectives of payment in shares (to limit the portion of variable remuneration paid in 
cash, to align the interests of the staff with that of shareholders, and to align the level of variable 
remuneration with the risk profile and long-term interests of the institution). In order to achieve 
this equivalence of effectiveness with shares, share-linked instruments should be designed in 
such a way that they closely track the value of the underlying shares, have the same effect in 
terms of loss absorbency as shares and be presented in a transparent way to staff.  

As Option  2 would allow achieving the same prudential outcome in  a less burdensome 
way, its efficiency is assessed as strongly positive.  

Table 23. Comparison of policy options for Problem 2 against effectiveness and efficiency 
criteria 

                                         Objectives 
Policy option  

Option 1: No policy change 

Option 2: Allow listed institutions to use share-
linked instruments in addition or instead of shares 
in fulfilment of the requirement under Article 
94(1)(l)(i) CRD IV 

EFFECTIVENE
SS 

Objective S-2 

0 

+ 

EFFICIENCY 
 (cost-effectiveness) 

0 

++ 

Table 24. Comparison of the impact of policy options on stakeholders for Problem 2 

Stakeholders 

/ 

Options 

Regulators / 
supervisory 
authorities 

Institutions / 
Shareholders 

Employees 

Tax-payers/ 
consumers 

Option 1: No policy change 

Option 2: Allow listed institutions to use share-
linked instruments in addition or instead of shares in 
fulfilment of the requirement under Article 
94(1)(l)(i) CRD IV 

0 

≈ 

0 

++ 

0 

+ 

0 

≈ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + 
positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

63 

 
 
 
 
 
 
4.7.  On problems on insolvency ranking  

Option 1: No policy change 

Under this option, MS would continue to have divergent approaches to the subordination of 
creditor claims, creating an uneven playing field and increasing uncertainty for investors and 
issuers alike, potentially rendering the cross-border application of the bail-in tool more difficult. 

Option 2: Partially harmonise insolvency ranking for unsecured debt 

Option 2a: Statutory subordination of all unsecured debt, retroactive application 

Based  on  market  observations  made  in  markets  which  implemented  such  an  approach, 
the  marginal  increase  in  the  cost  of  funding  for  subordinated  debt  is  estimated  to  be 
between 2 – 30 bps with a higher likelihood towards the lower range of that interval. As 
indicated by industry stakeholders who contributed to our impact assessment exercise, it 
is  very  difficult  to  accurately  isolate  the  impact  of  a  retroactive  subordination  of  all 
unsecured  debt  from  other  market  developments  (e.g.  rating  downgrade,  Brexit,  other 
developments). 

An  immediate  effect  of  applying  Option  2a  would  be  the  immediate  compliance  with 
TLAC  (assuming  GSIBs  held  sufficient  senior  unsecured  liabilities  that  would  become 
subject  to  statutory  subordination)  at  no  additional  funding  cost  because  outstanding 
contracts would continue under the previous issuing pricing conditions. 

The short-term effect of a retroactive subordination approach would be a gradual increase 
in  the  cost  of  funding  assuming  some  subordinated  instruments  reach  maturity  in  the 
short-term  and  need  to  be  rolled  over  as  subordinated  debt  at  an  additional  cost  of 
maximum 30bps. 

In  the  medium-long-term  banks  would  experience  a  significant  increase  in  the  cost  of 
funding because more debt gradually matures and must be rolled over as subordinated, at 
the extra cost of funding (up to 30bps), irrespective of the TLAC needs. 

Another  very  significant  effect  of  this  option  is  that  there  will  no  longer  be  a  senior 
unsecured  debt  category  in  practice;  therefore  banks  would  no  longer  be  able  to  fund 
themselves by issuing senior unsecured debt. The impact would extend also to investors, 
especially mandated investors who cannot invest in subordinated instruments. 

Option 2b: Creation of a non-preferred senior debt category 

Since  no  jurisdiction  implemented  already  such  an  approach  and  no  issuance  has  been 
done  yet  into  the  new  senior  "non-preferred"  class  it  is  not  possible  to  base  oneself  on 
market observations to estimate the impact on the cost of funding.  

The impact on cost of funding has been estimated by making reference to the issuance of 
similar Tier 3 instruments by an EU bank. The extrapolated effect is set between 20 – 50 
bps with a higher likelihood towards the upper range of that interval (50bps). This impact 
should  be  treated  with  caution  since  it  is  extrapolated  based  on  a  single  issuance  by  a 
single  bank,  which  means  it  could  be  biased  by  market  conditions  in  that  particular 
Member  State.  Another  potential  proxy  for  this  estimate  is  the  spread  differential 
between debt issued by a holding company compared to an operating company (HoldCo 
vs  Opco  spread).  Our  limited  data  (comparison  of  HoldCo  vs  OpCo  issuances  for  one 

64 

 
 
 
bank) shows an increase of 30 – 150bsp depending greatly on currencies and maturities. 
Given the limited sample and the large variation, this method may not be representative 
enough for this assessment.  

The  immediate  and  short-term  effect  of  this  option  would  be  a  sharp  increase  in  the 
marginal cost of funding (50 bps or more) for the senior "non-preferred" issuance aimed 
to close the TLAC gap. The total cost of funding would depend on the size of the TLAC 
shortfall  but  also  currencies,  maturities  and  general  market  conditions  at  that  point  in 
time. Banks have between 2017 and 2019 to build the TLAC  buffer, assuming January 
2019  as  the  start  of  the  TLAC  compliance  period  and  the  hike  in  the  cost  of  funding 
under  this  approach  is  expected  to  be  more  pronounced  in  the  first  part  of  that  time 
interval as several banks might issue non-preferred instruments at similar times. 

After  2019  and  beyond  it  is  expected  that,  once  banks  have  satisfied  the  TLAC  levels 
with the non-preferred senior class, the marginal cost of issuing such instruments would 
gradually decrease, as banks move to "cruise" mode and issue such instruments only to 
replace the stock as it comes to maturity. 

Option 2c: Statutory preferred status for all deposits vis-à-vis senior debt 

This approach separates senior liabilities only through preference of deposits. Uninsured 
deposits are preferred and rank higher to senior bonds, which effectively minimises (but 
does not eliminate) the risk of them bearing losses in resolution or insolvency. 

Other senior debt, including net uncollateralised derivative liabilities and structured notes 
continue to rank pari passu with unsecured senior debt.  

Table 25. Comparison of policy options against effectiveness and efficiency criteria 
EFFECTIVENESS 

COST-EFFICIENCY  

         Objectives 

Policy option  

Legal 
clarity 

Availability 
of TLAC 
eligible/bail-
inable debt 
– short-term 

Availability 
of TLAC 
eligible/bail-
inable debt 
– long-term 

Short-term 

Long-term 

Option 1: No policy 
change 

Option 2(a):  

Option 2(b):  

0 

++ 

++ 

0 

++ 

0 

0 

++ 

++ 

65 

0 

+ 

– 

0 

– – 

++ 

 
 
 
 
 
 
 
 
 
 
 
 
 
Option 2(c) 

+ 

0 

0 

0 

0 

Table 26. Comparison of the impact of policy options on stakeholders 

Policy option  

Stakeholder 

Institutions 
with larger 
TLAC 
shortfall  

Institutions 
with smaller 
TLAC 
shortfall  

Investors  

Resolution 
authorities  

Option 1: No policy change 

Option 2(a):  

Option 2(b):  

Option 2(c) 

0 

++ 

– 

0 

0 

+ 

– 

0 

0 

– – 

+ 

0 

0 

++ 

++ 

0 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

Option  1  is  the  least  preferred  option.  It  does  neither  have  a  positive  impact  on  the 
effectiveness of the bail-in tool, nor does it help banks to meet their TLAC target. On the 
contrary,  maintaining  a  heterogeneous  framework  in  insolvency  ranking  may  impede 
resolution authorities’ ability to apply the bail-in tool, may decrease investor confidence 
and  create  distortions  of  competition.  A  significant  number  of  Member  States  and 
industry stakeholders endorse an EU partially harmonised approach to the subordination 
of unsecured debt because this would facilitate the resolution of cross-border institutions 
while providing for more clarity for both banks and investors as well as a level playing 
field  in  the  EU  debt  markets.  Options  2(a)  and  2(b)  have  both  advantages  and 
disadvantages when assessing the short and long-term effects.  

Option  2(a)  has  the  strong  advantage  of  addressing  TLAC  shortfalls  with  immediate 
effect  and  it  may  be  advantageous  in  the  immediate  and  very  short  term  as  it 
accomplishes  TLAC  compliance  at  low  additional  cost  of  funding.  This  is  because  the 
retroactive subordination of the outstanding stock of debt changes the order of preference 
of  ongoing  contracts  concluded  at  what  was  previously,  a  senior  issuing  price.  A 
significant  disadvantage  for  the  medium  and  long-term  is  the  fact  that  banks  would  be 
prohibited  to  issue  senior  unsecured  debt  for  funding  reasons  other  than  TLAC 
compliance, and would need to roll-over the stock of subordinated debt at an increased 
cost  of  funding  irrespective  of  how  much  they  actually  need  to  meet  TLAC.  In 
conclusion,  this  option  is  rigid  and  a  "one-size  fits  all"  type  of  option,  with  very 
significant  effects  on  the  debt  market  in  the  long  run  (e.g.  the  absence  of  senior 
unsecured market, the crowding out of mandated investors who cannot buy subordinated 
instruments). 

However, Option 2(b) will enable banks to define and maintain the optimal funding mix 
according to their business and funding model. This option would allow banks to issue 
TLAC  eligible  senior  non-preferred  instruments  up  to  the  level  of  the  TLAC  shortfall. 
Although  potentially  costly  in  the  short-run  when  several  banks  may  issue  senior  non-
preferred  to  close  their  TLAC  shortfalls,  the  cost  increase  is  deemed  to  dampen  in  the 
long-run when banks would have filled-in their TLAC buffers and only need to issue in 
this category to roll-over TLAC debt as its maturity period is below 1 year. The investor 
base  for  senior  non-preferred  debt,  which  would  be  bail-inable  only  in  resolution,  is 

66 

 
 
expected to be similar to that for senior unsecured debt rather than that for subordinated 
debt.  This  is  because  subordinated  debt  bears  higher  risks,  being  potentially  subject  to 
write-down or conversion to equity also outside of resolution. 

In conclusion, Option 2(b) would provide sufficient flexibility to take account of different bank 
business models across the EU and reduce over time the impact on bank funding costs. It would 
avoid the crowding out of investors with a mandate outside of subordinated instruments and 
allow for appropriate calibration to ensure a level playing field in the market. This direction has 
been endorsed by Member States and industry representatives in the expert group discussions as 
it fulfils the acceptance criteria set forth namely: flexibility, taking account of banking business 
and funding models, the possibility to adjust so that level playing field is ensured and confined 
impact on funding costs. 

4.8.  On lack of effectiveness of the current rules on moratorium  

1. No policy change 

2. Further harmonise moratorium tools in the EU 

Policy options 

Option 1: No policy change 

This option would leave the current situation unchanged. 

Option 2: Further harmonise moratorium tools in the EU  

A further harmonisation of moratorium tools would require amendments to existing legislations, 
and particularly CRR/CRD IV and/or BRRD. A further harmonised moratorium tool at EU level 
could help smoothening the resolution process and guarantee that resolutions and supervisory 
authorities can freeze the bank's liquidity for a short period of time to assess whether the bank 
should be subject to early intervention measures, or should be declared failing or likely to fail, or 
to more precisely quantify its assets and liabilities in the context of the valuation process or to 
choose a certain resolution tool. 

The objective of a further harmonisation of moratorium tools is to provide banks with a flexible 
and effective instrument to prevent undesirable effects on liquidity in a supervisory or resolution 
scenario. 

At the same time it is of utmost importance to ensure that the execution of moratorium tools does 
not affect important safeguards (such as the rights of depositors) and, apart from this, is carried 
out in a proportionate manner. Also, it is important to ensure that the approach of 
supervisors/resolution authorities is as harmonised as possible to facilitate the smooth 
management of the resolution process in case of cross-border institutions. 

The effectiveness of such a tool may vary substantially in intensity depending on how the 
moratorium tool is structured. The main features of the moratorium tool currently being assessed 
are: 

- 

specific and clear conditions of application. The moratorium could be used only if 
necessary for specific purposes, namely: 
67 

 
 
 
 
 
 
 
o  decide on the existence of the conditions for early intervention measures 
o  decide on the determination whether the bank is failing or likely to fail 
o  assess the exact amount of assets and liabilities of the bank 
o  decide on the application of a specific moratorium tool  

- 

short  duration  (minimum  period  needed  for  the  purpose  above  and  anyway  not 
longer than 5 days) 

These features may effectively address the key concerns encountered by the Commission when 
consulting stakeholders in the course of expert discussion on the topic. 

In particular, the clear conditions of application would be beneficial to ensure clarity and avoid 
rash reactions from creditors' of the bank, which may in turn limit the risk of liquidity outflows. 
Also, the fact that such conditions are directly linked to specific steps in the pre-resolution and 
resolution procedure should further contribute to ensure certainty by avoiding excessive 
discretion for the supervisory/resolution authority. 

Moreover, the short duration appears as a key factor in avoiding bank runs. The short duration 
would be instrumental to the specific objective pursued by the regulator and would limit the 
impact on creditors. At the same time, the proposed provision should provide clarity on the 
maximum duration of the suspension, thereby limiting the possibility of diverging interpretations.  

Also, it seems important to clarify the possibility to apply a moratorium tool in a pre-resolution 
(early intervention) scenario. It seems important for supervisors/resolution authorities to be 
provided with the possibility to use a moratorium tool where possible to reduce the impact of a 
resolution or avoid it altogether. This however, as explained above, requires a consistent 
approach in case of cross-border resolution and should keep into account the safeguards in favour 
of creditors. In this light, the conditions of applications of the tool in an early intervention 
scenario should be clear and specific to avoid diverging interpretations. Also, the suspension 
should have a short duration to preserve creditors' prerogatives.  

It is worth mentioning that transactions which cannot be suspended – such as those involving 
CCPs – as well as covered deposits would be out of scope. 

Table 27. Comparison of policy options against effectiveness and efficiency criteria 

Objectives 

Policy option  

Option 1: No policy change 

Option 2: further harmonisation 

Legal clarity 

Level playing field 

0 

+ 

0 

+ 

Table 28. Comparison of the impact of policy options on stakeholders 

Policy option  

Stakeholder 

Institutions  

Supervisory 
authorities 

Resolution 
authorities 

Depositors 

Option 1: No policy change 

0 

0 

0 

0 

68 

 
 
 
                                         
Option 2: further harmonisation 

≈ 

           + 

+ 

? 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

4.9.  On insufficient proportionality of the current rules 

1. No policy change 

Policy options 

2. Measures to reduce administrative burden and legal complexity for smaller credit institutions 

3. Exemption of very small credit institutions from CRR/CRD IV 

Option 1: No policy change 

Under this option rules would remain unchanged. The CRR and CRD IV would simply continue 
to impose a general duty on Member States and European authorities to apply the rules in a 
proportionate manner (see Recital 46 of the CRR). Specifically, reporting would continue to be 
subject to the general requirement that it must be "proportionate to the nature, scale and 
complexity of the activities of the institutions" (see Art. 99(5) of the CRR). This formulation has 
proven to be excessively high-level and, as a result, insufficient to deliver a meaningful 
differentiation in the reporting required from smaller institutions.  

With regard to disclosure, the requirements set out in the CRR would continue to apply to all 
institutions without any distinction with regard to their size and complexity. 

Option 2: Measures to reduce administrative burden and legal complexity for smaller 
credit institutions 

To address concerns related to excessive administrative burden, option 2 would set out a specific 
reporting and disclosure framework for smaller institutions with reduced frequency and content. 
More precisely, smaller credit institutions would be required to provide to the supervisors less 
granular information by eliminating those reporting obligations that are not relevant for 
supervisory purposes. Smaller credit institutions would also be subject to less frequent reporting 
obligations (e.g. quarterly instead of monthly, biannually instead of quarterly). To this end, the 
CRR and the CRD IV would be amended to give a mandate to the EBA to develop ad hoc 
reporting for smaller credit institutions (see annex 3.3 for details). Furthermore, the CRR would 
be amended to provide for differentiated disclosure requirements for small credit institutions. In 
particular, similarly to reporting obligations, the number of information to be disclosed would be 
reduced for smaller credit institutions, as well as the frequency of disclosure obligations (see 
annex 3.2 for details).  

Finally, to address the difficulties for smaller institutions resulting from the volume and 
complexity of the current framework, the EBA would be mandated to develop an IT tool 
to guide them through the rules which are relevant to their size and business model. This 
IT tool could help smaller institutions to gain a better of understanding of the rules and 
reduce compliance costs. 

Option 3: Exemption of very small credit institutions from CRR/CRD IV 

69 

 
 
 
As an alternative to ad-hoc reporting and disclosure requirements, small credit institutions would 
be exempted from the CRR and CRD IV. The result of this would be to devolve to Member 
States full responsibility to regulate these firms from a prudential perspective.  

However, exempting very small credit institutions would result in a fragmentation of the Single 
Market undermining the level playing field. In fact, similar smaller credit institutions would be 
treated differently depending on the Member State where they operate. Moreover, exempted 
credit institutions would still being able to compete in the EU internal market with credit 
institutions to which CRD IV/CRR are applicable in full. Eempting very small credit institutions 
would also increase risks to financial stability since it wouldn't provide any EU instrument to 
address the simultaneous failure of different small credit institutions, which may hamper the 
stability of the whole EU banking sector. During discussions with Member States85 they shared 
this view and were also concerned that exempted credit institutions could be deprived from 
access to the EU Deposit Insurance Scheme (i.e. EDIS)86, currently under discussion, and that, 
once the EDIS was implemented, an exemption from the CRR/CRD IV would contradict the 
stated objective of the EDIS proposal, in particular its risk-sharing premise. Moreover, such an 
exemption was regarded as potentially hindering efforts in some Member States to restructure 
their banking system through consolidation as a means to improve the solvency of weaker credit 
institutions.  

Whilst calling for more proportionality in the prudential framework, stakeholders replying to the 
call for evidence did not advocate for very small credit institutions to be exempted from 
CRR/CRD IV. 

Comparison of policy options 

The combination of tailored prudential requirements as described under each relevant section 
(e.g. NSFR, leverage ratio etc.), specific reporting and disclosure requirements for smaller 
institutions and the introduction of an IT tool is assessed to be sufficient to deliver an appropriate 
balance between proportionality and consistency of prudential requirements for all institutions. 
Smaller institutions would benefit from prudential requirements and limited exceptions tailored 
to their business model, size, complexity and relative risk of the activities they undertake, but 
would be subject to the same baseline prudential standards as their larger counterparts. This 
would introduce in the EU banking system a degree of flexibility that would allow a significant 
number of credit institutions to benefit from proportionality measures. As a matter of fact, the 
high polarisation of the EU banking sector (i.e. there is a high difference between smaller and 
bigger credit institutions in terms of assets) and the differences across Member States in the 
composition of market operators (i.e. size and business model of credit institutions) would not 
allow for setting a 'one size fits all' type of regulatory framework for smaller institutions. For this 
reason, the possibility of exempting small credit institutions from the application from the CRD 
IV and CRR appears less effective. A plain exclusion of certain banks would not take into 
account differences in the composition of the EU banking sector in different Member States (no 
risk-sensitive) and would not improve legal certainty since 28 regulatory regimes would be 
applicable to credit institutions excluded from the CRD IV and CRR. This would also result in an 
unlevelled playing field both among credit institutions exempted and between the latter and credit 
institutions to which the CRD IV and CRR apply. 

85  This  option  was  discussed  with  Member  States  during  the  Expert  Group  on  Banking  Payment  and 

Insurance (EGBPI) meetings in June and July. 
information  on 

86  For  more 

the  EDIS  see  http://ec.europa.eu/finance/general-policy/banking-

union/european-deposit-insurance-scheme/index_en.htm.  

70 

 
 
                                                            
Other than the necessary measures to transpose the new provisions amending the CRD IV, 
Member States would not be required to put in place new specific administrative procedures. 

The summary of the analysis of different options to achieve the specific objective of providing a 
more proportionate prudential framework is presented in the table below. 

Table 29. Comparison of policy options against effectiveness and efficiency criteria 

EFFECTIVENESS 

EFFICIENCY 

                            Objectives 

Specific objectives 

Policy option  

S-1 

S-2 

S-3 

S-4 

S-5 

Option 1: No policy change 

Option 2: ad hoc reporting and 
disclosure requirements for small 
institutions and IT tool (plus tailored 
prudential requirements and limited 
exemptions) 

0 

0 

0 

0 

0 

++ 

++ 

++ 

0 

++ 

Option  3:  exempt  very  small  credit 
institutions from CRR/CRD IV 

- 

+ 

- - 

0 

- 

Table 30. Comparison of the impact of policy options on stakeholders 

 (cost-effectiveness) 

0 

++ 

+ 

Stakeholder 

Small credit 
institutions  

Other credit 
institutions 

Supervisors 

Policy option  

Option 1: No policy change 

Option 2: ad hoc reporting and disclosure requirements 
for small institutions and IT tool (plus tailored prudential 
requirements and limited exemptions) 

Option  3:  exempt  very  small  credit  institutions  from 
CRR/CRD IV 

0 

++ 

+ 

0 

++ 

- 

0 

++ 

- 

Based on the above analysis, option 2 scores better than the baseline option and option 3. Option 
2 would, therefore, be more appropriate and beneficial for both financial stability protection and 
economic growth promotion perspectives. 

4.10.  The choice of the instrument 

The policy options retained in the sections above could be implemented by amending the CRR 
and the CRD IV. The proposed measures indeed refer to or develop further already existing 
provisions inbuilt in those legal instruments (liquidity, leverage, remuneration, proportionality). It 
is therefore suggested that these measures be put forward as an amendment to the existing legal 
instruments. The indicated list of proposed amendments is presented in annex 6. 

As regards the new FSB agreed standard on total loss absorbance capacity it is suggested to 
incorporate the bulk of the standard into the CRR, as only a regulation can achieve the necessary 
uniform application, much in the same way as the pillar 1 primary capital requirements. Shaping 
prudential requirements in the form of an amendment to the CRR would ensure that those 
requirements will in fact be directly applicable to them. This would prevent Member States from 

71 

 
 
 
 
 
  
 
implementing diverging national requirements in an area where full harmonization is desirable in 
order to prevent an un-level playing field. Minor fine-tuning of the current legal provisions 
within the BRRD will however be necessary to make sure that TLAC and MREL requirements 
are fully coherent and consistent with each other. 

5.  THE CUMULATIVE IMPACTS OF THE ENTIRE PACKAGE 

5.1.  Introduction 

This section discusses the cumulative impact of additional capital and liquidity requirements for 
the EU banking industry, in terms of their costs and benefits, compared to the baseline scenario. 
The baseline scenario represents the cumulative impact in the absence of measures under 
consideration but including the CRR and CRD IV measures currently in force. Specifically, this 
cumulative impact consists of two parts: 

(1)  a  quantitative  assessment  of  benefits  and  costs  related  to  the  FRTB  and  the 
leverage  ratio,  finding  a  modest  reduction  in  expected  losses  in  the  banking 
system and associated potential burden on public finances at a very small overall 
costs to the economy;  

(2)  a  qualitative  assessment  based  on  available  empirical  evidence  of  benefits  and 
costs related to the NSFR, which shows that banks disposing of a higher level of 
stable  funding  tend  to  show  a  smaller  decrease  in  lending  to  the  real  economy 
during  the  financial  crisis  and  that  introducing  the  NSFR  would  not  have  a 
significant impact on the supply of credit to the economy.  

As indicated by Dewtripont and Hancock et al. (2016), capital and liquidity requirements have 
different direct impacts on banks' balance sheets which often interact. The reaction of individual 
banks can have an impact on aggregate economic activity - both positive (benefits) and negative 
(costs). Literature suggests87, on the benefits side, that higher capital and liquidity ratios improve 
resilience to shocks of both individual banks, and the financial system. Improved resilience, in 
turn, lowers both the probability of a financial crisis and reduces the size of economic losses in 
the event that a crisis occurs. The benefits, in this sense, are the expected losses that are avoided. 
On the costs side, higher capital and liquidity requirements may increase bank funding costs 
which could be passed on to end-users (i.e. banks could react by reducing the volume or 
increasing the price of lending to households and non-financial firms). Changes to liquidity 
requirements could impact interbank lending and maturity transformation, which also has an 
impact on aggregate borrowing. Lower borrowing reduces aggregate consumption and 
investment and, eventually, gross domestic product (GDP). Some authors88 also point to the 
effects of some of these measures on market liquidity in securities markets although the effects 
are difficult to disentangle from other factors influencing market liquidity. 

Overall, the net benefits of regulation can be thought of as the expected loss that is avoided in the 
event that a crisis occurs (the benefit), which is offset by the opportunity cost of reduced 
economic activity during non-crisis periods. 

This analysis focusses on the impact from additional capital requirements related to the leverage 
ratio requirements, market risk requirements (FRTB) and the NSFR, as calibrated by the Basel 
Committee. This implies that the actual impact of the preferred options, which leads to a 

87 For example: Miles et al (2013), de-Ramon et al (2012), BCBS (2010), de Bandt (2015), Brooke et al. 

(2015), Elliot et al. (2016)  
88 For example: Elliot et al. (2016) 

72 

 
 
                                                            
calibration better reflecting EU specificities, should provide the same benefits at lower costs. In 
general, it needs to be stressed that, given the inherent complexity and special nature of banking 
and given that many benefits and costs are dynamic in nature (often related to unobservable 
incentives), there are limitations to the reliability and precision with which quantitative models 
can comprehensively estimate the social benefits and costs. Nevertheless, these models are useful 
to better understand the transmission mechanisms and the results generally give a good estimate 
of the direction and order of magnitude of expected impacts. 

5.2.  Quantitative assessment of benefits and costs related to FRTB and the 

LR 

In order to support the qualitative assessment and comparison of reform options carried out 
above, the Commission services have attempted to quantify some of the costs and benefits that 
could result from the proposals on the leverage ratio and on FRTB.  

Benefits (further details in annex 5.1) 

Benefits are measured as a decrease in the potential costs for society due to bank defaults and 
recapitalisation needs. The analysis estimates the losses in excess of bank capital, as well as the 
recapitalization needs of banks to allow them to continue operating on an on-going basis. The 
effect of the various tools available in the various regulatory tools (i.e. bail-ins and resolutions 
funds) aimed at mitigating the leftover losses and recapitalisation needs, is also taken into 
account.  

Banking losses are simulated using the SYMBOL model (Systemic Model of Banking Originated 
Losses). SYMBOL simulates losses for individual banks using information from their balance 
sheet data. The model also allows taking into account the safety-net that is available to absorb the 
simulated shocks (capital, bail-in, resolution funds). The initial simulation output is the full 
distribution of bank losses. These initial individual bank losses are then transformed into losses in 
excess of capital and recapitalization needs, to be covered by the safety net, and the residual is 
finally aggregated at EU level. 

The simulations consider the case of a systemic crisis event, similar in severity to the one started 
in 2008, and the conservative assumption is used that all simulated bank excess losses and 
recapitalization needs that the safety net cannot cover would eventually fall on public finances.  

The exercise uses post-2014 data for a sample of 183 banks covering 83% of the EU total assets. 
A crisis comparable to the last global one is approximately placed on percentile 99.95 when 
considering excess losses and recapitalization needs based on pre-crisis data. 

As indicated above, the analysis ignores excess capital buffers that many banks currently hold, 
partly in anticipation of future capital requirements; the analysis assumes that all banks hold just 
enough capital to cover their 10.5% RWA minimum capital requirement (MCR), both before and 
after the reforms. In reality there are banks which already hold an actual capital commensurate 
with the new rules MCR or even above. For these banks the associated costs- and benefits would 
not arise. However, considering currently existing additional capital buffers in the baseline may 
lead to an underestimation of the benefits, since it is not certain that banks currently holding a 
buffer will maintain it. Moreover, to the extent that the analysis focuses on the adjustment to the 
new rules, looking at actual buffers may ignore some of the adjustment that has already taken 
place. For that reason we use a scenario where banks start from the minimum of their current 
capital level and the MCR incl. a limited buffer. 

73 

 
 
The baseline scenario represents the case where banks' capital equals 10.5% risk based capital 
requirements (excl. policy measures). The policy scenario represents the case where banks' 
capital is the highest of 10.5% risk based capital requirements (including policy measures) and 
4%89 of the leverage ratio exposure measure. Recapitalisation needs to take place at the highest of 
8% of risk based capital requirements and 3% of the leverage ratio exposure measure. 

As shown in table 1, the model estimates that the introduction of FRTB and the leverage ratio 
reduces expected bank losses in a severe 2008-type crisis from €346.32bn to €313.49 (a 9.19% 
reduction), and reduces the impact on public finances after taking into account bail-ins and 
resolution funds from an already very low figure of €5.49bn to €2.87bn (a -47.85% reduction).  

Table 31. Overview of benefits 

Benefits - 
Reduction in 
Financial 
needs 

In % of EU 
GDP  

Baseline 

Financial 
needs 
after 
capital is 
used 

Policy scenario 

Financial 
needs 
after 
bail-in90 

Financial 
needs 
after 
resolution 
fund 

Financial 
needs 
after 
capital is 
used 

Financial 
needs 
after 
bail-in 

Financial 
needs 
after 
resolution 
fund 

2.52% 

0.37% 

0.04% 

2.29% 

0.25% 

0.02% 

Impact 

Impact 
on 
Financial 
needs 
after 
capital is 
used 

Impact 
on 
Financial 
needs 
after 
bail-in 

Impact on 
Financial 
needs after 
resolution 
fund 

-9.19% 

-32.20% 

-47.85% 

In € bn 

346.32 

50.68 

5.49 

314.49 

34.36 

2.87 

Costs (further details in annex 5.2) 

In relation to costs, the analysis has focused on estimating through the QUEST model. In general, 
regulation induces banks to increase capital relative to debt (including deposits). This has two 
opposing potential effects on funding costs. Shifting to bank capital and paying an equity 
premium increases funding costs, while lowering the demand for deposits reduces the deposit 
rate, which lowers funding cost. The latter effect is, however, usually small, and likely even 
smaller in the current environment with effectively zero deposit rates. The first effect therefore 
dominates. 

89  It  is  assumed  that  banks  hold  a  1%  buffer  in  excess  of  the  minimum  leverage  requirements,  this  is  to 
keep consistency with the risk based capital requirement where not every euro of losses immediately 
leads to a recapitalisation need.   

90 On the use of bail-in, some assumptions had to be taken. The actual amounts of bail-inable debt are not 
available from the data, therefore we assumed that the amount of available bail-inable debt equals the 
double  of  the  minimum  capital  requirements  corresponding  to  a  loss  absorption  amount  and  a 
recapitalisation amount.   

74 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
 Optimising banks could try to shift the higher funding costs onto the non-financial private sector 
in the form of higher loan rates. This could increase capital costs for firms which partly finance 
their investment with loans which could have an impact on the size of their investments. Based 
on the same assumptions as for the estimation of the benefits, the estimated impact on long term 
GDP could range between -0.03% and -0.06% depending on whether an offset91 is applied on the 
cost of equity or not resulting from the improved capitalisation of banks. The impact on banks' 
funding costs would range between 1.38 bps and 2.71 bps. These estimates do not include 
potential adjustments considered in this impact assessment to counteract the negative impact of 
the contemplated measures. 

It is important to note that the costs and benefits that have been quantified are not comprehensive 
and are dependent on underlying assumptions (how to separate banks' balance sheets, behavioural 
responses of banks, required rates of returns for the different funding sources under different 
scenarios, etc.). Moreover, important social benefits (including the reduction in the occurrence of 
systemic crisis and reduction in possible contagion between banks as well as the impact of the 
reform on avoiding conflicts of interest, misallocation of resources and facilitating supervision, 
etc.) and costs (such as economies of scope and scale, impacts on liquidity of secondary markets 
and legal costs) have not been quantified and modelled.Qualitative assessment of benefits and 
costs related to the NSFR 

Because stable funding requirements have only recently been defined and have not yet been 
introduced in any jurisdiction, empirical results on the impact of stable funding requirements are 
sparse, especially the ones focussing on marginal costs and benefits of a stable funding 
requirement. Potential benefits of a stable funding requirement are the reduced likelihood of bank 
failure caused by liquidity shocks and smaller contraction of banks’ lending in reaction to a 
liquidity shock. It is important to keep in mind that, for stable funding requirements, the potential 
costs of the regulation in 'business as usual times' is compared to the costs of liquidity shocks.  

As indicated in Dewatripont and Hancock et al. (2016) and EBA (2015), existing literature on the 
NSFR discusses its expected impact on banks' balance sheets via a lengthening of liabilities’ 
maturity and a shortening of assets’ maturity. Funding sources considered as less stable may also 
be replaced with more stable funding sources through e.g. substituting short term wholesale 
funding with retail funding. As a direct effect, banks' profitability could decrease due to the 
increase in funding costs. At macroeconomic level, the theoretical effects of liquidity regulation, 
as discussed in existing literature, are a consequence of the interplay of the LCR and the NSFR. 
On the benefits side, these effects are a reduced cost of bank failures (Calomeris et al (2015), 
lower probability of simulatenous bank failures (Perotti-Suarez (2011)), a banking system less 
vulnerable to liquidity shocks (Goodhart (2011), EBA (2015), Farhi-Tirole (2012)) and a lower 
contraction of bank lending following a liquidity shock (Acharya-Viswanathan (2010), EBA 
(2015)). On the costs side, these effects are a possible greater impact on market prices of liquidity 
shocks due to similar asset holdings and herding (Bonfim-Kim (2012), Allen et al (2012)), a 
decrease in bank lending in ‘business as usual times’ (Acharya-Viswanathan (2010)), lower 
overnight and wholesale funding which could reduce the effectiveness of monetary policy (Bech-
Keister (2013)) and lower discipline of banks by wholesale investors (Calomeris-Kahn (1991), 
Diamond-Rajan (2001)). 

While none of the literature empirically tests all costs and benefits of the NSFR in an integrated 
way, some empirical evidences are available: 

91 This 50% offset is based on the work of Miles et al (2013) 

75 

 
 
                                                            
Some papers examined bank behaviour during the most recent financial crisis and provide 
indirect indications on the potential benefits of stable funding requirements. Cornett et al (2011) 
found that the contraction of bank lending during the financial crisis was significant and that US 
banks that had extended more contingent credit lines and banks having a lower proportion of 
stable funding sources reduced more significantly their lending than other banks. In the same 
vein, Pessarossi and Vinas (2015) found that banks with lower funding risk profile and a lower 
ratio of long term loans to long term funding and deposits provide more lending after the 
interbank market freeze in 2007-2008. 

Chiaramonte and Casu (2016) tested the relevance of both structural liquidity and capital ratios, 
as defined in Basel III, on EU banks' probability of failure. Estimates from several versions of the 
logistic probability model indicate that the likelihood of failure and distress decreases with 
increased liquidity holdings. The results show that banks that ran into difficulty almost always 
had low NSFR and capital requirements well above the statutory minimum.Stakeholder analysis  

The retention of simplified approaches to calculate capital requirements would ensure continued 
proportionality of the rules for smaller banks. Furthermore, the additional measures to increase 
proportionality of some of the requirements (related to reporting, disclosure and remuneration) 
should decrease the administrative and compliance burden for those banks. 

Other stakeholders, such as banks' clients (e.g. consumers and businesses), investors in securities 
issued by banks, and financial markets as a whole, would be affected by the initiative indirectly. 
As indicated above, there proposed measures could lead to an increase in lending rates, but the 
increase is not expected to be so marked that it would lead to a significant impact on banks' 
clients access to loans. Furthermore, after banks adjust to the new rules, they would be better 
placed to provide loans to their clients. The resolution-related measures contained in the proposal 
would have an impact on investors in banks' securities issued by G-SIIs: they will need to 
become more active in monitoring the amount of risk-taking of the G-SII. The proposed 
measures to increase the transparency of banks should help them in that respect. The same is true 
for markets more in general. Finally, the combined proposed measures would increase the safety 
and soundness of the financial system which is in the interest of all stakeholders. 

5.3.  Impact of the preferred options on administrative costs  

Administrative  costs92  stemming  from  the  implementation  of  the  whole  package  of 
preferred options will be reduced to banks as a whole, mainly due to more proportionate 
requirements for supervisory reporting and disclosure (for more details see annexes 3.2 
and 3.3), which will primarily concern smaller institutions.  

Burdensome  supervisory  reporting  was  frequently  mentioned  in  the  call  for  evidence. 
The  EBA  is  undertaking  the  analysis  on  proportionality  of  these  costs.  The  preferred 
options  would  reduce  recurring  costs  through  the  introduction  of  more  proportionate 
reporting and significantly reduced disclosure requirements. 

92  Administrative  costs  are  defined  as  the  costs  which  stakeholders  (e.g.  companies,  citizens  or  public 
authorities)  incur  due  to  legal  obligations  to  provide  information.  The  administrative  costs  have  two 
components: the business-as-usual costs and administrative burdens. The business-as-usual costs are the 
costs resulting from obligations to provide information which would be done by an entity even in the 
absence of the legislation. At the same time, the administrative burdens are the costs which the entity 
would not incur in the absence of legislation, i.e. which is borne solely because of a legal obligation. 

76 

 
 
                                                            
As  regards  disclosure  by  small  banks,  at  this  point  defined  as  banks  with  total  assets 
below  €1.2  billion,  they  would  be  required  to  disclose  only  a  simple  key  metrics  table 
with capital, liquidity and leverage ratios once per year compared to the current detailed 
annual  disclosure  requirements.  At  this  stage,  however,  precise  number  of  concerns 
banks  is  not  known  as  some  of  them  can  already  be  relieved  from  disclosure 
requirements  if  their  parent  company  decided  to  provide  disclosures  only  on  the 
consolidated basis. 

On reporting, small banks would be subject to a reduced frequency of reporting half year 
instead of quarterly and the EBA will be mandated to make  proposals to further reduce 
the  granularity  of  supervisory  reporting  templates  for  small  banks.  Moreover,  an 
independent  study  would  identify  additional  ad-hoc  supervisory  reporting  requirements 
that supervisors are currently imposing in addition to the single rule book on supervisory 
reporting. 

In some areas opportunity gains in administrative burden will be achieved by scoping out 
smaller  banks:  revised  CRR  requirements  such  as  for  the  trading  book  and  TLAC.  No 
incremental administrative costs are expected from setting binding NSFR and LR. In the 
same  way,  no  significant  administrative  costs  will  be  incurred  due  to  the  extension  of 
SME  Supporting  Factor,  even  for  small  banks,  and  the  measure  has  been  widely 
supported by the banking industry. Similarly, no significant administrative costs will be 
incurred  due  to  the  further  harmonisation  of  moratorium,  as  these  tools  will  continue 
operating based on the same procedures. The option to partially harmonise the hierarchy 
of creditor claims for unsecured debt would not have an impact on the administrative cost 
of banks.  

Moreover,  in  parallel  to  the  proposed  measures  and  with  a  view  to  further  reducing 
administrative costs resulting from supervisory reporting, the EBA has already a mandate 
for developing common IT solutions and has developed a single data point model and a 
single  XBRL  taxonomy  for  the  supervisory  reporting  package.  These  can  be  used  by 
banks  and  software  developers  to  optimise  the  collection  and  transfer  of  supervisory 
reporting data between the banks and supervisors as well as between supervisors and the 
EBA at an aggregated level. Overall, institutions are not expected to incur significant IT 
development costs from the implementation of the preferred options. 

5.4.  The impact on SMEs 

The proposed recalibration of the capital requirements for bank exposures to SMEs is expected to 
have a positive effect on bank financing of SMEs. This would primarily affect those SMEs, 
which currently have exposures beyond €1.5 million as these exposures currently do not benefit 
from the SME Supporting Factor. 

Other proposed options in the impact assessment, particularly those aimed at improving 
resilience of banks to the future crisis, are expected to increase sustainability of bank lending to 
SMEs.  

Finally, measures aimed at reducing compliance costs for credit institutions, particular the 
smaller and less complex institutions are expected to reduce borrowing costs for SMEs. 

77 

 
 
5.5.  Impact on third countries  

Third countries will benefit from the proposed review with regard to three important elements. 
On one side, the proposal will enhance the stability of EU financial markets thereby reducing the 
likelihood and costs of potential negative spillovers for global financial markets. Moreover the 
proposed amendments will contribute to increase the harmonization of the regulatory framework 
across Member States thereby reducing substantially administrative costs for third countries 
banks operating in the EU. Finally, since several amendments are intended to align the EU 
legislation to most advanced internationally agreed standards, the proposal will contribute to 
increase the level playing field between EU banks and banks established in third countries with 
an even more significant reduction of compliance costs for doing business in the EU. 

6.  MONITORING AND EVALUATION 

It is expected that the proposed amendments will start entering into force in 2019. The 
amendments are tightly inter-linked with other provisions of the CRD IV and CRR, which are 
already in effect since 2014. The current proposals underscore the importance of timely and 
appropriate changes of the rules in response to the markets events, the evolution of the EU 
economy, in particular its financing mechanisms, the new institutional setup with Banking Union 
in place and the EU commitments with international fora (FSB and Basel in particular).  

The Basel Committee and EBA will continue to collect the necessary data for the monitoring of 
leverage ratio and the new liquidity measures in order to allow for the future impact evaluation of 
the new policy tools. Regular Supervisory Review and Evaluation (SREP) and stress testing 
exercises will also help monitoring the impact of the new proposed measures upon affected credit 
institutions and assessing the adequacy of the flexibility and proportionality provided for to cater 
for the specificities of smaller credit institutions. Additionally, the Commission services will 
continue to participate in the working group of the BCBS and the joint task force established by 
the European Central Bank (ECB) and by EBA, that monitor the dynamics of institutions' own 
funds and liquidity positions, globally and in the EU, respectively. 

The set of indicators to monitor the progress of the results stemming from the implementation of 
the preferred options are the following: 

On NSFR: 
Indicator 
Target 

Source of data 

On leverage ratio: 
Indicator 
Target 

Source of data 

On SMEs 
Indicator 

Net Stable Funding Ratio (NSFR) for EU institutions 
As of date of application, 99% of institutions taking part to the EBA Basel III 
monitoring exercise meet the NSFR at 100% (65% of group 1 and 89% of 
group 2 credit institutions meet the NSFR as of end-of December 2015) 
Semi-annual the EBA Basel III monitoring reports 

Leverage ratio (LR) for EU institutions 
As of the date of application, 99% of group 1 and group 2 credit institutions 
will have the leverage ratio of at least 3% (93,4% of group 1 institutions met 
the target as of June 2015) 
Semi-annual EBA Basel III monitoring reports 

Financing gap to SMEs in the EU, i.e. difference between the need for 

78 

 
 
 
 
 
 
Target 

Source of data 

On TLAC: 
Indicator 
Target 

Source of data 

On trading book: 
Indicator 

Target 

Source of data 

On remuneration: 
Indicator 
Target 

Source of data 

On proportionality: 
Indicator 
Target 
Source of data 

On insolvency ranking: 
Indicator 

Target 

external funds and the availability of funds 
As of two years after the date of application, <13% (last known figure – 13% 
as of end 2014) 
European Commission / European Central Bank SAFE Survey (data coverage 
limited to the euro area) 

TLAC in EU G-SIIs 
All EU G-SIBs meet the target (>16% of risk weighted assets (RWA) /6% of 
the leverage ratio exposure measure (LREM) as of 2019, > 18% RWA/6.75% 
LREM as of 2022) 
Semi-annual EBA Basel III monitoring reports 

RWA for market risks for EU institutions 
Observed variability of risk-weighted assets of aggregated portfolios applying 
the internal models approach. 
- As of 2023, all EU institutions meet the own funds requirements for market 
risks under the final calibration adopted in the EU. 
- As of 2021, unjustifiable variability (i.e. variability not driven by differences 
in underlying risks) of the outcomes of the internal models across EU 
institutions is lower than the current variability* of the internal models across 
EU institutions. 
_______________ 

*Reference values for the "current variability" of value-at-risk (VaR) and incremental 
risk charge (IRC) requirements should be those estimated by the latest EBA "Report on 
variability of Risk Weighted Assets for Market Risk Portfolios", calculated for 
aggregated portfolios, published before the entry into force of the new market risk 
framework. 
Semi-annual EBA Basel III monitoring reports 
EBA Report on variability of Risk Weighted Assets for Market Risk 
Portfolios. New values should be calculated according to the same 
methodology. 

Use of deferral and pay-out in instruments by institutions 
99% of institutions that are not small and non-complex, in line with the CRD 
requirements, defer at least 40% of variable remuneration over 3 to 5 years 
and pay out at least 50% of variable remuneration in instruments with respect 
to their identified staff with material levels of variable remuneration. 
EBA remuneration benchmarking reports 

Reduced burden from supervisory reporting and disclosure 
80% of smaller and less complex institutions report reduced burden 
Survey to be developed and conducted by EBA by 2022 

Complaints about competitive disadvantages due to different insolvency 
rankings of unsecured bank debt  
Commission receives no indications or complaints about competitive 
disadvantages due to different insolvency rankings of unsecured bank debt 

79 

 
 
 
 
 
 
 
Source of data 

On moratorium: 
Indicator 
Target 

Source of data 

after the harmonisation. 
Stakeholder feedback 

Status of banks' liquidity before and after moratorium is used 
Absence of bank runs, no transfer of funds cross-border and smooth 
functioning of procedures in supervisory/resolution context  
SRB/NRAs/possibly survey 

The evaluation of the impacts is expected to be conducted within five years after the date of the 
application of the new measures. The methodology should be designed taking into account the 
output of monitoring indicators. 

Compliance and enforcement will be ensured on an ongoing basis including, where needed, 
through infringement proceedings for lack of transposition or for incorrect transposition and/or 
application of the legislative measures. Reporting of breaches of EU law can be channelled 
through the European System of Financial Supervision (ESFS), including the national competent 
authorities, EBA as well as through the ECB. EBA will also continue publishing its regular 
reports of the CRD IV-CRR/Basel III monitoring exercise on the European banking system. This 
exercise monitors the impact of the Basel III requirements (as implemented through the CRR and 
the CRD) on EU institutions in particular as regards institutions' capital ratios (risk-based and 
non-risk-based) and liquidity ratios (LCR, NSFR). It is run in parallel with the one conducted by 
the BCBS. 

80 

 
 
 
 
 
 
 
GLOSSARY 

ASF  

Available Stable Funding 

BCBS  

Basel Committee on Banking Supervision 

BRRD  

Bank Recovery and Resolution Directive 

CCP  

Central CounterParty 

CfE 

Call for Evidence 

CRR  

Capital Requirements Regulation 

CRD IV   Capital Requirements Directive 

CSR 

Credit Spread Risk 

EBA  

European Banking Authority 

ECB  

European Central Bank 

EDIS  

European Deposit Insurance Scheme 

EU  

European Union 

FSB  

Financial Stability Board 

FRTB  

Fundamental Review of the Trading Book 

GDP  

Gross Domestic Product 

G-SIB  

Global Systemically Important Bank 

G-SII  

Global Systemically Important Institution 

HQLA  

High Quality Liquid Assets 

IFRS  

International Financial Reporting Standard 

IRB  

Internal-Ratings Based 

LCR  

Liquidity Coverage Ratio 

MREL   Minimum Requirement on own funds and Eligible Liabilities 

MS 

Member State 

MtM 

Mark-to-Market 

MtMM  Mark-to-Market Method 

NSFR  

Net Stable Funding Ratio 

O-SII  

Other Systemically Important Institution 

RSF  

Required Stable Funding 

81 

 
 
SA-CCR   Standardised Approach for Counterparty Credit Risk 

SM 

Standardised Method 

SME  

Micro, small and medium-sized enterprise 

SME SF   SME Supporting Factor 

SSM  

Single Supervisory Mechanism 

SREP 

Supervisory Review and Evaluation Process 

SRMR 

Regulation on Single Resolution Mechanism 

TLAC  

Total Loss-Absorbing Capacity 

82 

 
 
 
 
ANNEX  1.  PROCEDURAL  ISSUES  AND  CONSULTATION  OF  INTERESTED 

PARTIES 

The  meeting  of  the  Regulatory  Scrutiny  Board  took  place  on  7  September  2016  to 
discuss  the  draft  impact  assessment.  The  Regulatory  Scrutiny  Board  issued  a  positive 
opinion on this impact assessment on 27 September 2016. 

Possible  impact  of  the  CRR/CRD  IV  on  financing  of  the  economy  ("CRR 
consultation") 

Consultation activity 

The CRR required the Commission to review the impact of own funds requirements on lending to 
SMEs and long-term financing, including infrastructures.93 As a result, the Commission services 
consulted on the potential impact of the CRR and CRD IV on the financing of the economy, 
including SME lending and long-term financing, in 2015.94 This consultation has fed into the 
preparation of the legislative initiative accompanying this impact assessment.  

Stakeholder groups 

There were 84 responses to the consultation. The majority of responses came from the financial 
industry. Half of the responses came from three Member States: Belgium (a vast majority of 
industry associations), the United Kingdom and Germany.  

Chart 1: Type of respondent 

Chart 2: Location of respondent 

93   Article 501: the impact of own funds requirements on lending to SMEs and natural persons; article 505: 
the appropriateness of the CRR requirements in light of the need to ensure adequate levels of funding 
for  all  forms  of  long-term  financing  for  the  economy,  including  critical  infrastructure  projects;  and, 
Article 516: the impact of CRR on the encouragement of long-term investments in growth-promoting 
infrastructure. 

94   The  public  consultation  was  launched  in  July  2015  and  closed  in  October  2015.  A  summary  of  the 

responses is published on the Commission's website. 

83 

 
 
 
 
                                                            
Results 

In terms of substance, the consultation asked stakeholders for their views on the impact and role 
of the CRR/CRD IV on the recapitalisation process; lending to corporates in general and SMEs in 
particular; and, lending to infrastructures. It also asked questions related to proportionality, 
simplification and the single rulebook. While views differed substantially between type of 
respondents, a number of high-level messages can be extracted: 

  Role  of  CRR/D  in  recapitalisation  process:  All  stakeholder  groups  shared  the 
view  that  the  CRR/D  have  increased  the  resilience  of  the  European  banking 
sector.  As  to  what  drove  the  increase  in  the  capital  levels,  most  banks  ranked 
regulatory demands as the most important ones, at the same time highlighting the 
importance of supervisory and market demands, which in general frontloaded full 
CRR  requirements  or  even  went  beyond  those.  The  views  of  other  stakeholders 
were mixed, emphasizing more the role of supervisory and market demands. The 
financial  industry  did  not  portray  capital  requirements  as  excessive  in  general 
(some  contrasting  views  on  the  securitisation  and  credit  valuation  adjustment 
(CVA)95  frameworks).  By  contrast  to  the  general  acceptance  for  the  minimum 
regulatory  requirements,  the  banking  industry  criticised  additional  supervisory 
capital requirements, largely stemming from supervisory stress tests (Pillar II add-
ons),  and  macro  prudential  buffers,  primarily  because  of  their  unpredictability, 
complexity, lack of transparency and uneven implementation across the EU;  

  Lending to corporates: all stakeholder groups argued that regulation was not key 
in driving lending. Other factors, such as demand-side factors (slowing economic 
activity)  and  monetary  policy,  affect  the  actual  level  of  lending  more  than 
regulatory  requirements.  Nevertheless,  stakeholders  generally  agreed 
that 
increased capital requirements have had a negative impact on the overall capacity 
to  lend,  at  least  during  the  transitory  period  to  adjust  to  the  new  capital 
requirements.  A  few  banks  however  stated  that  those  banks  which  raised  their 
capital and retained earnings and those banks that already had high capital levels 
were  able  to  maintain  their  lending  supply  unaffected.  A  vast  majority  of 
respondents  agreed  that  the  impact  on  corporate  lending  is  in  part  structural 
(permanent),  and  in  part  transitional  (temporary).  Banking  industry  most  often 
referred  to  the  structural  increase  in  refinancing  costs.  Banking  industry 
highlighted the important role of other financial sector regulations besides CRR, 
notably, the BRRD, in affecting the cost/availability of lending. There were also 
references  to  not  yet  implemented  standards,  such  as  the  NSFR  or  the  leverage 
ratio, as having the potential to affect the availability and cost of lending. Banks 

95   CVA risk is the risk of mark-to-market losses on OTC derivatives that are due to a deterioration in the 

credit quality of the counterparty.  

84 

 
 
 
                                                            
referred  in  general  to  instruments  bearing  more  risk  and  with  longer  maturities 
most  affected  by  regulatory  requirements.  More  specifically,  they  cited  among 
others:  securitisations,  trade  finance,  repos  and  derivatives  and  real  estate 
exposures; 

  Lending  to  SMEs:  views  differed  on  the  effectiveness  of  the  SME  supporting 
factor  (SF)  in  providing  more  lending  to  SMEs96.  The  financial  industry  was 
largely  of  the  view  that  the  SF  has  been  effective  to  incentivise  SME  lending. 
SMEs and other corporates also supported capital relief for these SME exposures 
and  asked  for  an  extension  of  the  scope  of  application  of  the  SF.97  SMEs  and 
corporates also highlighted the importance of bank lending, as market financing is 
associated  with  high  fixed  costs.  However,  a  majority  of  supervisors  and 
regulators did not notice any clear impact of the SF on lending, with some noting 
that  the  SF  distorts  the  perception  of  actual  risk  arising  from  SME  exposures. 
Many respondents thought that concerns about SME funding should be solved by 
other  means  (e.g.  creating  a  credit  register  for  SMEs  and  developing  specific 
public subsidies  or  guarantees for SME loans). Some respondents also provided 
alternative  proposals  to  change  CRR  in  favour  of  SMEs,  such  as  improving  the 
risk-sensitivity  of  the  standardised  approach,  making  the  standardized  approach 
dependent  on  SME  specific  factors  (profitability/turnover)  or  reviewing  the 
prudential calibration of some market segments, especially securitisations; 

  Lending to infrastructures: According to the banking sector, CRR requirements 
for infrastructure projects, especially capital and liquidity ones, do have an impact 
on the capacity of banks to provide loans to this sector. Moreover, some indicated 
that supervisory practices in approving banks’ risk measurement for infrastructure 
puts  some  banks  at  a  disadvantage  and  creates  an  uneven  playing  field.  Public 
authorities and supervisors were split on whether CRR requirements actually have 
an impact on infrastructure lending. Those who answered positively regarded the 
NSFR and the leverage ratio as having the greatest potential impact, arguing that 
these  would  affect 
instruments,  such  as 
infrastructure,  relatively  more.  On  the  issue  of  whether  infrastructure  projects 
should  continue  to  be  treated  as  loans  to  corporate  borrowers,  a  majority  of 
respondents  from  all  stakeholder  groups  answered  negatively,  except  for  public 
authorities  and  supervisors,  where  the  answers  were  more  split.  Justifications 
given for a specific treatment were based on the alleged different features98 and 
presumable  different  risk  of  these  two  types  of  exposures.  In  particular,  the 
banking  industry  and  corporate  sector  argued  in  favour  of  a  specific  supporting 
factor for infrastructure, similar to the one for SMEs. There were also, from these 
two  groups,  calls  for  greater  risk-sensitivity  of  the  standardised  approach  and 
more harmonization amongst supervisory practices as regards these loans; 

longer-maturity  and 

lower-risk 

  Proportionality:  within the banking sector, there was a divide between big  and 
small banks. The former generally argued against more proportionality, claiming 
that  there  are  already  additional  requirements  for  big  banks  and  systemic 
that 
institutions.  The 

increased  proportionality,  arguing 

favoured 

latter 

96   24% lower capital requirements for banks' SME exposures subject to certain conditions (see Article 501 

of the CRR). 

97   At the moment, only small SMEs are likely to benefit in practice given a  limit of €1.5 million on the 

total amount led to each SME. 

98   Among those cited: longer maturity, higher collateralisation, higher recovery rate and lower volatility 

of infrastructure exposures compared to corporate exposures. 

85 

 
 
                                                            
compliance costs for small- and medium-sized banks can be disproportionate. For 
those  banks  which  wanted  enhanced  proportionality,  there  were  different  views 
on  how  to  select  the  target  institutions  and  on  which  areas  of  the  CRR  should 
allow a more proportional treatment. On the former, size and risk profile were the 
most prominent responses. On the latter, there were a few singling out reporting 
requirements;  otherwise,  responses  were  much  dispersed,  including:  leverage, 
market  risk,  operational  risk  or  remuneration,  among  others.  Supervisors  and 
public authorities were of the opinion that proportionality is already embedded in 
the CRR through: risk-based rules, the possibility to choose between standardised 
approaches  and  internal  models  and  the  additional  requirements  for  systemic 
institutions.  However,  supervisors  and  public  authorities  suggested  simplifying 
reporting requirements for small banks or simpler institutions. They also saw the 
need  to  alleviate  disproportionate  compliance  costs  for  these  institutions  by 
simplifying complex rules, provided simpler rules are not less conservative; 

  Simplification: the banking industry generally supported greater simplicity of the 
rules. However, bigger banks were of the view that greater simplicity should be 
promoted  for  all  banks,  while  smaller  ones  thought  they  should  be  the  main 
target.  Specific  areas  mentioned  for  simplification  were:  supervisory  reporting, 
using accounting values (dismissing prudent valuation or credit risk adjustments), 
and governance and risk management requirements. Several private persons and 
think  tanks  argued,  as  a  general  policy  option,  that  internal  ratings  based 
approaches should be replaced by a simple leverage ratio in combination with the 
standardised approach; and 

  Single rulebook: a clear majority of respondents from the banking industry were 
supportive  of  greater  harmonization  and  against  national  discretions.  This 
harmonization  was  understood  by  many  respondents  not  only  as  harmonizing 
Pillar  I  requirements,  but  also  supervisory  practices  (Pillar  II).  There  was  some 
recognition  of  the  need  to  maintain  certain  national  flexibility  regarding  the 
macroprudential toolkit, given that different EU jurisdictions may not follow the 
same  financial  cycles.  However,  these  tools  should  be  solely  used  to  address 
systemic risks, and not to address risks covered by the other CRR requirements. 

Call for Evidence 

Consultation activity 

On  30  September  2015,  the  European  Commission  launched  a  public  consultation 
entitled  the  Call  for  Evidence:  EU  regulatory  framework  for  financial  services.  The 
consultation closed on 31 January 2016. The purpose of the Call for Evidence, which is 
part  of  the  Commission's  2016  work  programme  as  a  REFIT  item,  was  to  consult  all 
interested  stakeholders  on  the  benefits,  unintended  effects,  consistency,  gaps  in  and 
coherence of the EU regulatory framework for financial services. It also aimed to gauge 
the impact of the regulatory framework on the ability of the economy to finance itself and 
grow.  

Stakeholder groups 

86 

 
 
 
The Commission received 288 responses.99 Most responses came from the UK, Belgium, 
France,  Germany  and  the  Netherlands  (figure  A1,  table  A1).  Responses  came  from 
various  sectors  (tables  A2-A3).  The  majority  of  respondents  came  from  the  financial 
sector,  including  banking,  investment  management,  insurance  and  market  infrastructure 
operators.  The  majority  of  respondents  were  providers  of  financial  services,  or 
associations  representing  them.  In  contrast,  responses  from  consumers  of  financial 
services were more limited.  

Figure A1. Respondents by country 

Table A1. Respondents by country 

Country of respondent 
United Kingdom 
Belgium 
France 
Germany 
The Netherlands 
Sweden 
Italy 
Spain 
Finland 
Greece 
Denmark 
United States 
Ireland 
Croatia 
Austria 
Czech Republic 
Norway 
Switzerland 
Malta 
Luxembourg 
Hungary 
Slovakia 
Poland 
Guernsey and Jersey 
South Africa 
TOTAL 
Source: Call for Evidence database 

No. 
75 
52 
42 
27 
13 
9 
8 
7 
5 
5 
5 
4 
4 
4 
4 
4 
4 
4 
3 
3 
2 
1 
1 
1 
1 
288 

Source: Call for Evidence database 

99   Responses  to  the  Call  for  Evidence  as  well  as  the  summary  feedback  statement  can  be  found  on  the 

Commission's website. 

87 

UKBEFRDENLSEITESFIELDKOthers 
 
 
 
 
 
 
 
 
 
 
                                                            
Table A2. Respondents by type 

Table A3. Respondents by sector 

Type of respondent 
Public Authority 

Regulatory authority, Supervisory 
 Authority or Central bank 
Government or Ministry 
Regional or local authority 

Organisation 

Industry association 
Company, SME, 
micro-enterprise, sole trader 
Consultancy, law firm 
Consumer organisation 
Non-governmental organisation 
Think tank 
Trade union 
Academic institution 

Private Individual 
TOTAL 

No. 
29 

15 

13 
1 
246 
218 

89 
7 
7 
6 
4 
3 
2 
13 
288 

Sector of respondent 
Banking 
Investment management 
Insurance 
Market infrastructure 
operator 
Pension provision 
Auditing 
Consumer protection 
Accounting 
Civil society 
(advocacy, unions, NGOs) 
Other Financial services 
Credit rating agencies 
Corporate 
(governance, issuers, treasuries) 
Consultancy, law firm 
Telecommunication 
Social entrepreneurship 
Academia 
Energy 
Auto 
Real estate 
News 
Transport 
TOTAL 

Source: Call for Evidence database 

No. 
100 
79 
50 

39 

30 
21 
20 
19 

19 

19 
11 

11 

8 
8 
7 
7 
6 
2 
2 
1 
1 
288 

Results 

Respondents referred to all the main legislative acts in financial services, but most replies 
concerned the Capital Requirements Regulation and Directive (CRR/CRD IV). While the 
Call  for  Evidence  aimed  to  assess  the  effect  of  existing  legislation,  respondents  also 
expressed views on possible forthcoming regulation. This was particularly pronounced in 
the area of banking, where a large number of claims were focused on the leverage ratio, 
NSFR,  FRTB,  TLAC  and  BSR.  Responses  covering  the  CRR/D  raised  the  following 
issues that are of relevance for this impact assessment: 

  Unnecessary  constraints  on  financing:  some  public  authorities  and  other  non-
industry  respondents  argued  that  higher  regulatory  capital  requirements  for 
institutions may have a net positive effect on the financing of the economy in the 
longer  term,  while  adverse  effects  on  loan  supply  may  occur  in  the  short  term. 
They  further  argued  that  the  slowdown  in  lending  observed  in  some  Member 
States is more likely due to factors other than regulation (e.g. lower demand for 
loans).  Many  respondents  sought  improvements  in  financing  conditions  for 
SMEs. They suggested providing further support to SME financing, for instance 
by continuing with the current ‘supporting factor’ for loans to SMEs. They also 
expressed concerns about the potential impact of capital requirements for interest 
rate risk in the banking book, especially if those would be introduced in the form 
of a Pillar 1 requirement.. 

  Negative impact on market liquidity: many respondents stressed the combined 
impact  of  the  leverage  ratio,  the  NFSR  and  the  revised  capital  requirements  for 
market risk on  market liquidity in  general  and, in relation  to the revised  market 
risk  rules,  the  particularly  negative  impact  on  e.g.  market-making.  Hence,  as 
regards  the  latter  respondents  proposed  to  reconsider  specific  aspects  of 

88 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
calibration  and  making  it  less  operationally  difficult  to  apply  the  standardised 
approach. 

the  rules, 

  Proportionality: A large number of respondents called for a more proportionate 
application  of 
in  particular  on:  (i)  reporting  and  disclosure 
the  former, 
requirements;  and,  (ii)  prudential  requirements.  As  regards 
respondents  highlighted  the  difficulty  for  smaller  and  less  complex  credit 
institutions  to  comply  with  these  requirements,  including  those  that  will 
eventually  apply  in  relation  to  the  NSFR.  There  were  additional  concerns  that 
requirements  would  be  "gold-plated"  by  some  Member  States  (e.g.  require 
subsidiaries  of  international  groups  to  report  additional  financial  information  at 
individual  level).  As  regards  the  latter,  some  respondents  argued  that  capital 
requirements  should  take  better  into  account  firms'  size  and  business  model,  in 
particular  with  regard  to  smaller  and  less  complex  credit  institutions.  Finally, 
some respondents also argued that the leverage ratio could reduce diversity, as it 
would  have  a  disproportionate  negative  impact  on  low  risk-weighted  business 
models (e.g. specialised community banks, building societies, mortgage banks). 

  Reporting  and  disclosure  obligations:  Banking  associations  and  individual 
institutions frequently pointed to reporting burdens imposed by various regulatory 
and  supervisory  bodies  (national  competent  authorities,  the  SSM,  EBA,  etc.,  to 
perceived inconsistencies between various reporting requirements and respective 
templates, as well as to wide-spread ‘gold-plating’ by competent authorities in a 
context of maximum harmonisation. 

  Interactions:  many  claims  stressed  possible  inconsistencies  arising  from  the 
interaction between EMIR and the CRR. Specifically, respondents argued that the 
introduction  of  the  leverage  ratio  would  be  penalising  for  institutions  offering 
clearing services, as it does not take into consideration the risk-reducing effect of 
(segregated)  initial  margin  provided  by  the  institutions'  clients  in  relation  to  the 
CCP-cleared transactions. 

Targeted consultations  

On the NSFR, to complement the EBA report and the responses to the call for evidence, 
the  Commission  services  conducted  an  additional  targeted  consultation  to  gather 
stakeholder's views on some specific aspects of this requirement: 

- the potential adjustments resulting from complying with the NSFR; 
- the treatment of derivative transactions; 
- the treatment of short term transactions with financial institutions; 
- the effective application of the principle of proportionality. 

Respondents expressed concerns that the cost of compliance with the NSFR requirement might 
be excessive for certain specific business models or activities, in particular for short term and 
market activities. 

The treatment of derivative transactions is one of the main sources of concern in a vast majority 
of answers to the consultation. The additional requirement to hold 20% of stable funding against 
gross derivatives liabilities is very widely seen as a rough measure that overestimates additional 
funding risks related to the potential increase of derivative liabilities over a one year horizon. The 
rules underpinning the calculation of NSFR derivative assets and liabilities and in particular the 

89 

 
 
 
asymmetric treatment between variation margins received and posted and of initial margins 
received and posted is also cited as detrimental to derivatives markets.  

Regarding short term transactions with financial institutions, the vast majority of respondents are 
concerned that the asymmetric treatment of short term (less than 6 months) secured funding (0% 
ASF) and lending (10% or 15% depending on the quality of the underlying collateral) 
transactions with financial counterparties could be very detrimental to market making activities 
and, as a consequence, to the liquidity of repo market and of the underlying collateral. Repo 
markets are presented as essential for the smooth functioning of both bank liquidity management 
and market makers' inventory management. This treatment also raises some concerns regarding 
the impact on the interbank market, in particular for liquidity management purposes. 

The 5% RSF factor that applies to Level 1 HQLA and the high RSF factor that applies to non-
HQLA equities are criticised as being too high. For the Level 1 HQLA, this is deemed as not 
being consistent with the LCR that recognize the full liquidity of these assets even in time of 
severe stress. For non-HQLA securities, they think that funding requirements for a particular 
asset should depend on the purpose for which the bank holds the asset (eg securities held as a 
market hedge for a derivative transaction).  

Secured  issuances,  and  covered  bonds  issuances  in  particular,  are  single  out  as  being 
unintendedly  penalised  by  the  NSFR.  Concerns  are  also  raised  about  the  continued 
ability to operate pass-through structures, amongst which the distribution of promotional 
loans feature prominently. Doubts are also voiced about the relevance of a stable funding 
requirement for business models that, even though they require a banking license, engage 
into  maturity  transformation  to  a  very  limited  extent.  The  respondents  are  in  favour  of 
taking  into  account  European  specificities  and  raise  some  more  technical  issues  on  the 
design of the NSFR. 

Finally,  the  majority  of  respondents  do  not  favour  a  reduced  scope  of  application  or 
differentiated treatment for small banks to make NSFR requirements more proportionate. 
An  exemption  from  NSFR  requirements  or  the  introduction  of  simplified  metrics  for 
either  smaller  or  'low  funding  risk'  institutions  do  not  have  a  wide  support.  They  are 
furthermore in favour of applying the NSFR on a consolidated basis only or, at least, of 
defining a preferential symmetric treatment of intragroup transactions if the NSFR is also 
applied on an individual basis. 

On the FRTB, to complement the EBA report and the responses to the call for evidence, 
the  Commission  services  conducted  an  additional  targeted  consultation  to  gather 
stakeholder's  views  on  the  application  of  the  principle  of  proportionality  under  the 
revised market risk framework, including: 

- potential changes to the current derogation for small trading book businesses; and 

- potential options for a simplified calculation of the market risk capital requirements for 
small banks. 

A majority of respondents choose as preferred policy option a combination of the derogation for 
small trading book businesses and a simplified standardised approach.  

First, respondents agree that the new standardised approach of the FRTB framework, the 
sensitivities based approach (SBA), is far more complex than the existing approach under CRR 
and this additional complexity would be inappropriate for banks with small or medium trading 
books. In particular, respondents consider that the granularity of data requirements under the 

90 

 
 
 
 
SBA would be too extensive which would complicate its use on an on-going basis. In addition, 
the one-off costs of implementing the SBA could be substantial100.  

A majority of respondents agree that treatment of capital requirements of trading positions of 
institutions granted with the derogation for small trading book businesses would be inadequate 
for institutions with medium-sized trading books, due to its crudeness, implying that it would not 
be a solution to raise the thresholds of this derogation to capture more institutions that could 
suffer from the introduction of the SBA.  

An alternative, simplified standardised approach is envisaged as the solution for institutions with 
medium-sized trading books for most of respondents. To the question on what this simplified 
standardised approach should consist of, there is also a clear consensus among respondents to use 
the current standardised approach as the basis for the new simplified standardised approach. In 
this case, institutions would avoid any implementation costs. However, some respondents 
highlight that some recalibration of the current standardised would be necessary, in order to keep 
incentives to move to the SBA but also to avoid cliff-effects. Finally, no respondents provided 
clear proposals for the eligibility criteria that would grant institutions with medium-sized trading 
books the permission to use a simplified standardised approach instead of SBA. 

Regarding the derogation for small trading book businesses, most respondents support keeping it. 
There is not strong support for raising the threshold of the derogation, at least not significantly, 
but some say it should be explored, based on data. On the other issues concerning the definition 
of the derogation, respondents are not very specific. Some support clarifying the definition of the 
size of trading assets and the application of the treatment provided by the derogation. Others 
highlight the fact that the scope of the current derogation does not include positions in FX and 
commodities and need to apply a simpler regime for these positions for banks under the 
derogation, especially for FX. 

On  the  introduction  of  SACCR,  to  complement  the  EBA  report  and  the  responses  to 
the  call  for  evidence,  the  Commission  services  conducted  an  additional  targeted 
consultation  to  gather  stakeholder's  views  on  the  overall  complexity  and  operational 
burden to implement SACCR and whether it would be preferable to maintain some of the 
current  standardised  approaches  for  counterparty  credit  risk  exposures,  simpler  than 
SACCR, for small banks. 

The majority of respondents see some merits in introducing SACCR in the EU, mostly 
because it would increase the risk-sensitivity of the capital requirements for counterparty 
credit risk and align capital requirements with the true risks faced by institutions.  

However,  all  respondents  recognised  that  the  SACRR  approach  would  impose  undue 
complexity to institutions with small trading portfolios and therefore a simpler alternative 
approach should be maintained for them. Respondents have diverging views whether this 
simpler alternative should be the current Original Exposure Method, the current Mark-to-
Market method or a revised version of the Original Exposure Method to align certain of 
its assumptions with SA-CCR. 

Finally, most of the respondents considered that more institutions should be able to use a 
simpler  alternative  to  SACCR  than  institutions  that  are  currently  permitted  to  use  the 
OEM  (ie  the  institutions  that  are  eligible  for  the  derogation  for  small  trading  book 
business under CRR article 94). 

100 One member reported that the cost of implementation for a bank would be at least 1 Million, which is a 

considerable investment for an institution with small trading book activities. 

91 

 
 
                                                            
Remuneration 

The Commission has engaged in several work streams in order to carry out its assessment of the 
CRD IV remuneration rules and to collect the information underpinning this impact assessment. 
The strategy consisted of a mix of the following: stakeholders’ consultation (through a 
stakeholders’ event, bilateral meetings and a public consultation), own research, input from the 
European Banking Authority (EBA) and a study on a number of aspects relevant for evaluating 
the CRD IV remuneration rules commissioned to an external contractor. 

On  16  December  2015,  the  European  Commission  hosted  a  fact-finding  stakeholder 
event  in  the  context  of  its  ongoing  review  of  the  remuneration  rules  of  the  Capital 
Requirements  Directive  (2013/36/EU)  and  Regulation  (No  575/2013).  The  objective  of 
the  event  was  to  gather  evidence  on  the  effects  of  the  CRD  IV  remuneration  rules  in 
terms of contributing to curbing excessive risk taking and by impacting on the incentives 
for the so-called “material risk takers”.  

The  effectiveness  of  deferral  requirements  in  term  of  risk-adjustment  was  generally 
acknowledged,  with  a  number  of  participants  arguing  in  favour  of  a  possible 
differentiated regime for certain types of investment firms, or in favour of a proportional 
application depending on the size of the firm and on the level of individual remuneration.  

On  the  issue  of  pay-out  in  instruments,  it  was  expressed  that  the  use  of  share-linked 
instruments should be allowed for listed companies (as it is for non-listed ones), as the 
process  to  pay-out  in  shares  is  considered  burdensome,  unsuited  for  certain  types  of 
entities  (e.g.  cooperative  banks)  and  is  subject  to  certain  restrictions  in  some  foreign 
jurisdictions.  Non-listed  companies  on  the  other  side  can  be  faced  with  high  costs  for 
creating suitable instruments and this cost, it was argued, can be disproportionately high 
for small firms.  

A recurrent theme throughout the discussion was an argument about the allegedly excessively 
wide application of the CRD IV remuneration rules, and a plea from some of the participants to 
allow disapplication of those rules on the basis of the principle of proportionality with respect to 
certain entities, staff or awards. 

Public consultation 

The public consultation on the impacts of the maximum remuneration ratio under the Capital 
Requirements Directive 2013/36/EU (CRD IV), and on the overall efficiency of the CRD IV 
remuneration rules, ran from 22 October 2015 to 14 January 2016. By the set deadline 35 online 
contributions were received from a variety of stakeholders such as credit institutions, investment 
firms, industry or employee representation organizations and public authorities. A summary of 
the contributions is provided below for each of the topics covered by the public consultation. 

Figure A2. Country overview of the respondents 

92 

 
 
 
Figure A3. Profile overview of the respondents 

 The requirement to defer part of the variable remuneration 

Most respondents agreed with the deferral requirement and positively appreciated its 
effectiveness in ensuring alignment with long-term performance and deterring excessive risk-
taking behaviour. A few respondents highlighted its usefulness in conjunction with the 
application of malus and one respondent considered that deferral is useful in retaining employees. 

Regarding the percentage of variable remuneration to be deferred, a few respondents supported a 
higher deferred portion (i.e. 60%) for senior managers and the highest paid material risk takers. 
Those who assessed the deferral period generally supported the appropriateness of 3 to 5 years, 
but certain investment firms (e.g. proprietary trading firms) argue in favour of shorter deferral 
periods, better aligned with the time horizon of their investments and associated risks. Asset 
managers consider that the UCITS V and AIFMD rules contain provisions regarding deferral 
periods that appropriately account for the fund strategy, risk and lifecycle. 

93 

 
 
 
 
Many respondents argued that it is important to preserve flexibility in the application of the rules 
and to maintain the possibility to exempt some entities and staff from the application of some of 
the remuneration rules. Some ask for the definition at EU level of uniform thresholds to apply the 
requirements on variable remuneration. Another respondent considered that national supervisory 
authorities are the best placed to assess to which extent a particular bank should comply with 
each of the rules. 

It is argued that deferral is not appropriate for staff members receiving only low amounts of 
variable remuneration (or for small, non-complex institutions that generally pay out only limited 
amounts of variable remuneration) for a number of reasons: (i) the deferral of small amounts of 
variable remuneration would have detrimental motivational effects on staff and erode the 
perceived value of the award, leading in some cases to increases in either fixed or variable 
remuneration; (ii) it would make it less attractive for lower-paid identified staff with transferrable 
skills (e.g. in control functions or middle management) to retain or take up jobs in CRD IV-
regulated sectors; (iii) deferral would be particularly difficult to apply with respect to staff in 
non-EEA subsidiaries.  

Some respondents consider the deferral requirement costly and administratively difficult, with 
costs affecting disproportionately smaller firms and the multiple, small instalments of deferred 
variable remuneration in the case of staff with low bonuses. Deferral is also said to have only 
negligible (if any) influence on the risk-taking behavior of staff receiving only low variable 
remuneration. 

A vast majority of respondents therefore argued in favour of a proportionate application of the 
deferral requirement. 

The requirement to pay out part of the variable remuneration in instruments 

A number of respondents considered that pay-out in instruments is an efficient tool in terms of 
aligning the remuneration of material risk takers with the performance and risks of the institution. 

Nevertheless, most respondents pleaded for a more proportional application of the pay-out in 
instruments requirement and considered that its administrative burden outweighs its benefits in 
the case of staff earning only low levels of variable remuneration and in the case of institutions 
that are small, non-complex or of a certain legal form (e.g. public bank, building society, savings 
or cooperative bank, principal trading firm). 

Pay-out in instruments is considered particularly problematic for institutions with a specific legal 
form or ownership structure, for which there would be legal and factual barriers preventing them 
from issuing such instruments. Where institutions cannot issue shares, requiring to issue 
“equivalent non-cash instruments” is said to create additional risk for these firms (they cannot 
readily hedge against the additional cost that may be associated with an increase in the value of 
the underlying instrument) and additional cost (they would need to ”value” the instruments). 

Respondents stated that it is important to maintain flexibility in the type of instruments used, as 
long as they have the same efficiency. It is argued in this respect that listed institutions should 
have the choice between shares and share-linked instruments. Share-linked instruments are said 
to be as efficient as shares in terms of alignment with the institutions’ performance and risks, 
while it can be applied more easily, in a less costly way and in a uniform manner worldwide. 

94 

 
 
 
It is said that the payment in shares cannot be put in place in a uniform way in all countries, given 
the different legal, regulatory, accounting and tax constrains and formalities (in some countries 
payment in shares would even be forbidden). From an operational standpoint (IT, HR, 
governance accounting and tax, external and internal communication) pay-out in shares is also 
considered complicated and costly. Institutions would need to either create new shares or buy 
them in the market. Creating new shares would mean that existing shareholdings get diluted, 
whereas buying shares is said to have the possible disadvantage of triggering speculation, thus 
resulting in the institution needing to pay a hefty premium. 

On the other hand, one respondent considers that shares are commonly known financial 
instruments for which staff members may appreciate their link to the institution’s performance, 
while share-linked or debt instruments may be too opaque and difficult to understand, hindering 
the staff member’s ability to assess their value against the institution’s performance.  

Regarding the use of bail-in-able debt instruments, it was argued that they should be limited to 
top staff and that they could be costly if the existing instruments are not adapted to paying 
remuneration (e.g. because they are meant for large institution investors, with no secondary 
markets available and not aligned with remuneration schemes in terms of maturity).  

Some investment firms (in particular employee-owned or controlled by a small group of 
employees or founders, and where risks are said to be effectively aligned with those of the long-
term interest of the firm) consider that the rules on payment in instruments are too complex and 
expensive for their kind of firm. They consider that deferred cash bonuses that remain subject to 
full forfeiture serve as a far more effective disincentive to imprudent risk-taking. 

Cooperation with the European Banking Authority 

EBA was closely associated with the process of evaluating the CRD remuneration rules, by 
gathering and providing information and data through annual reports on Benchmarking 
remuneration practices at EU level101, a Public Consultation on its draft Guidelines on sound 
remuneration policies, which contained a number of questions directly relevant for the issue of 
the proportionate application of the rules102, as well as a Report on the Member States’ 
implementation of the rules under the principle of proportionality, accompanied by the Opinion 
on proportionality to the Commission advising on a CRD IV legislative change. 

ANNEX 2. PARTIAL EVALUATION OF THE EXISTING POLICY FRAMEWORK  

The CRR and CRD IV entered into force on 1 January 2014. Therefore, at this stage there is 
insufficient available data and experience for conducting a full evaluation. Nevertheless, the need 
of amending these instruments in order either to introduce new provisions or to review the 
existing ones has emerged as a result of the work carried out by the BCBS, obtaining evidence on 
the national implementation of the Directives or as an outcome of specific consultations and 
studies, solicited by the Commission.  

The focus of the analysis below is limited to providing early and targeted assessment of two 
specific areas: the rules on remuneration and the impact of CRR on bank financing of the 
economy, including SMEs.103 

101 Available at https://www.eba.europa.eu/regulation-and-policy/remuneration 
102 Consultation on Guidelines on sound remuneration policies (EBA/CP/2015/03) 
103 The other areas covered in the problem definition are not in the scope of the existing policy framework 

95 

 
 
                                                            
A full evaluation will be conducted after sufficient experience with the functioning of the new 
rules has been gathered.  

Annex 2.1. Evaluation of rules on remuneration 

As  required  under  Article  161(2)  of  the  CRD  IV,  the  Commission  has  reviewed  the 
efficiency,  implementation  and  enforcement  of  the  remuneration  rules.  In  carrying  out 
this  review,  the  Commission  engaged  in  several  work  streams.  It  studied  available 
academic literature and commissioned a study from an external contractor to assist with 
its  assessment104.  It  sought  stakeholders’  input  through  a  public  consultation105,  a  fact-
finding stakeholder event and bilateral meetings with industry representatives. Moreover, 
the Commission engaged with Member State representatives and supervisory authorities. 
In accordance with the CRD IV mandate, the European Banking Authority was closely 
associated with the review process and delivered valuable information. In particular, the 
European  Banking  Authority  reports  on  high  earners  and  on  benchmarking  of 
remuneration practices at EU level106 were a valuable source of data covering the years 
2010-2014. The findings of the Commission's evaluation are reflected in the Commission 
Report COM(2016) 510107.   

Other  than  for  the  maximum  ratio  between  variable  and  fixed  remuneration,  for  which 
the  review  found  that  for  the  time  being  there  is  insufficient  evidence  to  draw  final 
conclusions  on  its  impact,  the  review  allowed  for  a  largely  positive  assessment  of  the 
remuneration rules.  

The  rules  on  the  governance  of  remuneration  processes,  performance  assessment, 
disclosure  and  pay-out  of  the  variable  remuneration  of  identified  staff,  introduced  by 
CRD III are overall well received by stakeholders and thus can be positively assessed in 
terms of acceptability.  

These  rules  are  found  to  contribute  to  the  overall  objectives  of  curbing  excessive  risk-
taking  and  better  aligning  remuneration  with  performance,  thereby  contributing  to 
enhanced financial stability. These objectives are still fully relevant today. The rules can 
thus be positively assessed in terms of effectiveness and relevance. 

The CRD IV remuneration rules and associated delegated acts108 brought about a set of common 
requirements on remuneration. The rules continue to require action at EU level in order to ensure 
the level-playing field, avoid fragmentation of the internal market and eliminate the risk of 
similar institutions being treated differently depending on the jurisdiction in which they are 

104  institut  für  finanzdienstleistungen  e.V.,  study  on  the  remuneration  provisions  applicable  to  credit 

institutions and investment firms (2016).   

105 Public consultation on impacts of maximum remuneration ratio under Capital Requirements Directive 
2013/36/EU  (CRD  IV),  and  overall  efficiency  of  CRD  IV  remuneration  rules  (22.10.2015  –
 14.01.2016). 

106 All publications are available at https://www.eba.europa.eu/regulation-and-policy/remuneration/-/topic-

documents/ ckV8kFRsjau9/more. 

107  Report  from  the  Commission  to  the  European  Parliament  and  the  Council  of  [28  July  2016]  – 
Assessment of the remuneration rules under Directive 2013/36/EU and Regulation (EU) No 575/2013. 
108 Commission Delegated Regulation (EU) No 527/2014 introduced a harmonised definition of classes of 
instruments  that  adequately  reflect  the  credit  quality  of  an  institution  as  a  going  concern  and  are 
appropriate  to  be  used  for  the  purposes  of  variable  remuneration,  whereas  Commission  Delegated 
Regulation (EU) No 604/2014 ) laid down qualitative and quantitative criteria to identify categories of 
staff whose professional activities have a material impact on an institution’s risk profile 

96 

 
 
                                                            
located. A common binding framework is all the more relevant given that some institutions are 
active in more than one EU Member State. Thus, the rules on remuneration can overall be 
positively assessed in terms of their EU added value. 

The review nevertheless also revealed shortcomings with respect to the rules on deferral 
and pay-out in instruments in certain specific circumstances. The Commission therefore 
carried  out  a  detailed  evaluation  of  these  two  rules  in  function  of  their  relevance, 
effectiveness,  efficiency,  coherence,  acceptability  and  EU  added  value,  the  findings  of 
which are set out in a Staff Working Document109. The evaluation yielded positive results 
with regard to the relevance, effectiveness, efficiency and acceptability of the two rules 
overall,  but  revealed  significant  reservations  in  the  particular  cases  of  small  and  non-
complex  institutions  and  of  staff  with  low  levels  of  variable  remuneration.  A  negative 
assessment  was  also  made  with  respect  to  the  efficiency  and  acceptability  of  the 
provision requiring listed institutions to use shares (and not share-linked instruments) for 
meeting  the  requirement  under  Article  94(1)(l)(i)  CRD  IV.    The  coherence  of  the 
analysed  provisions  in  the  absence  of  implementation  flexibilities  for  the  above-
mentioned types of institutions and staff was assessed as rather low, whereas the overall 
EU added value was assessed positively. 

109  Staff  Working  Document  SWD(2016)266  -  Evaluation  of  the  deferral  and  pay-out  in 

instruments rules under Directive 2013/36/EU 
97 

 
 
 
 
 
 
                                                            
Annex 2.2. Impact on the bank financing of the economy, including SMEs  

Main  conclusions  on  the  impact  of  CRR  on  bank  financing  of  the  economy  and 
infrastructure 

As far as the impact of CRR on the long-term financing and investment is concerned, the 
Commission commissioned a study to London Economics to assess the impact of CRR 
on  bank  financing  of  the  economy.  [Impact  of  the  Capital  Requirements  Regulation 
(CRR) on the access to finance for business and long-term investments insert a link to a 
website where the study will be published]. 

The following main conclusions can be drawn from the report: 

  Main  estimate  of  the  transitional  effect,  derived  in  this  study  using  data  for  the 
period  1985-2014,  shows  that  for  a  one  percentage  point  increase  in  the  Total 
Capital Ratio  the impact on lending flows  of banks in the EU is -0.8% over one 
year with the implied impact over a three-year period being -1.5%. 

  Macroeconomic environment matters a lot for the credit flows to the economy. A 
one  percentage  point  increase  in  the  output  gap  results  in  a  0.95%  reduction  in 
bank lending flows. 

  An  analysis  carried  out  for  subsamples  of  banks  based  on  pre-crisis  business 
models proxied by size, capitalisation, and funding, showed that the impact of the 
Total  Capital  Ratio  on  bank  lending  flows  was  greater  for  banks  that  have 
historically been less capitalised and are funded to a greater extent through non-
deposit liabilities. 

  Estimated impact of the Total Capital Ratio on bank lending stocks in long-run is 

negative (of -2.2%), but the effect is not statistically different from zero. 

  There  is  not  clear  evidence  of  a  major  impact  of  increased  capital  requirements 
under  the  CRR  on  bank  financing  of  infrastructure,  a  result  which  is  consistent 
with findings from the consultations and survey. The results highlight further that 
the impact of changes in the Total Capital Ratio on bank lending flows in general 
(as per the transitional effects analysis) are economically more significant than on 
bank financing of infrastructure in particular. 

These  conclusions  have  been  taken  into  account  once  estimating  different  options, 
particularly on their impact to maintain sustainable bank financing of the economy. 

Main conclusions from the EBA report on SMEs 

Art 501 of CRR introduced a capital reduction factor for exposures to SMEs under both the SA 
and IRB approach. The introduction of this factor was accompanied by a review clause according 
to which the Commission, on the basis of an advice from the EBA, should have assessed by the 
28 June 2016 the impact of the measure on SME lending.  

The EBA in its 2016 report on SMEs110, using the data made available by national supervisors, 
highlighted that the capital reduction stemming from the CRR did not make SMEs to benefit 

110 EBA report on SMEs  

98 

 
 
                                                            
more than large corporates in the provision of new loans: there is no evidence yet that the SME 
SF has provided additional stimulus for lending to SMEs compared to large corporates. In 
particular, according to the results presented, SMEs have faced the same probability of being 
credit constrained as large firms. The EBA, however, also recognised that it might be too early 
to draw conclusions, given the limitations of the data available and the relatively recent 
introduction of the SME SF. In order to be effective the SME SF has to be fully integrated into the 
decision process of institutions which is not yet the case111. 

EBA in the SME report also highlighted that the use of SF is consistent with the empirical 
riskiness of SME exposures, except for the retail asset class in IRB banks: "The results for 
France and Germany suggest that, under CRR/CRD IV, the SME SF is consistent with the lower 
systematic risk of SMEs for all exposure classes in the SA, and for corporate SMEs in the IRBA. 
However, for IRBA retail loans, the capital reductions associated with the SME SF lead to 
relative capital requirements that are lower than those suggested by the systematic risk. As a 
result, after the application of the SME SF, the relative regulatory RWs are in line with the 
empirical ones in the IRBA corporate exposure class and the SA, but are lower than the 
empirical ones in the IRBA retail class, suggesting that these exposures may not be sufficiently 
capitalised relative to large corporates"112. 

Regional differences in the EU 

  For the EBA reporting banks, the highest impact in CET 1 ratios is observed in 
most Easter EU Member States>0.45% point in CET1 ratios: Estonia, Latvia, 
Lithuania, Slovenia;  

  For smaller banks, which do not report regularly to EBA, the highest impact 
(>0.4% point change in CET 1 capital ratio) is observed on Italy, Germany, 
Poland, Sweden, Belgium. 

Table A4. Increase in CET1 capital ratio due to SME SF 

111 EBA report on SMEs, March 2016, p. 11 
112 EBA report on SMEs, March 2016, p. 95 

99 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
100 

 
 
 
 
EBA conclusions on the consistency of risk weight with the actual riskiness of SMEs 

Table A5. Risk weights under IRB and SA and their comparison with the empirical riskiness in 
France and Germany over the full economic cycle  

France 

Turnover (€mio) 

Basel III 

CRR/CRD IV 

Estimated RWs on the actual 
riskiness of loans 
Difference to Basel III 

Difference to CRR/CRD IV 

Germany 

IRBA 
SA 
IRBA 
SA 

IRBA 
& SA 
IRBA 
SA 
IRBA 
SA 

Retail 
0.75 - 
1.5 

46% 
75% 
35% 
57% 

Corporate 

15 - 50  BM 

1.5 - 5 

 5 - 15 
Applicable risk weights 
78% 
100% 
59% 
76% 

80% 
100% 
61% 
76% 

91% 
100% 
70% 
76% 

100% 
100% 
100% 
100% 

% points difference from the applicable risk 
weights 

57% 
11% 
-19% 
22% 
-1% 

58% 
-20% 
-42% 
-2% 
-19% 

59% 
-21% 
-41% 
-2% 
-17% 

63% 
-28% 
-37% 
-6% 
-13% 

100% 
0% 
0% 
0% 
0% 

Turnover (€mio) 

0.75 - 1.5  0.75 - 1.5  1.5 - 5 

 5 - 15 

15 - 50  BM 

Retail 

Corporate 

Basel III 

CRR/CRD IV 

Estimated RWs on the 
actual riskiness of loans 
Difference to Basel III 

Difference to CRR/CRD IV 

IRBA 
SA 
IRBA 
SA 

IRBA 
IRBA 
SA 
IRBA 
SA 

Applicable risk weights 

46% 
75% 
35% 
57% 

47% 
75% 
36% 
57% 

78% 
100% 
59% 
76% 

82% 
100% 
62% 
76% 

93% 
100% 
71% 
76% 

100% 
100% 
100% 
100% 

% points difference from the applicable risk weights 

48% 
2% 
-27% 
13% 
-9% 

47% 
1% 
-28% 
12% 
-10% 

44% 
-34% 
-56% 
-15% 
-32% 

58% 
-24% 
-42% 
-4% 
-18% 

63% 
-30% 
-37% 
-7% 
-13% 

100% 
0% 
0% 
0% 
0% 

In comparison to empirical riskiness, in relative terms: 
RWs too low 
RWs are about right 
RWs are too high 

Source: EBA report on SMEs, figures 47 and 48 

101 

 
 
 
 
 
 
 
 
 
 
  
  
 
  
 
  
  
 
 
  
 
 
  
 
  
  
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
EBA conclusion on the relevance of the €1.5 mio threshold, EBA report p. 92 

"No empirical evidence supporting the limit of €1.5 million currently implemented in Article 501 
of the CRR is found for either Germany or France. This means that the limit of €1.5 million for 
the amount owed set in the Article 501 of the CRR does not seem to be indicative of any change 
in riskiness for firms. Hence, further work would be required to understand whether the limit is 
justified, compared to the €1 million threshold already existing in the CRR for the allocation of 
retail/corporate exposures or a different threshold". 

EBA conclusion on the prudential soundness of the SF, EBA report, p. 88-89, 94 

"The results for France and Germany suggest that, under CRR/CRD IV, the SME SF is consistent 
with the lower systematic risk of SMEs for all exposure classes in the SA, and for corporate 
SMEs in the IRBA. However, for IRBA retail loans, the capital reductions associated with the 
SME SF lead to relative capital requirements that are lower than those suggested by the 
systematic risk. As a result, after the application of the SME SF, the relative regulatory RWs are 
in line with the empirical ones in the IRBA corporate exposure class and the SA, but are lower 
than the empirical ones in the IRBA retail class, suggesting that these exposures may not be 
sufficiently capitalised relative to large corporates"  

Bank lending to natural persons 

Article  501  (4)  requires  the  Commission  to  report  on  the  impact  of  the  own  funds 
requirements also on lending to natural persons. The figure below does not indicate any 
material  drop  in  lending  to  natural  persons  in  the  aftermath  of  the  crisis,  except  mild 
reduction  in  the  stock  of  consumer  loans  during  2014.  However,  lending  to  natural 
persons  increased  in  all  the  relevant  categories  of  lending  over  2015,  namely  in  the 
category  of  households,  mortgage  lending  and  credit  for  consumption,  leading  to  a 
continuing  increase  in  the  stock  of  lending  in  these  categories.  While  it  is  cannot  be 
excluded that an increase  in the overall capital requirements could  have had a negative 
net  impact  on  lending  to  households,  particularly  over  2014,  overall  macroeconomic 
environment,  such  as  interest  rate  policy  by  monetary  institutions,  can  adjust  or  be 
adjusted  effectively  so  as  to  maintain  a  sustainable  level  of  credit  flow  to  households. 
Moreover,  the  success  of  the  peer-to-peer  lending  platforms  over  the  recent  years 
suggests that households can also obtain credit, particularly consumer credit, outside the 
banking  system.  Finally,  no  respondent  to  the  CRR  consultation  or  to  the  Call  for 
Evidence raised an issue of the lack of credit to natural persons. 

Figure A4. Evolution of bank lending in the EU 

102 

 
 
 
 
 
 
 
 
 
Source: ECB data warehouse.  

103 

 
 
 
 
 
ANNEX 3. ASSESSMENT OF OTHER PROPOSED AMENDMENTS TO CRR/CRD 

IV/BRRD 

As mentioned in annex 2, the CRR and CRD IV entered into force on 1 January 2014. Therefore, 
at this stage there is insufficient data for a full evaluation of most topics included in this impact 
assessment, even though the CRR included some early "review" clauses.  

However, the call for evidence launched by FISMA in 2015113 (please add reference) has allowed 
to identify shortcomings on some areas/provisions warranting some fine-tuning of existing rules. 
Moreover, for several of these issues, a review has been recently finalised by the BCBS and 
needs to be reflected in EU legislation. 

Therefore, an early review of a number of provisions becomes necessary even in the absence of 
data allowing completing a full evaluation. A preliminary analysis of the functioning of the 
provisions/areas referred above is summarised below. The amendments suggested in relation to 
these provisions/area are of limited scope/impact or, in other cases, implement a solution which is 
straightforward and uncontroversial. In  a few cases the amendment is basically required to 
ensure a better alignment with the applicable international standards. 

113See http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/index_en.htm 

104 

 
 
 
 
                                                            
Annex  3.1.  Calculation  of  derivative  exposures  in  the  counterparty  credit  risk 

framework 

Problem definition  

Under the current CRR institutions have the choice to use among three different standardised 
approaches for calculating the exposure value of derivative transactions under the counterparty 
credit risk framework: the Standardised Method ('SM'), the Mark-to-Market Method ('MtM 
method') and the Original Exposure Method ('OEM') (see Articles 276 to 282, Article 274 and 
Article 275 of the CRR, respectively). These approaches are also used in other areas of the CRR 
that need to measure the exposure value of derivative transactions. Among the own fund 
requirements, the MtM method, the SM or OEM can also be used in the own fund requirements 
for CVA risks and the own fund requirements for trade exposures to CCP. Otherwise the use of 
these standardised approaches is allowed in the large exposure framework while the leverage 
ratio and the own fund requirements for default funds exposures to CCP impose the MtM 
method.  

The proportion of own fund requirements under CRR calculated with one of the standardised 
approaches for derivative exposures is generally small: less than 5.28% of the total own fund 
requirements for 75% of large EU institutions and less than 0.06% of the total own fund 
requirements for 75% of small EU institutions. For large EU institutions, this proportion varies 
materially depending on the business models of the institution while this proportion remains 
relatively low for all EU institutions with small trading activities irrespective of their business 
models. 

Table A6. Materiality of the own fund requirements for Counterparty Credit risk and CVA risk 
for a representative sample of European institutions 

Sample of large EU institutions114 

Sample of EU institutions with small trading 
activities115 

Min  
 25% percentile  
 Median  
 75% percentile  
 Max  

0.00% 
0.85% 
2.17% 
5.28% 
55.75% 

Min  
 25% percentile  
 Median  
 75% percentile  
 Max  

0.00% 
0.00% 
0.01% 
0.06% 
18.21% 

Source: EBA report on SACCR and FRTB implementation, November  2016 

Table A7. Materiality of the own fund requirements for Counterparty Credit risk and CVA risk 
for a representative sample of European institutions depending on their business models 

114  This  sample  consists  of  193  large  European  institutions  that  the  EBA  receives  COREP  and  FINREP 

reporting from.  

115  This  sample  consists  of  1094  European  institutions  with  a  presumption  of  small  trading  activities  as 
identified  by  the  EBA  as  the  institutions  with  less  than  euros  500  million  of  fair  valued  assets  and 
liabilities. 

105 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Source: EBA report on SACCR and FRTB implementation, November  2016 

The EBA identified only 6 EU institutions currently using SM, 372 EU institutions116 using the 
OEM. Knowing that the EBA also identified 20 EU institutions currently permitted to use the 
Internal model method ('IMM') - the alternative model approach to the standardised approaches - 
all the other EU institutions subject to own funds requirement for counterparty credit risk – 
potentially few thousands - are supposed to currently use the MtM method.  

116  The  EBA  launched  an  ad-hoc  survey  to  identify  all  the  EU  institutions  that  currently  use  OEM. 
Therefore, the 372 EU institutions identified as currently using OEM come from a broader population 
than the 1094 European institutions with a presumption of small trading activities (for this population 

106 

Auto & cons. 53.11%160.06%CCP 28.08%0-Co-operatives 156.46%5050.28%Custodien inst. 31.41%30.42%Div. no retail dep. 140.05%30.33%Local Universal 524.37%2100.29%Mrtg. & Build.Soc. 1312.19%260.56%Other 20.19%281.38%Other no retail dep. 81.95%120.64%Pass-through142.52%0-Savings 101.30%1440.16%Sec. trading house 45.63%60.35%Univ. Cross-Border 334.49%130.31%Unclassified 318.12%470.34%TOTAL1935.55%10130.31% Large EU institutionsEU institutions with small trading activitiesNumberAverageNumberAverage 
 
 
 
 
                                                            
Table A8. Number EU institutions currently using OEM and SM per jurisdictions 

Source: EBA report on SACCR and FRTB implementation, November  2016. 'NA' means that the jurisdictions did not provide the 
relevant answer to the EBA during the survey. 

The need for an early review without evaluation  

The MtM method and the SM have been criticised117 for several limitations, mainly: they do not 
recognise appropriately the risk-reducing nature of collateral in the exposures (an issue in light of 
the forthcoming international clearing/margin obligations); their calibrations are outdated and do 
not reflect the high level of volatility observed during the financial crisis; they do not recognise 
appropriately netting benefits. While at this stage we do not have the relevant data to quantify the 
inefficiencies of that result from the current approach, it has to be noted that, in March 2014, the 
Basel Committee for Banking Supervision (BCBS) adopted a new standardised methodology to 
compute banks' derivatives exposures in the Basel framework – the Standardised Approach for 
Counterparty Credit Risk ('SA-CCR'). It agreed that SA-CCR would replace the two existing 
methodologies allowed in the Basel framework (the Current Exposure Method (CEM) and the 

117 See Section B in http://www.bis.org/publ/bcbs254.pdf 

107 

Member StateInstitutions using OEMInstitutions using SMAT176NABE10BG05CZ00CYNANADE1170DK00EE0NAEL0NAES40FINANAFR50HR260HU3NAIE0NAIT1NALT00LU27NALV1NAMTNANANLNANAPLNANAPT20RONANASENA1SI10SKNANAUK80TOTAL3726 
 
 
                                                            
Standardised Method (SM)) for computing banks' derivatives exposures in Basel counterparty 
credit risk framework from 01 January 2017. 

To better capture the exposure value of derivative transactions under the counterparty credit risk 
framework, and to comply with international agreed standards, SA-CCR should be introduced in 
the EU. 

Proposed solution 

Under the proposed amendment, institutions would use the SA-CCR in the counterparty credit 
risk framework while, under revised conditions, institutions with small trading activities would 
have the possibility to use a revised version of OEM. A simplified version of SA-CCR will also 
be available for banks that would face some operational difficulty to implement SA-CCR but 
have sizeable derivative activities that would not warrant them the use of the revised OEM. 

SA-CCR would provide institutions not permitted to use an internal model approach for 
calculating the exposures of derivative transactions (the vast majority of EU institutions since 
only 20 institutions have been permitting to use such a model according to a survey performed by 
the EBA) with a more risk-sensitive approach than the current ones, calibrated to stress 
conditions and differentiating between collateralised and uncollateralised derivative transactions. 
Under this option, SA-CCR would be implemented under CRR without any material deviations 
from the Basel rules.  

However, it is clear from the responses to the consultation paper that the implementation of SA-
CCR would be too challenging for banks with small trading activities that currently use OEM or 
the MtM method. The responses are split whether OEM, the MtM method or a simplified version 
of SA-CCR should be used for those banks. However, it is also clear that some of the features of 
OEM and the MtM method are too different from the features SA-CCR, leading to different 
exposures amount for the same transactions, which would create an unlevel playing field between 
the institutions applying SA-CCR and institutions that would be allowed to use these approaches 
if they were kept alongside SA-CCR. 

Based on the above evidence and to maintain the level playing field across all institutions not 
permitted to use an internal model for calculating derivative exposures, only one simple 
alternative to SA-CCR will be maintained under CRR – OEM – with revised assumptions to 
ensure its consistency with SA-CCR (the revised assumptions have been designed to limit 
additional undue complexity for the targeted institutions).  

In addition, new eligibility criteria would be set to permit institutions to use the revised OEM, 
based on the size of the market values of their gross derivative activities for trading purposes. A 
combination of absolute and relative threshold may be maintained to ensure that only institutions 
with small derivative portfolios, as compared to their entire balance sheet, would be eligible for 
the application of the revised OEM. 

The EBA has assessed different level of thresholds based on the new eligibility criteria for the 
application of the revised OEM based on a small sub-sample of the EU institutions with small 
trading activities (the sample has been reduced to 134 EU institutions due to lack of data 
available). The majority of EU institutions in this sub-sample have a size of the market values of 
their gross derivative activities for trading purposes below euros 20millions and a relative size of 
the market values of their gross derivative activities for trading purposes to total assets below 5%. 
The remaining few EU institutions in this sub-sample have a size of the market values of their 
gross derivative activities between euros 20 and 300 million and a relative size of the market 

108 

 
 
values of their gross derivative activities for trading purposes to total assets between 5% and 
15%.  

In order to allow enough leeway to capture those institutions that would face some operational 
difficulty to implement SA-CCR, it would be preferable not to set the level of the absolute and 
relative thresholds too low. Based on the EBA data, we propose that the new eligibility criteria 
for the application of the simplified SA-CCR would be based on an absolute threshold of EUR 
150 million and a relative threshold of 10%. 

109 

 
 
 
 
 
Annex 3.2. Disclosure  

Problem definition  

The specific policy objective is for institutions to provide meaningful, consistent disclosures of 
prudential information at a reasonable cost. These disclosures complement the mandatory 
solvency and liquidity requirements and the supervisory review process and are in combination 
the bedrock for safe-guarding the financial stability of institutions established in the Union.   

Under the current CRR institutions have to disclose information to allow users (investors and 
other stakeholders) to form a view on the risk profile of the institution and exercise market 
discipline. Whilst overall the substantial disclosure requirements of the CRR can be considered 
sufficient, the lack of harmonised disclosure formats hampers the comparability of disclosures 
between institutions and over time thereby reducing market discipline. Moreover, the existing 
disclosure requirements are mainly a "one size fits" allowing for hardly and differentiation based 
on the size of the institution and are therefore not optimally proportionate.   

Maintaining the status quo of Part Eight "Disclosure" of the CRR would imply that the disclosure 
requirements 1) would have very little proportionality thereby neglecting the claims for more 
proportionate disclosure requirements made during the call for evidence, 2) would not use the full 
potential of disclosures by facilitating efficient comparability and 3) create divergence from the 
revised Basel disclosure requirements in an area where the EU is currently fully compliant 

The Basel Committee adopted in January 2015 revised Pillar 3 disclosure requirements for 
financial years starting on or after 2016118 requiring common formats for any disclosure in 
relation to the Basel mandatory ("Pillar 1") requirements.  

The need for an early review without evaluation  

The current CRR disclosure requirements were applicable from 1 January 2014 onwards. The 
EBA issued a report on Pillar 3 disclosures by banks for the year 2014 in 2015 which included a 
synthetic overview of the missing CRR disclosures compared to the revised Basel Pillar 3 
disclosure framework. In order to be aligned with the revised Basel international requirements, 
the CRR should be amended.  

In addition, disproportionality of disclosure requirements was mentioned by many respondents to 
the call for evidence indicating the unnecessary administrative burden for smaller banks. In light 
of this Commission's better regulation agenda, these call for proportionality should be addressed 
before the evaluation of the CRD IV/CRR.  

Proposed solution 

In order to alleviate the current disproportionate operational burden and to be aligned with the 
revised Basel Pillar 3 disclosure framework institutions should be categorised on the basis of 
their significance. "Significant institutions" would be defined along the lines of the SSM 
Regulation criteria for identifying significant banks and "small institutions" would be defined on 

118 http://www.bis.org/bcbs/publ/d309.htm 

110 

 
 
 
 
 
  
 
 
                                                            
the basis of total asset size. A further proportionality criterion would be whether the institution 
has issued securities listed on an EU regulated market or not.  

Institutions would either be significant, small or "other" with or without being "listed". The 
disclosure requirements would be a sliding scale with differentiations in the substance and 
frequency of disclosures whereby for all types of institutions disclosure templates developed by 
the EBA would be mandatory.  

At the upper end of the sliding scale would be significant institutions that would be required to 
quarterly disclosure of approximately 1 to 2 pages key metric tables of prudential information, 
semi-annually disclosure of key metrics plus some selected more substantial disclosures and a 
fully-fledged annual disclosure small banks with no securities listed would be required to 
disclose only annual key-metrics.  

111 

 
 
 
 
 
 
 
 
Annex 3.3. Supervisory reporting 

Problem definition 

Reporting prudential information by institutions to supervisors is an essential prerequisite for 
effective ongoing supervision and monitoring of risks. The CRR constitutes a single rulebook for 
supervisory reporting whereby EBA develops Implementing Technical Standards (ITSs) for 
supervisory reporting with common data definitions, common templates, common reporting 
frequencies and common remittance dates as well as a common IT solution.  

The Commission adopts the ITSs prepared by EBA as implementing regulations. So currently the 
Union has a legally enforceable common supervisory reporting system applicable to any 
institution established within the EU. The single rulebook of supervisory reporting in 
combination with the underlying notion of maximum harmonisation implies that supervisors 
cannot impose additional systematic reporting requirements on institutions. However, supervisors 
have the power to request ad hoc information from individual institutions which is one the 
minimum supervisory powers laid down in the CRD IV.  

Although the CRR mandate on supervisory reporting specifically mentions that supervisory 
reporting shall be proportionate to the scale, nature and complexity of the activities of the 
institutions and where there is "implicit proportionality" in the sense that if an institution has a 
simple business model it only has to report a fraction of the data points from the supervisory 
reporting package, several claims have been made during the call for evidence that supervisory 
reporting in the EU has become disproportionate.  

Respondents  to  the  call  for  evidence  highlighted  in  particular  the  high  administrative 
burden  caused  by  1)  disproportionate  reporting  requirements  generally  and  for  smaller 
banks  in  particular  in  terms  of  content  and  reporting  frequency  and  2)  supervisors 
requiring  additional  reporting  on  top  of  the  regular  EU  reporting  requirements.  Some 
respondent  also  expressed  strong  concerns  about  further  disproportionate  reporting 
requirements based on forthcoming initiatives such as the ECB's AnaCredit and the ECB 
European Reporting Framework.  

So  based  on  the  call  for  evidence  there  seems  to  be  two  main  sources  of  potential 
disproportionality in the area of supervisory reporting: 

1.  EBA  is  not  considering  proportionality  optimally  when  developing  ITSs  on 
supervisory  reporting;  (Note:  this  includes  some  detailed  "level  1"  reporting 
requirements in the CRR that do not fulfil a clear supervisory purpose);   

2.  Supervisors  requesting  systematic  reporting  of  prudential  information  on  top  of 
the EU agreed supervisory reporting package; (Note: this is partly driven by the 
Commission's non-timely adoption of ITSs creating a misalignment between the 
applicable  level  1  prudential  requirements  and  the  reporting  requirements  or 
Commission decisions to reject certain reporting requirements that EBA decided 
necessary for effective supervision). 

The need for an early review without evaluation  

Disproportionality of reporting requirements was invoked by many respondents to the call for 
evidence as a cause of unnecessary administrative burden for smaller banks. In light of this and 
taking into account the Commission's better regulation agenda, these calls for proportionality 
should be addressed before an evaluation of the CRD IV/CRR can be undertaken.  

112 

 
 
Proposed solution 

Non optimal proportionality in level 1 and level 2 legislation  

As to the first source of disproportionality it is not straightforward for EBA to determine 
the  appropriate  trade-off  between  the  cost  of  reporting  relevant  prudential  data  by 
institutions and the benefits for effective supervision. EBA makes this trade-off inter alia 
via  public  consultations  of  draft  ITSs.  However,  since  proportionality  is  a  qualitative 
concept open to different views on the cost-benefit, the trade-off may not always be right 
depending on the stakeholder perspective.  

In particular the frequency of reporting for smaller institutions could be reduced leading 
to  less  reporting  burden  without  undermining  overall  the  supervisory  effectiveness  or 
financial stability risk. In order to achieve reduced frequency for smaller institutions the 
proportionality  concept  in  the  CRR  it  is  proposed  to  better  frame  in  the  CRD  IV  and 
CRR the proportionality mandate of EBA when developing ITSs.    

Additionally the extant body of reporting requirements should be reduced for some or all 
institutions depending on their size or other quantitative criteria. This can be achieved by 
including  in  the  CRR  a  specific  requirement  for  EBA  to  report  to  the  Commission  on 
concrete  proposals  for  reducing  the  current  supervisory  reporting  package  without 
sacrificing supervisory effectiveness or directly in the level 1 text.  

As regards too detailed level 1 reporting requirements, the CRR review proposal should 
include amendments to delete or reduce some specific reporting requirements in the level 
1  text.  In  particular  those  for  which  supervisory  experience  has  shown  they  are  dis-
proportionate but  which EBA has  to  include in the ITSs since they are specified in the 
level 1 text.  

Supervisors requesting additional systematic reporting of prudential information   

In order to address this supervisory behaviour, the CRR review proposal should include a 
mandate  for  an  independent  study  of  any  such  systematic  additional  reporting 
requirements that would infringe on the single rulebook. On the basis of the conclusion 
drawn  by  the  study  the  Commission  would  consider  whether  the  additional  reporting 
imposed by supervisors is infringing on the single rulebook and take corrective actions if 
deemed necessary.  

In  addition,  CRD  IV  rules  entrusting  supervisors  with  supervisory  reporting  powers 
should limit those powers to ad hoc reporting by individual institutions (thus eliminating 
the  possibility  for  supervisors  to  impose  systematic  reporting  by  all  or  a  subset  of 
institutions).  

113 

 
 
 
 
 
Annex 3.4. Pillar 2 additional capital  

Problem definition 

Pillar 2 capital requirements are additional capital requirements that supervisors may impose on 
individual banks in excess of Pillar 1 capital requirements (i.e. "minimum" requirements 
applicable to all banks) and the combined buffers requirement (i.e. the combination of various 
buffer requirements related to certain macro-prudential risks applicable to all banks or a subset of 
banks). According to CRD IV119, a bank that doesn't meet Pillar 1 or Pillar 2 capital requirements 
may lose its license, whilst the consequence of breaching the combined buffer requirement is the 
automatic restriction of dividend payments, bonus pay-outs and the remuneration of Additional 
Tier 1 (AT1) instruments to a certain share of the bank’s profits (i.e. Maximum Distributable 
Amount – MDA)120. 

The current text of the CRD IV sets the broad parameters of the exercise of Pillar 2 powers, 
whilst leaving to supervisory authorities a wide margin of discretion when exercising their 
powers. 

The need for an early review without evaluation  

Input received from industry and supervisory authorities during the 2015 public consultation on 
the CRR/CRD IV review, the Call for evidence and from bilateral contacts between the 
Commission and various parties concerned hinted to some discrepancies and weaknesses in the 
way Pillar 2 capital requirements are applied across jurisdictions and to the sometimes not 
transparent way supervisors' decisions on the additional capital imposed on individual banks are 
made. This is due to the ambiguities generated by the legal text as currently drafted. The way 
Pillar 2 capital add-ons are defined and calculated are an important driver of an institution’s 
overall level of capitalisation and are relevant for market participants since the level of additional 
capital imposed by supervisors as a Pillar 2 measure may impact on the triggering of restrictions 
of dividend payments, bonus pay-outs and the remuneration of AT1 instruments (MDA).  

Despite the lack of sufficient data for a full evaluation, a clarification of the current rules is thus 
needed to ensure the proper functioning of the market, especially for those financial instruments 
directly linked to the automatic restrictions of distributions (e.g. AT1). Moreover, with regards to 
the interest rate risks for banking book positions, the modification of the current text is justified 
by the shortcomings identified at international level and the solutions developed in the standard 
adopted by the BCBS in April 2016, to which the proposal seek to align.    

Solution proposed 

The relevant articles of the CRD IV and CRR will be modified to clarify: the relation between 
Pillar 1, Pillar 2 and buffer capital requirements (so called "stacking order" of capital 
requirements); the distinction between Pillar 1 (applicable to all banks) and Pillar 2 (bank 
specific) capital requirements; the difference between Pillar 2 capital requirements (to be met by 
the bank at all time and subject to public disclosure) and Pillar 2 capital guidance (which implies 
an expectation that the institution have additional capital beyond mandatory capital 
requirements); the fact that the MDA shall be calculated by taking into account Pillar 1, Pillar 2 

119 Article 18(1)(d) of CRD. 
120 Article 141 of CRD. 

114 

 
 
 
                                                            
and buffers capital requirements (but not Pillar 2 capital guidance) and that the AT1 instruments 
should be given priority if as a result of the MDA calculation distributions have to be limited. In 
addition, the framework for capturing interest rate risks for banking book positions under Pillar 2 
measures will be included. 

These proposed amendments are expected to promote consistency in the application of rules, 
improve transparency and legal certainty on the use of Pillar 2 capital instruments. 

Impact of the proposed solution 

The modifications of the CRD IV and CRR proposed are not expected to impact on the total 
amount of capital hold by credit institutions or on their ability to lend. As a consequence of the 
clarifications proposed credit institutions are likely to meet the different capital requirements or 
capital expectations by reallocating the capital they have.  

115 

 
 
 
 
 
 
 
Annex 3.5. Equity investments into funds 

Problem definition 

The CRR contains specific rules governing capital requirements for banks' banking book 
exposures in the form of units or shares in collective investment undertakings (CIUs) – basically 
undertakings for collective investment in transferable securities (UCITS) and alternative 
investment funds (AIFs).  

There is a separate set of rules for banks applying the standardised approach (SA) for credit risk 
on the one hand and those applying the internal ratings-based (IRB) approach on the other hand, 
both with different methods for calculating risk weights.  

Both SA and IRB banks may apply a "look-through approach", whereby they look through to a 
CIU's underlying exposure in order to calculate an average risk weight for their exposures in the 
CIU; this is the most risk-sensitive and transparent approach. The other, less risk-sensitive 
methods differ for SA and IRB banks and tend to assign risk weights based on crude criteria. For 
SA banks, the look-through approach is optional, whereas IRB banks must use it if certain 
criteria are met.  

The abovementioned rules are the EU implementation of the internationally agreed standards 
published by the Basel Committee as currently applicable.[1] 

During the crisis, concerns were raised regarding the oversight and regulation of "shadow 
banking" entities and activities, as well as their indirect regulation through banking regulation. In 
this context, the Financial Stability Board recommended[2] in 2011 that "the risk-based capital 
requirements for banks’ exposures to shadow banking entities should be reviewed to ensure that 
such risks are adequately captured", specifically referring to the treatment of investments in 
funds. Such review was conducted by the Basel Committee, resulting in a new standard published 
in December 2013, but not yet implemented in EU legislation.  

The concerns raised with respect to the current framework notably relate to risk sensitivity and 
transparency. The framework lacks risk sensitivity notably in the sense that it does not require 
banks to reflect a fund's leverage when determining capital requirements associated with their 
investment, even though leverage is a very important risk driver. This creates undesirable 
incentives by encouraging investments in higher-risk funds and may result in an insufficient 
capitalisation of such higher-risk exposures.  

Also, the framework does not promote transparency and appropriate risk management of the 
relevant exposures, as there is no clear rank ordering between the different approaches, with 
different degrees of prescriptiveness for SA banks compared to IRB banks and insufficient 
incentives to apply the look-through approach.  

The need for an early review without evaluation  

The Commission proposes to adopt the main aspects of the new Basel standards, which would 
help address a number of the aforementioned weaknesses of the current rules while allowing us 
to comply with our international obligations. However, at this stage, we do not have the relevant 
data to quantify the shortcomings of the current EU approach. 

[1]  Basel  Committee  on  Banking  Supoervision,  "International  Convergence  of  Capital  Measurement  and 

Capital Standards", 2006 

[2] Financial Stability Board, "Shadow Banking: Strengthening Oversight and Regulation", 2011 

116 

 
 
 
                                                            
Proposed solution 

The proposed framework consists of three approaches, which would apply to both SA and IRB 
banks' exposures. The look-through approach (LTA) requires banks to risk weight the fund's 
underlying exposures as if they were held directly; the mandate-based approach (MBA) assumes 
that the underlying portfolios are invested to the maximum extent allowed (as per the mandate, 
regulations, or other disclosures) in the assets attracting the highest risk weights; and the fall-
back approach (FBA) – used for funds with insufficient transparency – requires the application of 
a 1,250% risk weight. It provides a hierarchy of approaches as a function of the degree of due 
diligence performed by banks, with an appropriate incentive structure, whereby the degree of 
conservatism increases with each successive approach as risk sensitivity and transparency 
decrease. This promotes appropriate risk management of bank exposures to funds by providing 
incentives to use the more risk sensitive and transparent approaches.  

A leverage adjustment is added, whereby banks using the LTA or the MBA must adjust the 
average risk weight for an equity investment upwards by the fund's leverage (LTA) or permitted 
leverage (MBA). This will allow an improved reflection of the actual risks faced by the banks as 
concerns of double gearing are addressed.  

According to Basel Committee data, banks' equity investment in funds do not appear to be 
material exposures in most jurisdictions, as risk weighted assets arising from these investments 
represent less than 2 per cent of total RWAs in most jurisdictions, even though a considerable 
degree of heterogeneity across jurisdictions is observed.  

117 

 
 
 
 
Annex 3.6. Bank financing of infrastructure projects 

Problem Definition 

One of the goals of the Capital Markets Union is to help mobilise capital in Europe and channel it 
to the infrastructure and long term sustainable projects that Europe needs to create jobs. The 
European Investment Bank estimates that the EU may need up to €2 trillion in investment in the 
period up to 2020. Public support through measures such as the €315 billion Investment Plan for 
Europe (IP/15/5420) will help, but there is a need for more private investment in such projects in 
the longer term.  

Despite the growing role of large institutional investors in providing long-term funding for 
infrastructure investments, banks continue to play an important role and being the most relevant 
source of funding of infrastructure projects in the EU. In 2014 the proportion of the value of 
infrastructure financed through bank debt in the EU of the total value of infrastructure deals was 
equal to 65.9% (it was 82,7% in 2014).  

In absolute terms, bank lending for infrastructure has grown markedly from 2009 to 2014, almost 
reaching the pre-crisis peak of 2006. 

Figure A6. Proportion of infrastructure finance lent by banks in total volume of infrastructure 
funding 

Source: InfraDeals and Infrata calculations 

118 

0102030405060708090100200020012002200320042005200620072008200920102011201220132014CAPEX in €bnTotalFinanced by Bank Debt 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure A7. Total value of EU Infrastructure projects for which banks provided financing – 2000-
2014 

Source: InfraDeals and Infrata calculations 

The need for an early review without evaluation  

Although the limited time elapsed since the entry into force of CRD IV/CRR didn't allow an in-
depth evaluation of rules applicable to specialised lending, several replies in the call for evidence 
suggest the need for a more risk-sensitive approach to the credit risk attached to infrastructure 
projects. These calls highlight that in order to boost long-term funding for infrastructure 
investment to respond to the needs of the EU economy is therefore important, besides promoting 
the role of non-bank investors, to make infrastructure investments, in particular high-quality 
ones, more attractive to banks and allow banks to better understand and manage risks attached 
infrastructure projects.   

Proposed solution 

A specific 'population' of specialised lending exposures will be identified which aim at funding 
infrastructure projects and fulfil certain criteria able at reducing the different risks a bank would 
incur in providing such funding (financial, political, legal, operating, etc.). This new asset class of 
qualifying specialised lending exposures would benefit from a discount factor of 25% The 
criteria will denote safer infrastructure projects and ensure that lending banks understand the 
associated risks.  

These criteria, largely derived from those used for the Category I exposures in the so-called 
'slotting approach' in the IRBA (see draft EBA RTS on specialised lending exposures121), would 

119 

 
 
 
 
 
                                                            
 
be consistent with the criteria developed in the insurance framework for the prudential treatment 
of qualifying infrastructure investments (Commission Delegated Regulation 2016/467). 

The proposed amendment, while promoting high-quality, sustainable infrastructure investments, 
would enhance cross-sectoral harmonization and comparability between SA and IRBA banks122. 

121 Draft RTS on Assigning Risk Weights to Specialised Lending Exposures under Article 153(9) of 

Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR)  

122  Currently  the  slotting  approach  is  used  by  only  23%  of  IRBA  Banks  but  the  BCBS  is  currently 
considering  requiring  in  future  all  IRBA  banks  to  apply the  slotting  approach  for  specialised  lending 
exposures. 

120 

 
 
 
                                                                                                                                                                                 
Annex 3.7. Large exposure framework (alignment with Basel rules) 

Problem definition 

The purpose of the large exposure limits is to protect banks from significant losses caused by the 
sudden default of an individual counterparty or a group of connected counterparties. It thus 
targets exposures that are large compared to a bank’s capital resources. The current text set a 
general limit to large exposures of 25% of institutions' eligible capital123 (which is the sum of 
Tier 1 capital and an amount of Tier 2 capital equal to one third of Tier 1 capital124). 

The general limit of 25% is not sufficiently prudent, especially for larger banks, since it only 
capture a small part of the overall large exposures that European institutions have. In fact, the 
25% limit addresses only a limited number of the exposures. Moreover, it results in a higher limit 
for smaller banks since larger banks have usually more Tier 2 capital than smaller ones. This 
doesn’t ensure that the maximum possible loss a bank could incur if a single counterparty or a 
group of counterparties were to suddenly fail would not endanger the bank’s survival as a going 
concern. 

Moreover, the current limit doesn’t take into account the higher risks carried by the exposures 
that globally systemically important Banks (G-SIBs) have to single counterparty or groups of 
connected clients and, in particular, as regards exposures to other G-SIBs. The financial crisis 
has, in fact, demonstrated that material losses in one systemically important institution (SIFIs) 
can trigger concerns about the solvency of other SIFIs with potentially serious consequences on 
financial stability.  

Finally, the BCBS has developed in 2014 a new methodology (i.e. Standardised Approach for 
Counterparty Credit Risk, SA-CCR) for computing banks’ derivatives exposure (i.e. Over The 
Counter, OTCs) that better capture the risks carried by this type of exposures. The current large 
exposures framework relies instead on less accurate methods, which could lead to underestimate 
the risks linked to derivatives exposures.  

The need for an early review without evaluation 

At international level the BCBS identified some shortcomings in the large exposure regime that 
the BCBS standard, published in 2014 and expected to be implemented by jurisdictions by 2019, 
aims to address. The standard has been published for 2 years and market participants, which have 
participated in the public consultation125 and the quantitative impact assessment (QIS)126 
launched by the Basel committee, expect the EU system to be aligned with the standard. It is thus 
proposed to modify the CRR to reflect the Basel framework.  

Solution proposed 

The measures proposed to address the loopholes identified in the current large exposures 
framework are essentially three. First, increasing the quality of capital that can be taken into 
account for limiting large exposures, by limiting the eligible capital only to Tier 1 capital (no 

123 Art. 395 of CRR. 
124 This is the definition of eligible capital that applies as from 2016, after the transitional period set out in 

Article 494 of the CRR has expired. 
125 http://www.bis.org/publ/bcbs246.htm. 
126 http://www.bis.org/publ/bcbs246/instructions.pdf 

121 

 
 
  
                                                            
more Tier 2 capital). The higher quality of capital used as capital base will improve the ability of 
institutions to absorb losses. At the same time, the change in the capital base will reduce the 
quantity of exposures that a bank can have - and thus the risk of losses in case of default of the 
counterparty – and introduce a more proportionate system for smaller banks compared to larger 
ones. In the same direction, a second proposal is to introduce a lower limit for G-SIBs exposures 
to other G-SIBs (15% of banks’ Tier 1 capital instead of the 25% of banks’ Tier 1 capital 
required for other banks) in order to reduce systemic risks related to the interlink among large 
institutions and the probability that the default of G-SIBs counterparty may have on financial 
stability. Finally, it is proposed to impose to use the SA-CCR methods for determining exposures 
to OTC derivative transaction, even for banks that have been authorised to use internal models. 

These interventions will overall increase the risk-sensitivity of the large exposures regime and 
better tailor the requirements to specific types of exposures and to the size of banks. At the same 
time, the modifications introduced in the current framework will align the European system to the 
BCBS standard on large exposures issued in 2014127, thus increasing international comparability 
and consistency across jurisdictions. 

Impact of the proposed solutions 

The enhanced quality of capital (only to Tier 1 capital taken into account as capital base) is not 
expected to have a significant impact on the number of the exposures exceeding the large 
exposure limit. According to the available data the total number of exposures in breach of the 
25% limit of the capital base increases from 25 (considering eligible capital) to 63 (considering 
Tier 1 capital). 

Table A9. Changes in the number of large exposures due to the enhanced quality of capital 

Exposure bucket 

Total  Group 1  Group 2 

Total  Group 1  Group 2 

Eligible capital 

Tier 1 capital 

≤ 10% 

> 10% ≤ 15% 

> 15% ≤ 20% 

> 20% ≤ 25% 

> 25% 

Total 

14 096 

10 885 

3 211 

13 953 

10 800 

3 153 

384 

167 

62 

25 

130 

56 

13 

13 

254 

111 

49 

12 

417 

210 

91 

63 

183 

63 

32 

19 

234 

147 

59 

44 

14 734 

11 097 

3 637 

14 734 

11 097 

3 637 

Source: EBA (Group 1 and Group 2 institutions differentiate between respectively big and less big banks. The smallest 
bank in Group 2 has total assets of EUR 5 billion 

There would be 11 additional credit institutions out of 198 credit institutions analysed which 
would exceed the large exposures limit when the capital base changes from eligible capital to 
Tier 1 (of which 4 are Group 1 and 7 Group 2 institutions). This would imply that 6 Member 
States that would not have reported exposures above the large exposure limit (25% or 15%) 
would be affected by the change in capital base (namely, ES, AT, LUX, IE, DE and SE). 

127 BCBS, Supervisory framework for measuring and controlling large exposures, April 2014, available at 

http://www.bis.org/publ/bcbs283.pdf. 

122 

 
 
 
                                                            
Figure A8. Changes in the number of large exposures per country due to the enhanced quality of 
capital 

Source: EBA (Group 1 and Group 2 institutions differentiate between respectively big and less big banks. The smallest 
bank in Group 2 has total assets of EUR 5 billion) 

The modification of the large exposure limit for exposures between G-SIBs (from 25% to 15%) 
would in practice have no impact, since there are no G-SIBs in the EU that have reported 
exposures greater than 10% both in terms of eligible capital and Tier 1 capital. The imposition of 
a 15% limit will however prevent in the future G-SIBs to increase the number of exposures 
towards other G-SIBs. 

Table A10. Changes in the number of large exposures due to the change of limit for G-SIBs v G-
SIBs exposures 

Eligible capital 

Tier 1 capital 

Exposure bucket   Number of 
Institutions 

Number of 
Exposure 

Number of 
Institutions 

Number of 
Exposure 

> 0% ≤ 5% 

> 5% ≤ 10% 

13 

4 

193 

5 

13 

8 

186 

12 

Source: EBA 

As concerns the use of the standardised approach for measuring exposure at default for 
counterparty credit risk (SA-CRR), it was not possible to gather information concerning the 
impact of this change on the large exposure regime. A data collection on simulated data would 
need to be conducted given that the SA-CRR is not yet implemented in the CRR.  

Overall, the modifications to the large exposure framework are however not expected to impact 
on the ability of credit institutions to lend since the large exposure regime only impose a 
diversification of clients to which credit institutions' have exposures. The number of clients or of 
exposures are not limited. 

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Annex 3.8. Exemptions on large exposures 

Problem definition 

Article 400 (2) of the CRR lists a number of exposures that competent authorities may fully or 
partially exempt from the scope of application of the large exposures limit. These exposures can 
only be exempted if the conditions laid down in paragraph 3 of the same article are met. 

By way of derogation from Article 400 (2) and (3) of CRR, Article 493(3) of CRR provides for a 
temporary possibility for Member States to grant an exemption from the large exposures limit for 
the same exposures listed in Article 400 (2) of CRR, however without having to meet the 
conditions set out in paragraph 3 of Article 400 of CRR. 

The concurrent possibility of Members States and competent authorities of granting exemptions 
to the same exposures has proved to be problematic after the introduction of the Single 
Supervisory Mechanism (SSM). 

Since November 2014 the SSM (and not anymore national supervisors) has become the 
competent authority for significant institutions established in the banking union. It is therefore the 
SSM which has to decide whether one of the exposures listed in Article 400 (2) of the CRR 
should be partially or fully exempted from the large exposures limit for significant institutions. 
The fact that Article 493(3) of CRR entrusts Member States with the same power interferes with 
the ability of the SSM to perform its tasks in a consistent and coherent manner. In fact, the same 
exposure may or may not be exempted from the large exposure limit depending on whether the 
Member State where the significant institution is established has exercised the option set out in 
Article 493(3) of CRR or not. 

The need for an early review without evaluation  

Article 493(3) of CRR entered into force in 2013 and was elaborated when supervisory 
authorities were only national supervisors. The adoption of the SSM regulation (Regulation EU 
No 468/2014) and the start of the functioning of the SSM revealed the shortcomings created by 
the use of Article 493(3) of CRR by Member States. Moreover, Article 493(3) of CRR is a 
transitional provision and its modification is expected. 

Solution proposed 

We would propose to end the transitional period allowing Member States to grant exemptions for 
certain exposures to the large exposure limit set out in Article 493(3) of CRR.  

The modification will allow for a more coherent application of large exposures rules, foster 
harmonisation across Member States and promote a level playing field among significant banks 
established in the banking union.  

At the same time, ending the transitional period is not expected to have negative impacts on the 
EU system since competent authorities – including national supervisors for banks not falling 
under the supervisory competence of the SSM – will still be able to grant exemptions to the same 
types of exposures according to Article 400 (2) and (3) of CRR. 

Ending the transitional period for exemptions to the large exposure regime would also be 
more prudent since exemptions to the large exposures limit could only be allowed when 
the  conditions  of  paragraph  3  of  Article  400  of  the  CRR  are  met.  Finally,  ending  the 

124 

 
 
Member States transitional period could also enhance the further integration of the single 
market in banking services.  

Impact of the proposed solutions 

The proposed measure is not expected to have any impact on credit institutions (including their 
lending capacity) since they will not be deprived of the possibility of being exempted from the 
large exposure limit. Competent authorities will still be able to exempt form the application of the 
large exposures limit the same exposures set out in Article 493(3) of CRR according to Article 
400 (2) and (3) of CRR.  

125 

 
 
 
 
Annex 3.9. Rules on exposures to CCPs 

Problem definition 

The CRR introduced specific rules on capital requirements for institutions' exposures to central 
counterparties (CCPs). The introduction of these rules represented an important change in terms 
of the measurement, monitoring and management of such exposures as they had previously 
attracted no capital requirements. 

In a nutshell, the CRR contains capital requirements for two types of exposures to CCPs: trade 
exposures and exposures due to default fund contributions. The size of the requirement depends 
on whether a CCP is labelled as a 'qualifying' (QCCP) or not (non-QCCP). Requirements for the 
former are lower than requirements for the latter (in fact, the requirements for exposures to non-
QCCPs were deliberately designed to be penal to disincentivise institutions from using them). In 
order for a CCP to be considered a QCCP, it has to be either authorised (for CCPs established in 
the EU) or recognised (for CCPs established outside the EU) in accordance with EU rules. 

In order to achieve a certain degree of risk sensitivity in the level of capital requirements for 
exposures due to default fund contributions, the CRR sets out a method ('Method 1') that 
compares a “hypothetical” level of resources that a QCCP should have in order to cover potential 
losses resulting from the default of one or more of its members with the actual resources the 
QCCP has at its disposal. The capital requirement depends on the difference between those two 
amounts (the requirement is higher if the "hypothetical" resources exceed the actual resources 
than in the opposite case). The CRR also contains an alternative method for calculating the 
capital requirements for such exposures, which depends solely on the size of the exposures 
('Method 2'). Institutions are free to choose which of the two methods to apply. 

The abovementioned rules are the EU implementation of the internationally agreed interim 
standards published by the Basel Committee.128 

Under the CRR, Method 1 relies on the application of the Mark-to-Market Method (MtMM) 
when calculating the "hypothetical" resources in relation to derivatives exposures.129 One concern 
that was expressed in relation to the use of MtMM in that context was that, given that the MtMM 
was designed for simpler and more directional derivatives positions, it was not suitable for the 
centrally cleared space. This is because CCPs have, by definition, balanced positions (i.e. the 
amounts owed by the CCP to its members and the amounts the CCP's members owe to the CCP 
perfectly offset each other)130 and clear also more complex derivatives. Impact studies carried out 
at international level found that calculating the hypothetical level of resources using the MtMM – 
combined with the nature of the formula for determining the capital charge – meant that capital 
requirements on member contributions to default funds varied significantly between QCCPs: in 
many cases the charges were very small, and in some cases they were very large. That degree 
variation could not be explained solely by differences in the risk profiles of the different QCCPs. 
In other words, the results showed that the method did not capture risks sufficiently well, i.e. 
either leading to too low or too high requirements. 

128  Capital  requirements  for  bank  exposures  to  central  counterparties,  July  2012.  Available  at 

http://www.bis.org/publ/bcbs227.pdf.  

129 Within the Basel framework it is known as the Current Exposure Method (CEM). 
130 This balance can be disrupted only in case one or more of the CCP's members default. 

126 

 
 
                                                            
There were also concerns that the rules did not take a sufficiently holistic view of how the 
different types of exposures to a QCCP interrelate and were therefore not sufficiently sensitive to 
the aggregate risk of those exposures and how that risk is distributed. More specifically, the 
concerns were that the rules did not recognise sufficiently the fact that increasing members' 
contributions to a QCCP's default fund would, all else equal, make the QCCP safer. These 
concerns were due to the fact that the capital requirements proportionately increase with the size 
of the contribution to the default fund of the QCCP.131 

The abovementioned Method 2 was introduced in the interim international standard (an 
implemented in the CRR) as a temporary solution intended to address situations where Method 1 
was deemed to lead to excessively high capital requirements. It was meant to buy time to allow 
for the development of a permanent solution that would address the abovementioned problems.132 
The permanent solution was published by the Basel Committee in April 2014.133 

The need for an early review without evaluation  

Despite the lack of sufficient implementation experience for an in-depth evaluation of existing 
rules, impact studies at international level and work conducted by the BCBS have showed the 
shortcomings of current rules which will be fixed with the amendment described below. The 
review is also needed to comply with BCBS standards. 

Proposed solution 

The revised standards adopted by the Basel Committee will be implemented. Notable revisions to 
the Basel standards include the use of a single method for determining the capital requirements 
for exposures to QCCPs stemming from default fund contributions, an explicit floor for those 
requirements, as well as an explicit cap on the overall capital requirements applied to exposures 
to QCCPs (i.e. those charges will not exceed the charges that would otherwise be applicable if the 
CCP were a non-qualifying CCP). They did not change the treatment of exposures to non-
QCCPs. 

Under the new method for capital requirements for default fund contributions a more holistic 
approach is taken that ensures that the capital requirement no longer increases in proportion with 
the size of the contribution. The method also applies a more risk-sensitive approach for 
calculating the "hypothetical" resources (called the standardised approach for counterparty credit 
risk or SA-CCR). While this new approach is more complicated, the fact that the calculation of 
the hypothetical resources is actually required from the QCCP and not from the institutions, 
means that there is no increase in compliance costs for institutions and the increase in costs for 
the QCCP should be fairly limited (mostly due to the one-off cost of changing their systems to 
accommodate this new approach) but this is more than outweighed by the benefits brought from 
the higher risk-sensitivity of the approach. The method also introduces a floor to the capital 
requirements to ensure that there is at least a small capital requirement for those exposures and 
hence that institutions still monitor them and manage them. 

131 This is true under both Method 1 and Method 2. 
132 Its introduction created a new problem: since institutions were left full freedom of choice between the 
two methods, this meant that they were allowed to choose the method that delivered the lower capital 
requirement and not necessarily the one that reflected the inherent risks better. 

133  Capital  requirements  for  bank  exposures  to  central  counterparties  -  final  standard.  Available  at 

http://www.bis.org/publ/bcbs282.pdf. 

127 

 
 
 
                                                            
The revised standard also provides for an explicit cap on the capital requirements for exposures 
to QCCPs: the latter cannot be higher than in case if the same CCP would be deemed a non-
QCCP. 

The fact that only one method is used instead of two has the additional benefit of decreasing the 
complexity of the rules and removes the arbitrage possibility present in the current rules (because 
of the two methods). 

The revised rules further reduce the administrative burden for institutions by dropping the 
requirement for legal opinions from the conditions that need to be met by institutions in order to 
be able to use the more favourable treatment for trade exposures (it was replaced by the condition 
for the institution to conduct sufficient legal review). 

128 

 
 
 
 
Annex 3.10. Contractual recognition of bail-in (article 55 BRRD)  

Background/introduction:  

Stakeholders raised practical concerns with respect to Article 55 of Directive 2014/59/EU 
establishing a framework for the recovery and resolution (BRRD).  The provision requires credit 
institutions and other entities falling under the scope of the BRRD to include in contracts to 
which they are party and which are governed by the law of a third country a clause by which the 
creditor recognises the bail-in power of Union resolution authorities.  This obligation is 
particularly relevant for branches of Union banks in third countries, as their business, and in 
particular concluded contracts, are usually governed law of those third countries.   

Problem definition 

Stakeholders reported that compliance with Article 55 BRRD raises two types of difficulties. 
First, certain third country counterparties refuse to include a contractual clause recognising a 
Union bail-in power in financial contracts concluded with Union banks.  These third country 
entities often have a high degree of negotiating power against Union banks, or apply 
internationally agreed standard contractual terms in their banking contracts, e.g. with respect to 
liabilities to non-Union financial market infrastructures or trade finance liabilities (letters of 
credit, bank guarantees and performance bonds).  As a result, the only way for Union banks to 
comply with Article 55 BRRD in these cases would be not to enter into the contract at all.  In 
extreme cases this could entail that a certain portion of their business would need to be ceased. 
Secondly, even when third country counterparties are prepared to accept bail-in related clauses in 
their contracts with Union banks, in some cases the local supervisor may forbid this.  In this case 
the only way for banks to comply with Article 55 BRRD would be to either contravene to the 
rules imposed by the local supervisor or exit the relevant part of their business.  

The need for an early review without evaluation  

The BRRD provisions entered into force in 2016. Despite the lack of sufficient implementation 
data to conduct an evaluation, in particular the provisions of Article 55 generated an extensive 
feedback from the industry and resolution authorities. Data on the magnitude of the problem has 
been made available by banks under the coordination of the European Banking Federation. It was 
not verified to what extent this data was representative, but it was nevertheless suitable to 
demonstrate the different degrees of impact for banks, since their share of liabilities governed by 
third-country law widely differs. Hence, an early adjustment of rules seemed necessary and the 
proposed solution to grant discretion to the resolution authority in applying the requirement 
seemed the most suitable approach. 

Objective 

A better environment for jobs and growth across Europe is the ultimate goal. In this respect, it is 
worth mentioning that a credible and stable financial system is key. To achieve this goal, there 
must be reassurance that global institutions can be resolved in an orderly manner without causing 
disruptions to the financial system and to the economy in general, therefore avoiding the use of 
taxpayers’ money. This is only possible if institutions hold sufficient liabilities that can actually 
be bailed-in in resolution. It is within this spirit that the EU agreed initially on a broadly worded 
provision (Article 55 of BRRD) whereby any liability which is subject to the law of a third 
country would not escape the normal loss absorption cascade in resolution, and therefore, would 
not be treated more favourably than other liabilities of the same type only for the reason that they 

129 

 
 
are not subject to EU law. Still, this should not be seen as a one-size- fits-all-approach. A series 
of instruments, including trade finance instruments are of the utmost importance for international 
trade, in particular, for small and medium sized EU companies. In this regard, article 55, should 
not affect access of European manufacturers and service providers to trade finance instruments, 
in particular, and should not weaken their competitiveness in international markets with potential 
adverse economic effects in the EU. 

Furthermore, the effectiveness and practicability of the Article 55 provisions need to be judged in 
the context of their ultimate purpose, i.e. the facilitation of bail-in. To that end, Commission staff 
has gathered evidence from the European Banking Federation, jointly with the Bankers 
Association for Finance and Trade (BAFT) and the International Chamber of Commerce (ICC). 
The evidence includes a survey to banks which aims at quantifying the potential effects of 
application (or waving of) Article 55 for two types of liabilities: (i) information on subordinated 
and senior unsecured debt, i.e. debt that would likely be available for bail-in, (ii) other liabilities, 
which may impede the effectiveness of the bail-in tool due to e.g. operational challenges.   

For the first type of liabilities, the submitted data shows a large margin of deviation regarding the 
share of  subordinated and senior debt governed by third country law in comparison to debt of 
that category governed by Union law. For some banks this category is entirely irrelevant, whereas 
some banks claim that up to 35% of these securities are governed by 3rd country law.  

The conclusions are three-fold: Firstly, the issue at stake is generally sizable for parts of the 
industry. If third-country counterparties would not be willing to enter into contractual recognition 
clauses, banks  may struggle to roll-over significant parts of their liabilities at maturity. Secondly, 
for some banks the resolution authority will need to assess the effectiveness of these clauses for a 
significant part of the liabilities, as well as managing the related risks. Thirdly, the data exhibits a 
very heterogenous picture that suggests enabling the resolution authority to conduct a case-by-
case approach.  

For the second type of liabilities, stakeholders have singled out three particular classes for which 
the application of Article 55 would likely lead to costs without equivalent benefits:   

a) Contingent liabilities arising from e.g. trade finance products (e.g. letters of credit)  

Trade finance generates mostly contingent exposures; hence its potential value in resolution is 
difficult to evaluate ex-ante. Moreover, a reduction of the liability under a letter of credit vis-à-
vis the bank under resolution would automatically result in a corresponding reduction of the 
counterclaim of this bank against the third party in whose interest the trade finance product in 
question has been issued, therefore it is unlikely to create any loss absorption or recapitalisation 
capacity. No industry-wide data has been available, but banks who have responded to the survey 
indicated that the value of the (contingent) liabilities stemming from trade finance does not 
exceed 1-2% of MREL. 

b) Liabilities vis-a-vis Financial Market Infrastructures/Central Counterparties 
(FMIs/CCPs)  

FMI/CCP participation is generally governed by standard contracts that individual banks are 
incapable of changing on their own. Hence, Article 55 appears to be a particularly inappropriate 
mechanism for introducing bail-in rights vis-à-vis FMIs. In addition, according to Article 44(2)(f) 

130 

 
 
 
 
 
BRRD, liabilities with a remaining maturity of less than seven days owed to operators of such 
infrastructures are excluded from bail-in and already not subject to Article 55.  

c) Derivatives  
Respondents to the survey indicated that the immense majority of derivative contracts are written 
under standard (ISDA) terms into which individual banks cannot insert Article 55 clauses. Those 
few respondents who provided data indicated that contracts which are not governed by such 
standard contracts would not exceed 3% of the nominal value of all derivatives, including 
collateralised positions. The costs of inserting Article 55 hence seem to outweigh the benefits 
significantly. 

Proposed solution 

Article 55 can only be amended by a new legislative proposal.  It cannot be revised by way of a 
technical 'Level 2' measure or through interpretative guidance.  Even before the proposal would 
be finally adopted by the co-legislators, it would produce some benefits for the authorities and  
industry concerned as it is common practice for the Commission not to pursue violations of 
Union law provisions after it has adopted a proposal which aims at amending the provision in 
question in a way that would eliminate the violations.   

The amendment to article 55 BRRD would entail an application of the requirement by the 
resolution authority in a proportionate manner.  The resolution authority can exclude the 
obligation by means of a waiver if it determines that this would not impede the resolvability of 
the bank, or that it is legally, contractually or economically impracticable for banks to include the 
bail-in recognition clause for certain liabilities. In these cases, those liabilities should not count as 
MREL and should rank senior to MREL to minimize the risk of breaking the No-Creditor-Worse-
Off (NCWO) principle. In this regard, the proposal will not to weaken the bail-in.  

131 

 
 
 
 
 
Annex 3.11. Changes to MREL 

Problem definition 

The incorporation of TLAC in the EU legislative framework should not materially affect the 
burden of non G-SIBs to comply with the current MREL framework. Fundamentally, TLAC and 
MREL aim to achieve the same policy objective of ensuring that banks hold a sufficient amount 
of bail in-able liabilities that allow for smooth and quick absorption of losses and bank 
recapitalisation. Some technical differences exist however between the 2 frameworks regimes in 
terms of eligibility criteria (excl. subordination) and in terms of basis of calculation of the 
requirement. Additionally, MREL is not specific as to how bial-in capacity should be allocated 
within groups depending on the choses resolution strategy. MREL is set on an individual basis to 
each institution. As resolution policies are developing, thereby distinguishing between a Single 
Point of Entry (SPE) and a Multiple Point of Entry (MPE), it becomes clear that resolution tools 
will be applied at the level of the resolution entity, covering all material subgroups (subsidiaries) 
that compose the resolution group. Firstly, the concepts of resolution entities, resolution groups 
and material subgroups are not defined in the current BRRD level 1 legislation. Secondly, the 
prepositioning of internal/external loss absorbing capacity at subsidiary level is not defined in the 
current MREL framework. 

Maintaining the status quo would imply that the existing differences between TLAC and MREL 
would be maintained which would result in 2 technically inconsistent frameworks which pursue 
similar objectives. Moreover, the lack of an adequate approach to resolution policies within 
groups could lead to divergence of practices across member states and reduced confidence by 
resolution entities in charge of subsidiaries, leading to ring fencing measures. In the call for 
evidence, several claims were received on the lack of consistency between the TLAC and the 
MREL framework and the complexity that this would entail.  

The need for an early review without evaluation  

BRRD provisions requiring banks to comply with MREL entered into force in 2016. Reviewing 
them is consistent with the directive, Article 45(18) of which includes a mandate to the European 
Commission by December 2016 to submit, if appropriate, a legislative proposal to the European 
Parliament and the Council on the harmonised application MREL, including proposals for the 
introduction of an appropriate number of minimum levels of MREL and any appropriate 
adjustments to the parameters of the requirement. The proposal takes into account the analytical 
report of the EBA on a wide range of MREL-related aspects listed in Articles 45(19) and (20) of 
the BRRD, including consistency of MREL with the minimum requirements relating to any 
international standards (such as TLAC) developed in the international fora. 

Proposed solution 

MREL will be amended to address some shortcomings, notably to (1) create 1 set of eligibility 
criteria for MREL/TLAC eligible instruments (except for subordination), (2) clarify the internal 
loss absorbing capacities within banking groups, independent of the chosen resolution strategy 

132 

 
 
 
 
 
 
 
 
 
 
 
through introduction of the concepts of resolution groups, resolution entities and material 
subgroups, and (3) the alignment of the basis for calculation on the RWA and the leverage ratio 
exposure measure. 

133 

 
 
 
Annex 3.12. Application of IFRS 9 by the EU banks 

Problem definition 

After the financial crisis, the G20 and the BCBS pushed international accounting standard setters 
to enhance the "too little too late" credit loss provisioning rules under the IAS 39 and the US 
GAAP models. IFRS 9 will bring improvements in that respect by introducing a forward looking 
model for the provisioning of loan losses that should lead banks to book higher and earlier 
provisions than in the past. IFRS 9 which was endorsed by Member States on 27 June 2016 will 
be applied from the beginning of 2018. 

The move from IAS 39 to IFRS 9 will affect CRR capital requirements. The impact will depend 
on: 

1.  the amount of the increase in provisions due to the change in accounting;  
2.  the  type  of  regulatory  approach  the  bank  follows  to  calculate  its  capital 

requirements; 

3.  for  IRB  banks,  their  present  level  of  provisions  compared  to  the  regulatory 

expected loss. 

In relation to the first issue, there is still uncertainty about the difference in levels of 
provisioning between current IAS 39 and IFRS 9. Banks are still working on the 
implementation of the new IFRS. They have therefore not been able to produce precise figures so 
far. Some analysts have however pointed to a 20% increase in provisions. A 20% - 30% increase 
of loan loss provisions seems to be confirmed by an analysis the EBA is currently carrying out 
for a sample of banks. The EBA provisionally estimates a reduction of 50 basis points on average 
for the CET1 ratios. EBA has however already pointed out that data are not fully reliable. 

In relation to the second issue, banks on the Standardised Approach (SA) will probably be the 
most affected. They will see a reduction in their CET1 capital equal to the increase in provisions 
following the introduction of IFRS 9 which is only very partially compensated by reduced capital 
requirements following a reduction of exposure values from increased deductions of specific 
credit risk adjustments. 

In order to partially limit the impact on accounting provisioning, Basel and CRR (Art. 62) allow 
banks that use the standardised approach to add back provisions which are "general" in nature 
(i.e. not linked to any particular position) and deducted from CET1, as (lower quality) Tier 2 
capital to meet some of the bank's capital requirements. The adding back of general provisions as 
Tier 2 capital is subject to a cap of 1.25% of the bank's risk weighted assets RWA. 

In contrast to the US, where all credit provisions are considered as "general", the EU has adopted 
a RTS that labels any credit risk provision under the current IAS 39 incurred loss model as a 
"specific" provision which cannot be added back to Tier 2 capital. 

In relation to Internal Ratings Based (IRB) banks, it is necessary to differentiate the analysis 
on whether present accounting rules result for certain assets (e.g. a loan portfolio) in a provision 
that is higher or lower than the Expected Loss calculated according to CRR / Basel prudential 
rules. There are two possible cases. 

134 

 
 
 
 
  The "shortfall" case: if the accounting loan loss provision is lower than the prudential 
expected losses. In this case banks must, when calculating their capital ratio, deduct 
from CET1 capital the difference between the prudential expected losses (higher) and 
the  accounting  provisions  (lower).  Obviously,  this  reduces  for  a  bank  the  available 
amount  of  CET1,  the  highest  quality  of  capital,  and  makes  it  for  the  bank  more 
difficult to maintain a certain surplus on top of capital requirements and therefore a 
certain rating. 
This deduction from CET1 is imposed by bank regulators to prevent insufficient levels of 
provisions from accounting standards.  

  The  "excess"  case:  if,  in  the  alternative  case,  the  accounting  provision  for  credit 
losses is higher than the prudential expected loss, when calculating their capital ratio 
IRB banks can add the "excess" in provisioning back as Tier 2 capital up to a limit of 
0.6% of the Risk Weighted Assets.134 

The impact on an IRB bank of an increase in accounting provisions due to the introduction of 
IFRS 9 will therefore depend on whether the bank is in a "shortfall" or in an "excess" case. If this 
increase happens for a bank with a "shortfall" (i.e. accounting provisions are less than the 
prudential expected loss), IFRS 9 will increase accounting provisions, but the effect on CET1 
capital of these higher provisions will be normally compensated by fewer deductions according 
to Basel / CRR rules described above. The impact can therefore be expected to be - by and large - 
limited. 

If the increase in accounting provisions occurs instead for a banks in an "excess" case, (i.e. 
accounting provisions are already higher than the prudential expected loss), any increase in 
accounting provisions will directly determine a reduction in CET1 capital, and the bank CET1 
capital ratio will be reduced accordingly, with all expected consequences (higher funding costs, 
lower rating, etc.). The possible increase in lower quality Tier 2 capital would not provide a 
sufficient compensation. 

EBA has informally estimated that some 2/3 of the EBA sample (large) banks using the IRB 
approach are in a situation of "shortfall" of accounting provisions, while one third would be in a 
situation of "excess" of accounting provisions. These some 38 banks in the "excess" case, plus all 
those on the SA approach not comprised in the EBA sample would be the one most probably 
affected by any increase in provisioning due to the introduction of IFRS 9 in 2018. 

We suspect that banks more active in commercial banking activity and focused on Member States 
with high levels of NPLs might be the most affected. Although there are not entirely reliable 
numbers on the impact, we have understood that for some banks the capital ratios might be 
reduced by 0.5 – 1.5 percentage points (i.e. up to minus 15% for a bank with a 10% capital ratio). 
This would most probably have a direct impact on those banks' lending practices. 

The Basel Committee will not finalise a revised specification of how IFRS 9 accounting interacts 
with the calculation of bank capital requirements until after IFRS 9 becomes effective on 1 
January 2018. 

The need for an early review without evaluation  

134  IRB banks in the "excess" case and SA banks are therefore in a "similar" situation in relation to how the 
introduction of IFRS 9 can impact their capital (higher deductions from CET1, possibly reconsidered in 
Tier 2). 

135 

 
 
                                                            
The mandatory application of IFRS 9 starts from 1 January 2018 onwards, before the CRR will 
be evaluated. In light of the potential significant and sudden impact on banks' capital ratios it is 
opportune to include the transitional phasing in of expected credit loss provisions in the CRR 
review. 

Proposed solution 

The potential significant impact of IFRS 9 expected loss provisioning on CET1 capital creates a 
need for action now so that possible measures can avoid any sudden unwarranted impact on 
banks' capital ratios and lending in 2018. 

The best possible solution seems to introduce in CRR a transitional regime so that IFRS 9 
changes will be phased-in progressively over a few years. Treatment would need to be adapted 
according to the approach for calculating capital requirements used by banks. 

The CRR review would need to include a separate article (e.g. Art. 473a) for a transitional regime 
on the phasing in of the higher loan loss provisioning of IFRS 9 compared to IAS 39 from 2018 
onwards. 

136 

 
 
   
 
 
 
 
Annex 3.13. Comparative analysis of characteristics of EU G-SIIs and O-SIIs 

The calibration of MREL should be closely linked to and justified by the institution’s resolution 
strategy and should take into account such criteria as the business model, size, risk profile, 
funding model or the extent to which the Deposit Guarantee Scheme could contribute to the 
financing of resolution135. It can be observed from the figure below that in terms of size 
compared to GDP (of the member state in which a O-SII is recognised) there is a large 
heterogeneity between the different O-SIIs both within and across member states.   

Figure A9. Size of EU G-SIIs and O-SIIs compared to GDP 

Source: The European Commission calculations based on SNL and Eurostat  

Also in terms of business models and activities there is a large disparity between the different O-
SIIs. In the figure bellow we split up both assets and liabilities of EU G-SIIs in four main activity 
categories (interbank, customer loans and deposits, derivatives and securities/senior debt). It can 
be observed that O-SIIs on average have on the one hand more interbank activities, more 
customer loans and deposits, on the other hand on average they have less derivative and securities 
activities. Senior debt levels are similar in both groups. Looking beyond the averages gives a 
good insight in the variety in business models. For each activity, there are O-SIIs which have 
more than 60% of their total balance sheet volume in this activity, but there are also O-SIIs which 
have no volume in it. This a consequence of the different types of banks which have been 
identified as O-SIIs ranging from retail savings banks, depositary banks, investment banks, 
captive banks, building societies, etc. 

Figure A10. Importance of selected liabilities for EU G-SIIs and EU O-SIIs 

135 Article 45(6) of the BRRD 

137 

 
 
 
 
 
 
 
 
                                                            
 
The figure shows, based on data for almost all EU-SIIs, for selected balance sheet components the minimum, maximum, interquartile 
range and average compared to total assets for respectively EU G-SIIs and EU O-SIIs  

Source: The European Commission calculations based on SNL 

138 

 
 
 
 
 
 
 
 
Annex 3.14. Analysis of a leverage ratio requirement for different business models and 

exposure types 

The EBA has assessed the impact of the leverage ratio for different levels of calibration for 
twelve different business models and found some differences in impact of the leverage ratio on 
certain business models, including public development banks. However, EBA's advice is that 
these differences are not so material that they would justify a differentiation in the calibration of 
the leverage ratio requirements. Hence the EBA advises on a single Tier 1 capital calibration for 
the leverage ratio for any institution irrespective of its business model.  

A possible lower calibration for public sector lending by public development banks   

As evidenced by the Call for Evidence some public development banks have to date a 1% 
leverage ratio. Normally public development banks are majority owned by the State or the public 
sector, are not for profit, do not take retail deposits and are subject to legal constraints on their 
lines of business which limits their possibilities to meet a leverage ratio requirement compared to 
other types of banks. The latter implies that public development banks have much less discretion 
to manage their balance sheet or income compared to universal banks that can freely choose their 
business model. The EBA recognises this special situation for public development banks in its 
report.  

The EBA points out that it is difficult to provide a common European definition of public 
development banks given the broad diversity of types of public development banks. It may be 
difficult indeed to define public development banks and one should be wary of distorting 
competition through favourable prudential treatments and favourable treatments being considered 
State aid. However, there are common criteria that could define a public development bank. A 
public development banks is a credit institution that:   

is organised as a credit institution under public law; 

 
  has  a  legally  defined  mandate  defining  the  public  policy  objective  of  its 
business and defining the business areas in which it is allowed operate;  

  operates on a not for profit basis; 
  does not take deposits from retail clients.     

Moreover, there is already a definition of promotional banks in the Commission delegated 
regulation (EU) 2015/63 on the ex-ante contribution to resolution financing arrangements.  

In a context of enhancing economic growth and jobs creation, it seems contradictory to impose 
prudential requirements on public development banks through a leverage ratio that would 
increase the cost of public sector lending.  

The leverage ratio requirement should therefore be adjusted by excluding from the leverage ratio 
exposure measure public development loans and pass-through promotional loans provided by 
public development banks set up by a Member State, central or regional government or 
municipality.  

A possible higher calibration for G-SIIs (Globally Systemically Important Institutions)  

If a bank is categorised as a G-SIB its CET1 risk sensitive capital requirement will increase 
depending on its degree of SIFI-ness. In order to maintain the same level of backstop of the 

139 

 
 
 
 
 
 
leverage ratio for G-SIIs subject to higher risk sensitive capital requirements, the leverage ratio 
requirement would need to be increased in proportion to the additional G-SIB capital surcharges. 
The Basel Committee has not yet decided on possible leverage ratio surcharges for G-SIBs. The 
EBA has indicated in its report on the leverage ratio that it is carefully monitoring the possible G-
SII surcharge in terms of design and calibration. At this point the outcome of the Basel 
Committee work on G-SII surcharges should be awaited and upon the Basel Committee adopting 
G-SIB surcharges should be decided whether the Basel G-SIB surcharges would be appropriate 
for European G-SIIs and whether these surcharges should be considered also for large O-SIIs 
(Other Systemically Important Institutions).  

Several claims have been made in the Call for Evidence about undesired effects of a binding 
leverage ratio on other prudential or economic objectives. In particular claimants asserted 
(without providing further evidence on the impact) that the leverage ratio:  

  would  run  counter  the  Liquidity  Coverage  Requirement  objective  of  holding 
highly  liquid  assets  as  the  leverage  ratio  would  impose  constraining  capital 
requirements on these low risk weighted highly liquid assets;  

  would  undermine  central  clearing  of  derivatives  by  banks  for  clients  due  to  not 
recognising  segregated  collateral  for  reducing  the  leverage  ratio  exposure 
measure including initial margins;   

  would require holding more capital for trade finance exposures secured by Export 

Credit Agencies (ECAs);  

Although the comments on the LCR interaction are understandable, the LCR and leverage ratio 
pursue different prudential objectives (liquidity and capital) which credit institutions have to meet 
in parallel. EBA concluded in its report that correlations between the LCR and the leverage ratio 
are very weak. Holding buffers on top of the prudential minimum requirements for a particular 
ratio, such as the LCR, is not necessarily accompanied by a low Leverage ratio. On the contrary, 
the EBA results give evidence that many institutions manage to hold significant buffers on top of 
all prudential requirements at the same time. The leverage ratio requirement should therefore not 
be adjusted for the interaction between the LCR and the leverage ratio. 

Banks acting as clearing member have argued that if the leverage ratio requirement does not 
allow the initial cash margins received from clients and properly segregated from their own cash, 
to reduce the potential future exposure on the client leg of the centrally cleared client derivative 
transaction this would result in a disproportionate increase in capital requirements for this low 
margin business. This would adversely affect the provision of central clearing services to clients 
which is contrary to the G20 objective of promoting central clearing. The Basel Committee is 
currently considering this issue carefully and seeking further evidence on the potential impact of 
the Basel III leverage ratio on clearing members’ business models during the consultation period. 
The leverage ratio should not adversely impact the provision or pricing of centrally cleared 
derivative transactions that credit institutions as a clearing member to a CCP (Central Clearing 
Party) offer to clients. From this perspective the Commission looks forward to the forthcoming 
Basel decision on the treatment of initial margins for inclusion in the CRR review. 

Short term trade finance exposures such as letters of credit are often subject to higher capital 
charges than the implicit leverage ratio capital requirement of 35% or in case of off balance sheet 
trade finance positons subject to the same credit conversion factor and hence the leverage ratio 
would not be constraining compared to the risk weighted capital requirements. This is however 
different for export credits guaranteed by sovereigns or export credit agencies which receive a 
considerably lower risk weight. In these instances the leverage ratio would be constraining capital 
requirement leading to higher capital charges. The leverage ratio would in any case affect the 

140 

 
 
internal allocation of capital costs within banks to the specific business line of export credit and 
depending on the relative importance of export credit within the bank overall business impact the 
overall leverage ratio. (Albeit that since virtually all banks operate well above a 3% Tier 1 
leverage ratio the inclusion of guaranteed export credits in the leverage ratio exposure measure 
will not necessarily create a sudden need for banks to raise capital or to deleverage.) However, 
export credits are important for jobs and growth and therefore guaranteed export credits need to 
be excluded from the leverage ratio exposure measure. 

141 

 
 
 
 
 
ANNEX 4. ESTIMATED IMPACT OF POLICY OPTIONS 

On funding Risk 

Comparison of the different policy options to provide a complementary stable funding requirement to 
capital and liquidity requirements 

Effectiveness 

Efficiency 

Option 1: No policy change 

n.a. 

n.a. 

Option 2: A single NSFR requirement 
as per Basel for all banks 

(+) would be an internationally recognised 
credible stable funding measure for all EU 
banks 

(-) may disproportionally "hit" business 
models of banks that are outside the scope 
of the international  Basel framework  

(-) may have a disproportionate impact on 
some specific activities   

(+) since institutions have already to 
ensure that their long term 
obligations are adequately met with a 
diversity of stable funding 
instruments there is hardly 
incremental operational cost to 
determine the requirement  

Option 3: A single NSFR requirement 
as per Basel with some adjustments for 
all credit  banks   

(+) could allow taking into account some 
European specificities  

 (+) less operational cost if 
adjustments to the NSFR are closer to 
the economic reality of the operations  

(+) could help to alleviate the unintended 
consequences of the NSFR on some specific 
activities 

(-) difficult to define these specific activities 
and an appropriate calibration  

(-) uncertainties linked to the 
potential different calibration of the 
European NSFR 

Option 1 (no policy 
changes) 

n.a. 

Impact on stakeholders 

Option 2 

(A single NSFR 
requirement as per 
Basel for all banks) 

(+/-) Improves the stability of funding of banks' activities on an ongoing structural 
basis and reduces the maturity mismatches but can disproportionately impact some 
specific activities that are not adequately recognised by the Basel standard.   

(-) Banks having a low funding risk profile on the one hand benefit from a further 
improvement in the stability of their funding but, on the other hand, the adjustment 
costs that they face are disproportionate compared to the marginal benefits.  

 (+) Supervisors gain an additional instrument to monitor and limit the ongoing, 
structural dimension of funding risk that was not properly captured so far.      

(+) Companies and households benefit from this requirement as more stable 
funding sources increase banks' resilience at times of funding stress, reducing the 
likelihood of systemic stress with adverse macroeconomic consequences, and 
enhancing the ability of banks to continue lending in a challenging liquidity 
environment.    

Option 3 

(++) Improves the stability of funding of banks' activities on an ongoing structural 
basis and reduces the maturity mismatches, while preserving the ability to run 

142 

 
 
 
  
 
 
 
(A single NSFR 
requirement as per 
Basel with some 
adjustments for all 
banks) 

Impact on stakeholders 

activities that would be disproportionately impacted, as not adequately recognised, 
by the introduction of the Basel standard.  

(+/-) Banks having a low funding risk profile on the one hand benefit from a 
further improvement in the stability of their funding but, on the other hand, the 
adjustment costs that they face are disproportionate compared to the marginal 
benefits if the adjustments to the Basel standard do not take enough account of their 
specific business models. 

(+) Supervisors gain an additional instrument to monitor and limit the ongoing, 
structural dimension of funding risk that was not properly captured so far. 
Adjustments applicable to all institutions are unlikely to have a significant impact on 
supervisory work. 

(++) Companies and households benefit from this requirement as more stable 
funding sources increase banks' resilience at times of funding stress as described in 
option 2. Moreover, the adjustments to the Basel NSFR standard prevent a negative 
impact on the financing of the economy in the activities that would otherwise be 
disproportionately affected.      

On leverage ratio 

Option 1 (baseline) 

n.a. 

Effectiveness 

Efficiency 

Option 2  

(+) would act as a backstop to model risks and the build-up of excessive leverage   

A single leverage 
ratio requirement as 
per Basel for all 
institutions 

Option 3 

A leverage ratio 
requirement 
differentiated for 
business models or 
adjusted for 
exposure types   

(-) one size fits all implies that the leverage ratio is more constraining on 
institutions with low risk  business models    

(+)Would not have 
disproportionate effects 
on low risk business 
models    

(+)Would not have 
disproportionate effects 
on low risk business 
models    

(+)Would not have 
disproportionate effects 
on low risk business 
models    

(+) would prevent 
undesirable impact on 
other prudential policy 
objectives such as  the 
LCR, or central clearing 
or specific types of 
lending (public sector  , .  

(+) would prevent 
undesirable impact on 
other prudential policy 
objectives such as  the 
LCR, or central clearing 
or specific types of 
lending (public sector  , .  

(+) would prevent 
undesirable impact on 
other prudential policy 
objectives such as  the 
LCR, or central clearing 
or specific types of 
lending (public sector  , .  

(-)potentially reduces 
the backstop function of 
the leverage ratio  

(-)potentially reduces 
the backstop function of 
the leverage ratio  

(-)potentially reduces 
the backstop function of 
the leverage ratio  

143 

n.a. 

(+) same measure 
and method of 
calculation applies 
to all banks   

(+) common 
backstop 
irrespective of the 
type of business 
model  

(- )users of leverage 
ratio information 
would need to take 
into account varying 
calibrations of the 
leverage ratio  

(-) definition of 
business models 
would need to be 
developed   

(-) makes the 
calculation of the 
leverage ratio 
slightly more 
complex 

 
 
 
 
 
 
 
Effectiveness 

Efficiency 

(-) would create a 
divergence from the 
international agreed 
leverage ratio 

Impact on stakeholders 

Option 1 (no policy 
changes) 

n.a. 

Option 2 

(A single leverage ratio 
requirement as per for 
all  institutions) 

Option 3 

A leverage ratio 
requirement 
differentiated per 
business model  or 
exposure type  

(+) Improves the financial stability of banks' due to underestimating risks in 
particular during economic upswings  

 (-) Banks with low risk weighted business models may be disproportionally affected 
by a one size fits all leverage ratio requirement  

  (+) Supervisors will have an additional minimum benchmark for assessing risk of 
excessive leverage of institutions during their supervisory review process.  

 (+) Companies and households benefit through enhanced financial stability of the 
banking system 

 (-) for some companies loans and other services provided by institutions may 
become more expensive due to capiadditonal capital charges stemming from the 
leverage ratio.  

(+) Would prevent creating disproportionate effects from the leverage ratio 
requirement for banks with low risk weighted business models due to enhanced risk 
sensitivity of the leverage ratio.  

(-) would water down the main feature of the leverage ratio for banks as a non-risk 
based back-stop to risk sensitive capital requirements  

 (-) Supervisors have to deal with differently calibrated leverage ratios which lessen 
supervisory effectiveness due to reduced  comparability of the leverage ratio of 
supervised entities  

 (+) Companies and households would benefit from enhanced financial stability 
without unnecessarily increasing costs for banking business that have a truly low 
risk character.  

(-) comparing leverage ratios across banks would become more complex for 
investors  

Option 4 

(A leverage ratio 
adjusted to prevent 
undermining other 
policy objectives  

(+/-) Improves the financial stability of banks' due to risk of excessive leverage 
albeit to a lesser extent than under option 2 and 3 because more adjustments to the 
leverage ratio would be made.  

 (+) The leverage ratio requirement as a prudential measure would not have 
unintended or unwanted adverse impacts on other prudential objectives or jobs and 
growth policy objectives to the benefit of companies and households.   

144 

 
 
 
 
 
 
Impact on stakeholders 

 (--) Supervisors have to deal with differently calibrated leverage ratios and 
adjusted leverage ratio exposure measures which lessen supervisory effectiveness 
due to reduced  comparability of the leverage ratio of supervised entities 

(+) Companies and households would benefit from enhanced financial stability 
without unnecessarily increasing costs of for banking business that have a truly low 
risk character.  

 (-) comparing leverage ratios across banks would become more complex for 
investors 

On SME exposures 

Comparison of the impact of policy options on stakeholders 

Impact on stakeholders 

Option 1 (no 
policy changes) 

n.a. 

Option 2 

Alignment with 
the Basel rules 

(-) Banks using standardised approach for SME exposures would be worse off. While on 
average the change is only 0.16% difference in the capital ratios, there is a high variation 
among individual banks. The effect could be partially offset by the new Basel 
Standardised Approach, which is currently being revised, as BCBS intends to reduce 
exposures to SME loans from the 100% to 85%. 

(– –) Banks using internal ratings-based approach for SME exposures would be worse 
off. While on average the change is only 0.16% difference in the capital ratios, there is a 
high variation among individual banks. Moreover, currently BCBS does not foresee any 
change to the internal ratings-based approach. 

(–/≈) Companies and households might be affected by the additional funding constraints 
by banks, particularly from the most capital constraint banks. 

(≈) Some regulators/supervisors might see the benefit of aligning risk weight calibration 
with the Basel rules, while others might be concerned by moving back to Basel rules 
which could go against the evidence seen on the actual riskiness of SME loans in the EU. 

Option 3 

Introducing 
additional capital 
reduction for SME 
exposures above 
€1.5 million 

(+) Banks using SA and IRBA. Both banks using SA and IRBA would be better off as 
they would obtain additional capital relief and thus would have incentives to provide 
more financing to the economy and, in particular, SMEs. 

(+/≈)Companies and households. They might benefit, in terms of both volume and price, 
from increased incentives for banks, particularly the most capital-constraint banks, to 
provide additional financing of the economy,  

(≈) Some regulators/supervisors might be concerned by moving back to Basel rules which 
could go against the evidence seen on the actual riskiness of SME loans in the EU, while 
others might see the benefit of aligning risk weight calibration with the Basel rules. 

145 

 
 
 
 
 
 
 
 
On loss absorption and recapitalisation capacity 

Option 1: No policy change  

n.a. 

n.a. 

Effectiveness 

Efficiency 

Option 2: Integrate TLAC standard in MREL for EU G-SIIs 

Option 3: Integrate TLAC standard in MREL for EU G-SIIs 
and O-SIIs 

(+) Enhances global financial 
stability by promoting    
implementation of framework 
for bail-inable liabilities 
across jurisdictions   

(+) Common backstop for 
all G-SIIs 

(+) Clarity on applicable 
regulatory framework 

(+) Enhances level playing 
field and enhances clarity   

(-) Depending on calibration 
of MREL, this could represent 
an additional funding cost for 
banks  

(+) Enhances global financial 
stability by promoting    
implementation of framework 
for bail-inable liabilities 
across jurisdictions   

(+) Common backstop for 
all SIIs 

(+) Clarity on applicable 
regulatory framework 

(+)Enhances level playing 
field and enhances clarity  

(- )Disproportionate to impose 
specific G-SII standards to O-
SIIs and additional funding 
cost impact compared to 
option 2 

(-)Would be 
disproportionate for a 
large number of banks as 
TLAC standard developed 
for G-SIIs and minimum 
calibration might 
overshoot actual needs 
based on resolution 
strategy 

Stakeholder 

Policy option  

Option 1: No policy 
change  

Option 2: Integrate 
TLAC standard in 
MREL for EU G-SIIs 

Option 3: Integrate 
TLAC standard in 
MREL for EU G-SIIs 
and O-SIIs 

Banks 

Bank debt- and 
shareholders 

Supervisors 

Companies and 
households 

0 

+ 

+/- 

0 

+ 

+ 

0 

+ 

+ 

0 

+/- 

+/- 

Impact on stakeholders 

146 

 
 
   
 
 
 
 
 
 
 
 
 
 
Impact on stakeholders 

Option 1 (no policy 
changes) 

n.a. 

Option 2 

(Integrate TLAC 
standard in MREL 
for EU G-SIIs) 

Option 3 

(Integrate TLAC 
standard in MREL 
for EU G-SIIs and O-
SIIs) 

(+) Improves the financial stability of banks' due to increased loss 
absorption and recapitalisation capacity in the global banking system and 
avoids overlaps in regulation between EU MREL and international TLAC  

 (+)Provides increased clarity for bank debt- and shareholders on the order 
in which instruments could be bailed in  

  (+) Supervisors will have a minimum benchmark to set loss absorption and 
recapitalisation capacity  

 (+/-) Companies and households benefit through enhanced financial 
stability of the global banking system but loans and other services provided 
by institutions may become more expensive due to increased funding costs.  

(+/-)As under option 2 banks' benefit from increased financial stability in the 
global banking system but for O-SIIs this could have disproportionate effects  

(+)Provides increased clarity for bank debt- and shareholders on the order 
in which instruments could be bailed in   

(+) Supervisors will have a minimum benchmark to set loss absorption and 
recapitalisation capacity.  

(+/-) Companies and households benefit through enhanced financial 
stability of the banking system but loans and other services provided by 
institutions may become even more expensive compared to option 2 due to a 
further increase in funding costs stemming from the disproportionate impact 
on O-SIIs. 

On remuneration 

Problem 1  

Option 1: No policy 
change 

n.a. 

Impact on stakeholders 

Option 2: Allow 
Member States or 
supervisory authorities 
to exempt some 
institutions and staff 
from the rules on 
deferral and pay-out in 
instruments 

(+) Positive effect on Regulators / supervisory authorities, as the level 
of supervision would be tailored to the riskiness of institutions and staff; 
some Regulators / supervisory authorities may find it an advantage that 
they could fix their own exemption criteria and thresholds 

(+) Positive effect on Institutions and Employees, as the rules would be 
more proportionate 

(?)Uncertain effect on Taxpayers / Consumers, as the effectiveness of 

147 

 
 
 
 
 
Option 3: Exempt small 
and non-complex 
institutions and staff 
with low variable 
remuneration from the 
rules on deferral and 
pay-out in instruments, 
based on harmonised 
exemption criteria 
defined at EU level 

Impact on stakeholders 
the future different national criteria for exemptions in terms of coverage 
of  the prudentially-relevant entities and staff  cannot be assessed 

(+) Positive effect on Regulators / supervisory authorities, as the level 
of supervision would be tailored to the riskiness of institutions and staff; 
some Regulators / supervisory authorities may prefer that the exemption 
criteria and thresholds be established at EU level 

(++) Very positive impact on Institutions, as the rules would be more 
proportionate and also uniform across the EU 

(+) Positive effect on Employees, as the rules would be more 
proportionate 

(≈) Neutral effect on Taxpayers / Consumers, as the prudentially-
relevant entities and staff will continue to be covered 

Regulators / supervisory authorities 

Under Option 1 (baseline), regulators / supervisory authorities are not in a position to allow for a 
proportionate application of the rules on deferral and pay-out in instruments, in the sense of going 
below or dis-applying the de minimis thresholds of the Directive. This lack of flexibility would 
put them in a position whereby they would need to enforce requirements vis-à-vis institutions and 
staff where this might not be warranted from a prudential supervision perspective.  

Options 2 and 3 are positively assessed, as they would bring about a level of supervision better 
tailored to the prudential riskiness of those supervised (institutions and staff).  Regulators / 
supervisory authorities may find it an advantage that under Option 2 they could fix their own 
exemption criteria and thresholds. Others could, however, see an added value in having the 
exemption criteria defined at EU level as proposed under Option 3, in particular when these EU 
harmonised exemption criteria would be combined with a possibility for supervisory authorities 
to adopt a stricter approach. 

Institutions / Shareholders 

Under Option 1 (the current CRD IV provisions), institutions are required to comply with the 
deferral and pay-out in instruments requirements in a manner which for some of them triggers 
costs/burden disproportionate when compared to the prudential benefits.  

Options 2 and 3 are positively assessed from an institutions' perspective, as they would bring 
about a higher level of proportionality and a reduction in the institutions’ compliance burden. 
Under Options 2 and 3, small and non-complex institutions would still need to ensure that their 
remuneration practices do not have a negative impact on their long term interest and sound risk 
management. However, they would have more flexibility when setting their remuneration 
schemes and practices, thereby potentially benefiting from one-off and on-going savings on the 
costs, currently estimated to range from € 50 000 to € 500 000. Also large institutions would 
benefit from savings on costs currently estimated between € 400 000 and € 5 million with regard 
to staff with non-material levels of variable remuneration. 

148 

 
 
 
 
Under Option 2, different national exemption regimes would exist, thereby potentially creating 
regulatory complexity and unwarranted compliance costs for cross-border activities. Option 3, is 
in principle not associated with such risks and therefore is assessed as strongly positive. 

Employees 

Under Option 1 (baseline), all Identified Staff need to comply with the deferral and pay-out in 
instruments requirements, regardless of their level of variable remuneration and the incentives for 
excessive risk-taking this may or may not entail. As a result, in cases of staff with low levels of 
variable remuneration, there can be instances of perceived decrease of the overall value of 
remuneration (because of its deferral in time and its pay-out in instruments, as opposed to cash), 
and resulting from this detrimental motivational effects, without this being associated with clear 
prudential benefits.  

Options 2 and 3 would ensure an application of the remuneration rules that is proportionate 
given the rather limited prudential usefulness of deferral and pay-out in instruments in the case of 
these staff with low levels of individual variable remuneration. Option 3 has the advantage of 
ensuring that staff with low levels of remuneration is in principle subject to equal treatment 
across the EU. 

Tax payers / Consumers 

Option 1 (current CRD IV provisions), by requiring institutions and their Identified Staff to 
comply with certain remuneration rules, contributes to enhancing risk management through 
remuneration policies and thus contributes to fostering financial stability to the benefit of tax-
payers / consumers.   

The impact of Option 2 is uncertain, as the effectiveness of the future different national criteria 
for exemptions in terms of coverage of the prudentially-relevant entities and staff cannot be 
assessed. 

Option 3 is expected to also preserve the interests of tax-payers and consumers, by ensuring that 
all the prudentially-relevant (potentially risky) institutions and staff will continue to be subject to 
the rules. They are therefore assessed as having a neutral effect on tax-payers / consumers 
compared to the baseline scenario. 

Problem 2   

Option 1: No policy 
change 

n.a. 

Impact on stakeholders 

Option 2: Allow listed 
institutions to use 
share-linked 
instruments in addition 
or instead of shares in 
fulfilment of the 
requirement under 
Article 94(1)(l)(i) CRD 
IV 

(≈) Neutral impact on Regulators / supervisory authorities, as the extent of 
supervision stays the same 

(++) Very positive effect on Institutions, as listed firms will be allowed to reach 
the same prudential results through the less costly means of using share-linked 
instruments instead of or in addition to shares; moreover, shareholders will no 
longer be  faced with shareholdings dilutions each time shares are issued for 
remuneration purposes 

149 

 
 
 
 
Impact on stakeholders 

(+) Positive impact on Employees through greater flexibility induced by share-
linked instruments (e.g. Employees no longer faced with potential insider trading 
problems when selling their shares) 

(≈) Neutral impact on Taxpayers / Consumers, as the prudential objectives of the 
rule will be met to the same extent 

Regulators / supervisory authorities 

Under Option 1, regulators / supervisory authorities would not be in a position to allow listed 
institutions a proportionate application of the rule on pay-out in shares.  

Option 2 is assessed as having a neutral effect on regulators / supervisory authorities, as the 
extent of supervision and the risk profile of supervised entities would not change compared to the 
current situation. 

Institutions / Shareholders 

Under Option 1 (current CRD IV provisions), listed institutions are required to comply with the 
pay-out in instruments requirement by means of shares only. This triggers difficulties and 
administrative burden for the institution and its shareholders. Institutions would need to either 
create new shares or purchase them in the market. Both are complex processes.  

Existing shareholders can be confronted with a dilution of their rights. The staff members that 
receive shares can be confronted with problems of insider trading (e.g. problems with selling 
shares received as remuneration).  

Under Option 2, allowing listed institutions to use share-linked instruments in addition to or 
instead of shares in fulfilment of the requirement under Article 94(1)(l)(i) CRD IV would reduce 
compliance cost and administrative burden for these institutions. Moreover, Option 2 is 
positively assessed from the shareholders’ perspective, as it prevents the dilution of 
shareholdings and the disruption of shareholding structures through repeated awards of shares for 
remuneration purposes. 

Employees 

Under Option 1, all Identified Staff of listed institutions would receive part of their variable 
remuneration in shares. Depending on their role in the institution, they might be confronted with 
insider dealing problems if trying to sell these shares. This method of paying out variable 
remuneration might not be the most flexible/convenient from the employees’ perspective, and 
might lead to a perceived deterioration in the overall value of remuneration and/or detrimental 
motivational effects.  

Option 2 would allow Identified Staff to be remunerated in share-linked instruments in addition 
to or instead of shares. This would provide staff with more flexibility in benefitting from the 
awarded instruments (for instance by avoiding a potential situation in which staff may not be able 
to sell the shares after the retention period because of insider dealing concerns). 

Tax payers / Consumers 

150 

 
 
 
 
Option 1, by requiring listed institutions to pay part of their variable remuneration in shares, 
contributes to enhancing risk management through remuneration policies and thus contributes to 
fostering financial stability to the benefit of tax-payers / consumers.  

Option 2 is expected to preserve the interests of tax-payers and consumers, as the prudential 
objectives of the pay-out in instruments requirement are reached to the same extent through pay-
out in shares as they are through pay-out in share-linked instruments.   

ANNEX 5. BACKGROUND TO CUMULATIVE IMPACT ASSESSMENT 

Annex 5.1. Estimation of costs of FRTB and LR using the QUEST model 

Introduction 

 Table A11. Regulatory measures and their impact on bank capital requirements. 

Policies 

Baseline 

FRTB only (change 
in RWA calculation 
method) 

FRTB  
+ Leverage Ratio ( 
at 3% Total 
Assets) 

10.50% 

10.77% 

11.17% 

Average capitalization as a share of 
RWA 

average absolute variation in PP wrt 
baseline (share of RWA) 

Average capitalization as a share of 
TA 

3.81% 

average absolute variation in PP wrt 
baseline (share of TA) 

Source: Commission calculations 

0.27 

0.67 

4.05% 

0.24 

The QUEST model is well suited to assess the costs of regulatory constraints but is less 
developed to also assess the benefits. For this purpose the model would need to be extended to 
allow for a better modelling of how regulation affects risk taking by banks. By taking into 
account the risk taking channel the model could also be used to assess how regulations affect the 
probability of the economy being hit by large negative shocks (financial crises). The model can 
still be used to look at the cost of regulation in normal times. The major effect of regulation 
which is captured by the model is the impact of bank funding costs which are then transmitted 
onto lending rates and increase capital costs for non-financial firms with negative effects on their 
investment. There is a cost effect because an increase in capital requirements shifts funding from 
deposits to bank capital and the cost of capital for banks is larger than the cost on deposits. 

The size of this cost effect from changing the financing structure of banks is, however, not 
undisputed among economists. For example Admati and Hellwig (2012)136 argue that because of 

136   Admati, A., DeMarzo, P., Hellwig, M. and Pfleiderer, P. (2010). “Fallacies, irrelevant facts, and myths 
in capital regulation: why bank equity is not expensive”. Stanford University Working Paper no. 86. 

151 

 
 
 
 
  
 
 
 
 
                                                            
the change in the composition of liabilities of the bank does not fundamentally change the 
riskiness of lending a larger share of bank capital should reduce the risk premium since the total 
risk of the bank is now borne by a larger equity base. This argument is based on the Modigliani 
Miller (MM)137 theorem. However, others argue that MM does not apply for banks because of an 
implicit bail out subsidy. Therefore increasing the capital base is shifting the risk from the public 
to shareholders. Assessments of bank regulations carried out by the BIS (BIS (2010a138, 2010b139, 
2010c140) follow this argument and they assume that there is no offsetting effect on risk premium. 
There are also many micro banking studies who look at this effect. They usually come to the 
result that there is at least a partial reduction of the risk premium on capital if capital 
requirements are increased (see, for example, Miles et al. (2013) and Kashyap et al. (2010) ). The 
relatively detailed study by Miles et al. suggests that the risk premium effect is such that it offsets 
about 50% of the increase in funding costs compared to a situation where the equity premium is 
kept unchanged.  

To calibrate the key features of the model the following assumption have been made: the ratio of 
loans to GDP is set at 108%; the ratio of bonds to loans is set at 28%; the ratio of bank capital to 
total assets (leverage ratio) is set at 3.81% and the ratio of bank capital to risk-weighted assets at 
10.5%. In the simulations shown below, the combined effect of the change in FRTB and leverage 
is presented. We consider two scenarios. In the first scenario it is assumed that the equity 
premium of bank capital remains unchanged and in the second scenario we present results where 
the equity premium is reduced in such a way that the funding cost increase under the first 
scenario is halved. Notice, under the first hypothesis discussed above, namely that MM holds 
fully, there would be no macroeconomic cost associated with an increase in capital requirements.  
In principle the macroeconomic effects from changes in RWA and changes in TA should be very 
similar, since the change in the two ratios represents identical policy measures which are only 
expressed in a different metric. We have conducted the policy experiment both w. r. t a change in 
RWA and a change in TA but in the note we only report results related to the RWA experiment, 
which gives a slightly larger cost estimate in terms of GDP. 

Scenario 1: Increase in capital requirements with constant equity premium on bank capital 

The regulation induces banks to increase capital relative to deposits. This has two opposing 
effects on funding costs. Shifting to bank capital and paying an equity premium, increases 
funding costs, while lowering the demand for deposits reduces the deposit rate, which lowers 
funding cost. The latter effect is, however, extremely small, this applies especially in the current 
juncture with effectively zero deposit rates, thus the first effect dominates.  Optimising banks 
shift the higher funding costs onto the non-financial private sector in the form of higher loan 
rates. This increases capital costs for firms which partly finance their investment with loans. 
Consequently the cost of the regulatory measures affect the real economy via reduced investment. 
Since capital costs are permanently increased the economy moves to a lower capital output ratio 
and a permanently lower (relative to the baseline) level of GDP.  As shown in Table A12, higher 

137   Modigliani,  F.  and  Miller,  M.  (1958).  “The  cost  of  capital,  corporation  finance  and  the  theory  of 

investment”, American Economic Review, vol. 48(3), pp. 261-97. 

138   BIS  (2010a).  “An  assessment  of  the  long-term  economic  impact  of  stronger  capital  and  liquidity 

requirements”, Basel Committee on Banking Supervision, Bank for International Settlements. 

139   BIS (2010b). “Assessing the macroeconomic impact of the transition to stronger capital and liquidity 

requirements”, Basel Committee on Banking Supervision, Bank for International Settlements. 

140   BIS (2010c). “Results of the comprehensive quantitative impact study”, Basel Committee on Banking 

Supervision, Bank for International Settlements. 

152 

 
 
                                                            
capital requirements in terms of risk weighted assets of 0.67pp reduces the level of GDP in the 
long run by 0.06%. This effect is mostly generated by a decline of investment, which is reduced 
by 0.15%. GDP falls less than investment (capital) in the long run since long run employment 
levels are hardly affected. This is due to the fact that real wages are adjusted downward (relative 
to the baseline) because of the decline in productivity associated with a fall in capital, this wage 
behaviour stabilises employment. 

Table A12. Increase in ratio of bank capital-to-risk-weighted assets (FRTB+leverage, 0.67pp) 

2014 

2015 

2016 

2017 

2020 

2030 

2050 

2150 

Y 
I 
C 
LO 
L 
RLO 
Note: Y: GDP, I: Investment, C: Consumption, LO: Stock of loans, RLO: Loan rate, L: employment. 
Y, C, I,  LO, L are % deviations from baseline levels. RLO is the deviation from the baseline level in BP. 

-0.02 
-0.2 
0.02 
-0.07 
-0.01 
2.91 

-0.02 
-0.2 
0.01 
-0.08 
-0.01 
2.61 

-0.04 
-0.17 
-0.02 
-0.11 
-0.01 
2.64 

-0.06 
-0.16 
-0.05 
-0.14 
-0.01 
2.69 

-0.01 
-0.2 
0.03 
-0.07 
-0.01 
3.72 

-0.01 
-0.19 
0.03 
-0.07 
-0.01 
0.59 

-0.02 
-0.14 
0.01 
-0.04 
-0.02 
2.71 

-0.06 
-0.15 
-0.06 
-0.15 
-0.01 
2.71 

In the simulation experiment where the capital requirement in terms of total assets is increased by 
0.24pp yields a long term GDP effect of -0.05%.  

Table A13. Increase in ratio of bank capital-to-risk-weighted assets (FRTB+leverage, 0.67pp) 
(with 50% MM offset) 

2014 

2015 

2016 

2017 

2020 

2030 

2050 

2150 

Y 
I 
C 
LO 
L 
RLO 
Note: Y: GDP, I: Investment, C: Consumption, LO: Stock of loans, RLO: Loan rate, L: employment. 
Y, C, I,  LO, L are % deviations from baseline levels. RLO is the deviation from the baseline level in BP. 

-0.01 
-0.1 
0.01 
-0.03 
-0.01 
1.48 

-0.01 
-0.1 
0.01 
-0.04 
0 
1.33 

-0.02 
-0.09 
-0.01 
-0.06 
0 
1.34 

-0.03 
-0.08 
-0.02 
-0.07 
0 
1.36 

-0.01 
-0.1 
0.02 
-0.04 
0 
1.89 

-0.01 
-0.1 
0.02 
-0.04 
-0.01 
0.3 

-0.01 
-0.07 
0.01 
-0.02 
-0.01 
1.37 

-0.03 
-0.08 
-0.03 
-0.08 
0 
1.38 

153 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annex 5.2. Estimation of benefits of FRTB and LR using the SYMBOL model 

This report is an assessment of the effects of the implementation of the fundamental review of the 
trading book (FRTB, henceforth) as envisaged by CRR 2 proposals and of requirements on 
leverage ratio (LR, henceforth). This analysis includes the following steps: 

1.  Estimation  of  average  risk-weights  for  trading  activities  and  non-trading  activities. 
This analysis grounds on a panel regression methodology already developed for the 
impact assessment of bank structural separation.  

2.  Estimation of impacts of the FRTB on RWAs for banks based on expected changes 

to risk-weights (the median impact estimated by the EBA is used as input).  

3.  RWAs estimated as per points 1 and 2 are used as inputs to run simulations of bank 

losses through the SYMBOL model.  

We aim to estimate the potential benefits for public finances of implementing: 

1. 

2. 

the new rules established by the FRTB  

the new binding requirements concerning LR.  

Benefits for public finances are measured as a decrease in the potential costs due to bank defaults 
and recapitalization needs that would remain uncovered by the available tools setup in the EU 
legislation, thus potentially hitting Public Finances.  

Section 1 - Panel analysis to estimate risk weighted assets for trading activities and non-
trading activities 

In this section, we provide the description of the dataset and the empirical application in order to 
estimate risk weighted assets. This panel regression analysis builds on a work developed for the 
impact assessment of bank structural separation.  

Dataset 

In  order  to  predict  individual  banks’  RWAs,  we  identify  9  categories  of  assets  and 
liabilities, summarised in Table A14.  

Table  A14.  List  of  assets  and  liabilities  included  in  the  preferred  model  to  estimate 
RWAs 

Short 
name 
LB 

NCL 

AMZ 

HTM 

AFS 

FV 

TSA + 
TSL 
DA+DL 

Description 

Net loans to banks 

Net loans to customers 

Total assets held at amortised cost excluding loans to banks and customers held at amortised 
cost 

Securities held to maturity 

Available for sale assets excluding loans 

Assets held at fair value excluding loans 

Securities held for trading excl. derivatives (volume in assets and liabilities side) 

Derivatives held for trading (volume in assets and liabilities side) 

154 

 
 
 
 
DHV 

Derivatives held for hedging purposes (volume in assets and liabilities side)  

Empirical results  

(1
) 

where 

 is the dummy variable that represents the entry into force 

of Basel III, and 

 are dummy variables for time-fixed effects.  We estimate the model by 

running a fixed-effect regression and we build standard errors through a robust clustered variance 
estimator on the 194 banks. Table A15A15 reports estimated coefficients of Equation (1) from 
panel regression of RWAs on the categories of assets listed in Table A1A14. The coefficients for 
net loans to banks and customers, and the total assets held at amortised cost are positive and 
statistically significant (i.e., p-value are less than 1%). The estimated coefficients 
  for 
the securities held to maturity,  and for assets held at a fair value, have a positive effect on RWA 
but they are not significant at a statistical significant level of 10%. As expected by the economic 
theory, the available for sale assets are positive. We observe that the estimated coefficient for the 
volume of trading assets gets a positive small value: it decreases from 14% to 3% when we 
introduce the interaction with the dummy variable for Basel III. However, this estimate is not 
significant. The volume of derivatives for trading is always positive and significant. Finally, the 
coefficient for the derivatives held for hedging indicates a negative relation w.r.t. the RWA.  

 and 

In order to save space, the estimates for the dummies  

, with 

, are not reported. 

The estimated coefficients 
available on request). In table A15, the coefficient of determination R-squared is also reported. 
Since the dependent variable RWA is built on the balance sheet values, R-squared of regression 
(1) is very high. 

 are all statistically significant at a level of 10%. (Results are 

Table A15. Coefficients from the panel regression, P-values are reported in parentheses and *, 
**, *** denote significance at 10, 5 and 1 percent significance level, respectively. Moreover, + 
denote significance at 20 percent.  

Eq. (1) 

0.3378*** 
(0.001) 
0.4409*** 
(0.000) 
0.5022*** 
(0.000) 
0.4640 
(0.355) 
0.1649* 
(0.084) 
0.1426+ 
(0.113) 
0.1369+ 
(0.161) 
0.0348 
(0.684) 

LB 

NCL 

AMZ 

HTM 

AFS 

FV 

0.5 * (TSA + TSL) 

0.5 * (TSA + TSL) * 
dB3 

155 

 
 
 
 
 
 
0.5 * (DA + DL) 

0.5 * (DA + DL) * dB3 

DHV 

Number of obs 
Number of groups 
R-squared: 

within 
between 
overall 

0.0670*** 
(0.001) 
0.1184*** 
(0.005) 
-1.292*** 
(0.000) 
1.462 
194 

0.6760 
0.9590 
0.9491 

Considering a significance level of at least 20 percent, the coefficients of 

 and  

 can be dropped. Thus, let us consider the following hypothesis: 

, the constrained model used to predict RWAs is: 

(2
) 

Model (2) is nested within model (1). That is, model (2) has a smaller number of 
parameters than (1). We compute the F-test in order to ensure that the model (2) fit to the 
data. We test the null hypothesis  

, and we do not reject it. The 

estimation results from regressions (2) and (1) are very similar.  Models (1) and (2) fit in 
a similar way the data.   

Estimation of trading activities RWA and non-trading activities RWA 

This  step  of  the  analysis  builds  on  the  results  of  the  panel  regression  to  estimate  the 
portion of RWA that can be affected by the FRTB (proxied by “market risk RWA”). To 
this  end,  each  category  of  assets  is  attributed  to  one  of  the  two  lines  of  activities  (i.e. 
trading  and  all  the  rest)  and  RWAs  of  each  activity  are  predicted  according  to  the 
relevant coefficients obtained in the econometric model.  

Table  A16.  Allocation  of  assets  and  liabilities  categories  to  trading  and  non-trading 
activities 

Short 
name 
LB 

NCL 

AMZ 

HTM 

AFS 

FV 

Category 

Net loans to banks 

Net loans to customers 

Total assets held at amortised cost excl. loans to banks and customers 
held at amortised cost 

Securities held to maturity 

Available for sale assets excluding loans 

Assets held at fair value excl. loans 

156 

Approach for RWA 
allocation 

non-trading 

non-trading 

non-trading 

non-trading 

non-trading 

non-trading 

 
 
 
 
 
 
 
TSA + 
TSL 
DA+DL 

DHV 

Securities held for trading excl. derivatives (assets & liabilities) 

Derivatives held for trading (assets & liabilities) 

trading 

trading 

Derivatives held for hedging purposes (assets & liabilities)  

Proportional allocation  

Predicted  trading  and  non-trading  RWAs  are  calculated  for  each  bank  and  are  then  re-
normalised to sum up to the total RWAs as reported in balance sheet.  

Results 

As  shown  in  Figure  1,  the  scatterplot  shows  an  increasing  relationship  between  the 
dimension of trading assets (X-axis) and the related RWAs (Y-axis). Moreover, the share 
of trading RWAs ranges from 0 to 10%/15% of total RWSs for most of the institutions 
analysed, and only few of them present higher shares, from 15% to around 40%. Figure 
A12 complements  this information:  the vast majority of small  and medium size banks 
have a share of trading RWAs below 5%, while large banks are the ones most involved in 
trading  activities.  It  can  also  be  observed  that  the  share  of  trading  RWAs  is  in  general 
quite  steady  over  time,  with  the  exception  of  2014  where  it  seems  to  be  increased, 
especially for the banks in the sample (this is probably due to the increased coefficient 
for 2014 wrt the previous years, which is confirmed by alternative model specifications). 
Figure  A13  focuses  on  the  2014  by  showing  the  frequency  distribution  of  the  share  of 
trading RWAs. The histograms confirms that the distribution is very skewed: most of the 
considered sample has a share below 5% and only few outliers present a share of trading 
RWAs that spans from 10% to 35%.  

These  results  are  in  line  with  the  composition  of  RWAs  reported  by  the  EBA  in  the 
“CRD IV–CRR/Basel III monitoring exercise report”.141 The EBA splits total RWA into 
5 components: credit risk (attributable to non-trading activities), CVA (trading activities), 
market risk (trading activities), operational risk (that can be proportionally attributed to 
trading and non-trading activities) and other RWA. In 2014 the sum of market risk, CVA 
and the share of operational risk is around 10% for group 1 banks (roughly 4% for group 
1 banks). This number is consistent with the average share of trading RWA as estimated 
by our model for the large banks (13%) and for medium/small banks (around 3%).  

141 https://www.eba.europa.eu/documents/10180/950548/CRD+IV++CRR+-

+Basel+III+monitoring+exercise+report.pdf/f414a01e-4f17-4061-9b88-4e7fb89cc355 

In particular, see figure 7 

157 

 
 
                                                            
 
Figure  A11.  Scatter  plot  of  estimated  share  of  trading  assets  and  estimated  share  of 
trading risk weights (2006-2014).  

Figure A12. Box plots of share of trading RWAs by groups of institutions: small (total 
assets below 30 bn €), medium (total assets from 30 to 500 bn €) and large (total assets 
above 30 bn €). One box-plots for each year from 2006 to 2014.  

158 

0.1.2.3.4.5Share of trading RWAs0.2.4.6.8Share of Trading Assets0.05.1.15.2.25.3.35.4.45Share of trading RWAsSmall (<30bn)Medium (30-500bn)Large (>500bn)200620072008200920102011201220132014200620072008200920102011201220132014200620072008200920102011201220132014 
 
 
 
 
 
Figure A13. Histogram of the share of trading RWAs in 2014 

Share of trading RWAs (predicted, 2014) 

Total trading RWAs (predicted, 2014) 

Total Trading RWAs (predicted, 2014) 

Section 2 - Estimation of impacts on RWAs based on expected changes to risk-
weights due to the introduction of the FRTB and LR requirements 

RWAs  can  also  be  modified  to  obtain  a  counterfactual  scenario  representing  the  full 
implementation of CRD IV–CRR requirements.  

159 

050100150Frequency0.1.2.3.4Share of trading RWAs2014                                                                                                            Total             rwatrb..           0  .0012238  .0297103  .0099578  .0354806  .3500271  .0342568       186                                                                                                            Large (>500bn)    rwatrb..    .0099959  .0500465  .1251117  .0850369  .2369824  .3500271  .1869359        18Medium (30-500bn) rwatrb..           0  .0043999  .0296267  .0161946  .0411101  .1706299  .0367101        76Small (<30bn)     rwatrb..           0  .0002282  .0111138   .002609  .0118071  .1332347  .0115789        92                                                                                                            liiksizeclass     variable         min       p25      mean       p50       p75       max       iqr         N                                                                                                            Total             r~rb_fvc           0    7776.5   6107522   86899.3    893023  1.52e+08  885246.5       186                                                                                                            Large (>500bn)    r~rb_fvc     2326904  1.48e+07  5.55e+07  2.30e+07  1.22e+08  1.52e+08  1.07e+08        18Medium (30-500bn) r~rb_fvc           0  99195.16   1729398    508756   2214900  1.86e+07   2115704        76Small (<30bn)     r~rb_fvc           0  392.4134  66632.49   10242.5  64110.25  874550.4  63717.84        92                                                                                                            liiksizeclass     variable         min       p25      mean       p50       p75       max       iqr         N                                                Total             r~rb_fvc         186  1.14e+09                                                Large (>500bn)    r~rb_fvc          18  9.98e+08Medium (30-500bn) r~rb_fvc          76  1.31e+08Small (<30bn)     r~rb_fvc          92   6130189                                                liiksizeclass     variable           N       sum 
 
 
 
 
 
 
 
 
 
 
In order to develop a scenario representing the full implementation of Basel III rules, we 
apply  correction  factors  to  RWA  and  Total  capital  of  banks  in  the  sample.  Such 
correction  factors  come  from  the  EBA’s  report  “CRD  IV–CRR/Basel  III  monitoring 
exercise report”. The study conducted by the EBA analyses that banks are still subject to 
transitional arrangements at the current142 implementation stage of CRD IV–CRR. This 
results in a reduction in the level of capital for both Group 1 and Group 2 banks and a 
slight increase in RWAs under full implementation.  

Table A17. Changes in total capital and RWA relative to the current amounts 

Group 1 

G-SIBs 

Group 2 

Total 
Capital 

RWA 

-12.8% 

0.1% 

-13.3% 

0.0% 

-7.0% 

0.9% 

Large Group 2 

-7.1% 

1.3% 

Medium Group 2 

-7.2% 

0.6% 

Small Group 2 

-6.1% 

0.0% 

Source: EBA 

Potential impact of FRTB on market risk RWAs 

The EBA estimated the potential impact on RWAs coming from the new requirements of the 
FRTB. According to the EBA, the median impact is a 27% increase of market risk RWAs.  

Simulations  are  conducted  using  input  data  as  of  2014.  This  analysis  is  based  on  the 
expected changes to risk-weights due to the introduction of the FRTB and LR.  

142 as of December 2014 

160 

 
 
 
 
                                                            
Section 3 - Potential impact on public finances 

The analysis presented in this section estimates the potential benefits for public finances of 
implementing the new rules established by the FRTB and of the new requirements on LR. 
Benefits for public finances are measured as a decrease in the potential costs due to bank defaults 
and recapitalization needs143 that would remain uncovered by the available tools (i.e. the safety-
net) setup in the EU legislation, thus potentially hitting Public Finances.   

We assume that the safety-net that can intervene to cover losses and recapitalization needs 
includes the bail-in tool, Resolution Funds (RF), as well as the improved standards on minimum 
capital requirements and capital conservation buffer set up in the CRR/CRD IV package.  

Banking losses are simulated using the SYMBOL model (Systemic Model of Banking Originated 
Losses). SYMBOL simulates losses for individual banks using information from their balance 
sheet data. Capital is the first source to absorb losses. We assume that a bank goes into 
insolvency when simulated losses are larger than the available level of capital (the difference 
between the loss and capital is the excess loss). Moreover, we also consider recapitalization needs 
to reflect the minimum capitalization under which a bank can be considered viable. We refer to 
excess losses plus recapitalization needs as financing needs hereafter. In case capital is not 
sufficient, the bank makes use of its bail-in-able liabilities. Since data on the actual amount of 
bail-in-able liabilities held by banks are not available, we assume that each bank has a total loss 
absorbing capacity that is twice the minimum capital requirement. In other terms, banks are 
assumed to hold an amount of bail-in-able liabilities that is equal to the minimum amount of 
capital. In a next step, in case there would be financing needs after the bail-in intervention, the 
RF can intervene. We assume that a single RF has at its disposal a target fund equal to 1% of the 
amount of covered deposits of banks in the sample. Moreover, the RF can cover financing needs 
up to a ceiling equal to 5% of each bank’s total assets. The remaining financing needs will remain 
uncovered.  

Dataset 

Data used for the present exercise are as of 2014. The sample has 183 banks in EU and covers 
83% of the EU TA.144  

Scenarios 

The scenarios implemented in this analysis aim to represent the case where the FRTB and LR 
requirement are not in place (baseline), the implementation of the FRTB (scenario 1), and a final 
situation where both FRTB and LR requirements are in force (scenario 2 and scenario 3).  
In all scenarios, the real riskiness of bank assets is assumed to be in line with an RWA amount 
fully compliant with Basel III rules and the FRTB. This means that the balance sheet value of 
RWA is adjusted by applying the following correction:  

The baseline and the alternative policy scenarios differ from each other by the assumed level of 
capital held by banks and the amount of recapitalisation needs.  

143  The  recapitalization  need  is  the  amount  necessary  to  allow  banks  suffering  from  losses  to  continue 

operating on an on-going basis.  

144  We  use  the  amount  of  total  assets  in  the  banking  sector  excluding  branches  as  provided  by  ECB  as 

reference for the population. 

161 

 
 
 
                                                            
Baseline: all banks are assumed to be fully compliant with Basel III rules only. This implies the 
Basel III correction to the definitions of risk-weighted assets and capital, as per Table A17A17. 
As for the initial capital, we consider both the case where all banks hold the minimum capital 
requirement (MCR) plus the capital conservation buffer (CCB), as per CRR/CRD IV (i.e. 10.5% 
of RWA under a full implemented Basel III environment) and an alternative case where each 
bank is assumed to hold at least 10.5% of RWA, while keeping any excess buffer (topping the 
capital up to 10.5% of RWA). As for the recapitalisation needs, the viability requirement is set to 
8% of RWA.  
Scenario 1: The FRTB is in place. The amount of capital has been set both to the minimum (i.e. 
10.5% of RWA fully compliant with the FRTB) and to the maximum between the actual level 
and the minimum. The viability requirement for recapitalisation is 8% of RWA under FRTB.  
Scenario 2: The leverage ratio requirement is in place in addition to the FRTB. All banks hold 
the minimum regulatory requirement for total capital (10.5% of RWA compliant with the FRTB) 
or an amount in line with the minimum requirement for the LR (i.e. 3% of total assets145), 
whichever is higher. Also in this scenario two alternative options have been considered: staying 
at the minimum and topping up actual capital. The level of recapitalisation takes into account also 
the LR requirement (i.e. recapitalisation is at the highest of 8% RWA FRTB and 3% TA).   
Scenario 3: This scenario differs only in the chosen level of the LR requirement from scenario 2. 
We assume that banks may hold an extra buffer on top of the 3% minimum, that we set to 4%146 
of total assets.  

Table A18. Scenarios implemented  

Total regulatory capital 

Recapitalization levels  

Scenario 

Baseline 

No buffers 

10.5% RWAno FRTB 

Top up 

Max{K, 10.5% RWAno FRTB } 

Scenario 1 

No buffers 

Top up 

10.5%∙RWAFRTB 
Max{K, 10.5% RWA FRTB } 

No buffers  Max{10.5%∙RWAFRTB, 3%TA} 

Scenario 2 

Top up 

Max{K, 10.5%∙RWAFRTB, 
3%TA} 

No buffers  Max{10.5%∙RWAFRTB, 4%TA} 

Scenario 3 

Top up 

Max{K, 10.5%∙RWAFRTB, 
4%TA} 

Results 

8% RWAno FRTB 

8% RWAFRTB 

Max(8% RWAFRTB, 3%TA) 

Max(8% RWAFRTB, 3%TA) 

145  The  policy  refers  to  Tier  1  capital.  However,  due  to  technical  reasons,  the  current  version  of  the 
SYMBOL  model  is  not  able  to  keep  track  separately  of  T1  and  T2  capital.  The  requirement  is  thus 
considered with respect to Total Regulatory Capital, leading to a slight under-estimate of the increase in 
capital needs.  

146  4%  is  close  to  the  same  amount  of  “relative”  buffer  afforded  by  the  CCB  on  the  8%  MCR  (i.e. 

3*10.5/8=3.9) 

162 

 
 
 
 
 
 
                                                            
A  set  of  simulations  has  been  run  for  each  scenario.  The  resulting  distributions  are 
presented showing percentiles of the simulated distribution  in the tables below, both  in 
terms of share of EU GDP and in billion Euro.  

The  simulation  model  runs  on  a  representative  sample  of  EU  banks.  In  order  to  show 
results related to the entire population of banks, results based on the sample are upscaled 
by using a sample coverage ratio based on total assets.  

Table A19. Distributions of financing needs FN (i.e. potential costs for public finances 
due  to  bank  defaults  and  recapitalization  needs)  for  all  scenarios,  no  buffers.  FN  are 
reported as a share of EU GDP 

Baseline:  

FN 
after 
capital 

FN 
after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.34% 
0.81% 
1.90% 
1.98% 
2.11% 
2.24% 
2.36% 
2.52% 
2.75% 
3.05% 
3.47% 
3.80% 
4.27% 
5.23% 
8.36% 
9.49% 
9.61% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.04% 
0.23% 
0.24% 
0.26% 
0.30% 
0.32% 
0.37% 
0.41% 
0.50% 
0.62% 
0.74% 
0.88% 
1.20% 
2.74% 
3.32% 
3.38% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.02% 
0.02% 
0.02% 
0.03% 
0.04% 
0.05% 
0.09% 
0.16% 
0.24% 
0.34% 
0.63% 
2.16% 
2.75% 
2.81% 

Percent
iles 

80 
82 
84 
86 
88 
90 
92 
95 
97.5 
99 
99.5 
99.9 
99.91 
99.92 
99.93 
99.94 
99.95 
99.96 
99.97 
99.98 
99.985 
99.99 
99.995 
99.999 
99.9999 
100 

Scenario 1 

Scenario 2 

Scenario 3 

FN 
after 
capital 

FN after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.33% 
0.79% 
1.87% 
1.95% 
2.08% 
2.21% 
2.32% 
2.49% 
2.71% 
3.01% 
3.43% 
3.75% 
4.23% 
5.18% 
8.31% 
9.43% 
9.55% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.03% 
0.21% 
0.22% 
0.24% 
0.28% 
0.30% 
0.34% 
0.38% 
0.47% 
0.58% 
0.70% 
0.82% 
1.13% 
2.62% 
3.19% 
3.25% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.01% 
0.02% 
0.02% 
0.03% 
0.03% 
0.05% 
0.08% 
0.13% 
0.21% 
0.29% 
0.57% 
2.05% 
2.61% 
2.67% 

FN 
after 
capital 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.60% 
1.17% 
2.38% 
2.47% 
2.63% 
2.76% 
2.89% 
3.08% 
3.32% 
3.64% 
4.10% 
4.44% 
4.93% 
5.93% 
9.13% 
10.28% 
10.40% 

FN 
after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.04% 
0.25% 
0.26% 
0.28% 
0.32% 
0.34% 
0.39% 
0.44% 
0.53% 
0.65% 
0.78% 
0.92% 
1.25% 
2.85% 
3.45% 
3.52% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.02% 
0.02% 
0.02% 
0.03% 
0.03% 
0.05% 
0.06% 
0.10% 
0.17% 
0.26% 
0.37% 
0.68% 
2.27% 
2.88% 
2.94% 

FN 
after 
capital 

FN 
after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.28% 
0.70% 
1.72% 
1.79% 
1.91% 
2.02% 
2.14% 
2.29% 
2.50% 
2.78% 
3.19% 
3.50% 
3.95% 
4.87% 
7.92% 
9.03% 
9.14% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.02% 
0.15% 
0.16% 
0.17% 
0.19% 
0.22% 
0.25% 
0.28% 
0.35% 
0.44% 
0.54% 
0.64% 
0.89% 
2.11% 
2.58% 
2.63% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.01% 
0.01% 
0.01% 
0.02% 
0.02% 
0.03% 
0.05% 
0.08% 
0.13% 
0.18% 
0.35% 
1.53% 
2.00% 
2.05% 

Table A20. Distributions of  financing needs  FN (i.e. potential costs  for public  finances 
due  to  bank  defaults  and  recapitalization  needs)  for  all  scenarios,  no  buffers.  FN  are 
reported in billion Euro 

Baseline:  

Scenario 1 

Scenario 2 

Scenario 3 

Percent
iles 

FN after 
capital 

FN 
after 
bail-in 

FN  
after 
RF 

FN after 
capital 

FN after 
bail-in 

FN  
after 
RF 

FN 
after 
capital 

FN 
after 
bail-in 

FN  
after 
RF 

FN after 
capital 

FN 
after 
bail-in 

FN  
after 
RF 

80 
82 
84 

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  

0.00  
0.00  
0.00  
163 

 
 
 
 
 
 
86 
88 
90 
92 
95 
97.5 
99 
99.5 
99.9 
99.91 
99.92 
99.93 
99.94 
99.95 
99.96 
99.97 
99.98 
99.985 
99.99 
99.995 
99.999 
99.9999 
100 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
46.65  
111.40  
260.61  
271.66  
289.83  
307.21  
323.14  
346.32  
377.11  
418.29  
476.28  
520.92  
586.12  
717.66  
1,147.55  
1,301.90  
1,317.90  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
1.52  
5.15  
31.63  
33.60  
35.27  
41.27  
44.12  
50.68  
56.21  
68.89  
85.19  
102.11  
120.76  
164.13  
375.45  
455.82  
464.18  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.03  
0.11  
1.98  
2.16  
2.42  
3.15  
4.23  
5.49  
7.47  
12.85  
21.27  
32.52  
46.29  
86.31  
296.93  
377.25  
385.60  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
45.21  
108.87  
256.61  
267.53  
285.43  
302.70  
318.45  
341.48  
371.99  
412.92  
470.45  
514.93  
579.72  
710.64  
1,139.57  
1,293.64  
1,309.61  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
1.47  
4.57  
28.91  
30.72  
32.31  
37.83  
40.48  
46.64  
51.96  
64.19  
79.36  
95.53  
113.13  
155.14  
359.28  
437.12  
445.21  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.03  
0.11  
1.73  
1.94  
2.18  
2.66  
3.66  
4.67  
6.48  
11.24  
18.39  
28.65  
40.38  
77.69  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
82.76  
159.86  
326.45  
338.64  
360.13  
379.24  
396.48  
421.91  
455.75  
499.87  
562.68  
608.49  
676.47  
814.00  
280.68   1,253.08  
358.43   1,409.92  
366.51   1,426.18  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
1.62  
5.98  
34.12  
35.84  
37.90  
43.83  
46.63  
53.55  
59.82  
72.79  
89.61  
106.66  
126.66  
171.12  
390.35  
473.60  
482.26  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.03  
0.12  
2.35  
2.56  
2.97  
3.78  
4.55  
6.23  
8.46  
14.31  
23.67  
35.86  
51.10  
93.20  
311.87  
395.07  
403.72  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
38.32  
95.76  
235.49  
245.45  
261.40  
277.54  
293.00  
314.49  
343.47  
381.74  
437.26  
479.85  
541.81  
667.65  
1,087.12  
1,238.38  
1,254.06  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.90  
2.82  
20.02  
21.73  
23.04  
26.41  
29.65  
34.36  
37.92  
47.93  
60.37  
74.08  
87.14  
121.67  
289.24  
353.86  
360.59  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.02  
0.09  
1.04  
1.15  
1.36  
1.55  
2.47  
2.87  
4.06  
7.24  
11.24  
18.05  
24.66  
48.43  
210.51  
274.30  
280.94  

Table A21. Distributions of financing needs FN (i.e. potential costs for public finances 
due to bank defaults and recapitalization needs) for all scenarios,  top up of capital. FN 
are reported as a share of EU GDP 

Baseline:  

FN 
after 
capital 

FN 
after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.10% 
0.35% 
1.04% 
1.10% 
1.17% 
1.24% 
1.34% 
1.44% 
1.59% 
1.79% 
2.08% 
2.31% 
2.64% 
3.35% 
5.92% 
6.86% 
6.96% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.07% 
0.08% 
0.09% 
0.10% 
0.11% 
0.13% 
0.16% 
0.20% 
0.25% 
0.31% 
0.39% 
0.55% 
1.38% 
1.70% 
1.73% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.01% 
0.01% 
0.03% 
0.04% 
0.06% 
0.09% 
0.15% 
0.84% 
1.12% 
1.15% 

Percent
iles 

80 
82 
84 
86 
88 
90 
92 
95 
97.5 
99 
99.5 
99.9 
99.91 
99.92 
99.93 
99.94 
99.95 
99.96 
99.97 
99.98 
99.985 
99.99 
99.995 
99.999 
99.9999 
100 

Scenario 1 

Scenario 2 

Scenario 3 

FN 
after 
capital 

FN after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.11% 
0.37% 
1.09% 
1.15% 
1.22% 
1.30% 
1.40% 
1.51% 
1.66% 
1.86% 
2.16% 
2.39% 
2.74% 
3.46% 
6.06% 
7.01% 
7.11% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.08% 
0.09% 
0.09% 
0.11% 
0.12% 
0.14% 
0.17% 
0.21% 
0.27% 
0.32% 
0.40% 
0.58% 
1.42% 
1.75% 
1.78% 

FN 
after 
capital 

FN 
after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.18% 
0.51% 
1.33% 
1.40% 
1.49% 
1.58% 
1.68% 
1.81% 
1.99% 
2.22% 
2.55% 
2.80% 
3.19% 
3.99% 
6.77% 
7.78% 
7.88% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.10% 
0.11% 
0.12% 
0.14% 
0.15% 
0.18% 
0.20% 
0.25% 
0.31% 
0.38% 
0.47% 
0.66% 
1.60% 
1.97% 
2.01% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.01% 
0.02% 
0.03% 
0.04% 
0.07% 
0.09% 
0.16% 
0.87% 
1.17% 
1.20% 

164 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.01% 
0.01% 
0.02% 
0.02% 
0.04% 
0.06% 
0.09% 
0.12% 
0.21% 
1.04% 
1.38% 
1.42% 

FN 
after 
capital 

FN 
after 
bail-in 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.13% 
0.42% 
1.19% 
1.26% 
1.34% 
1.42% 
1.52% 
1.64% 
1.81% 
2.03% 
2.35% 
2.60% 
2.97% 
3.75% 
6.49% 
7.49% 
7.59% 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.08% 
0.08% 
0.09% 
0.10% 
0.11% 
0.13% 
0.16% 
0.20% 
0.26% 
0.32% 
0.39% 
0.56% 
1.43% 
1.77% 
1.80% 

FN  
after 
RF 

0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.00% 
0.01% 
0.01% 
0.01% 
0.03% 
0.04% 
0.07% 
0.09% 
0.15% 
0.88% 
1.19% 
1.22% 

 
 
 
 
Table  A22.  Distributions  of  financing  needs  FN  (i.e.  potential  costs  for  public  finances  due  to 
bank defaults and recapitalization needs) for all scenarios,  top up of capital. FN are reported in 
billion Euro  

Baseline:  

FN 
after 
capital 

FN 
after 
bail-in 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
13.51  
47.35  
142.80  
150.68  
159.96  
170.70  
183.30  
198.22  
217.76  
245.13  
285.29  
316.24  
362.40  
460.12  
812.21  
941.14  
954.52  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.31  
0.66  
10.00  
11.35  
11.90  
13.64  
15.49  
18.46  
22.04  
27.19  
34.83  
42.57  
53.30  
76.09  
188.98  
232.95  
237.53  

FN  
after 
RF 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.01  
0.03  
0.28  
0.44  
0.50  
0.58  
1.25  
1.50  
2.02  
4.01  
5.51  
8.86  
12.12  
20.70  
114.68  
153.98  
158.09  

Percent
iles 

80 
82 
84 
86 
88 
90 
92 
95 
97.5 
99 
99.5 
99.9 
99.91 
99.92 
99.93 
99.94 
99.95 
99.96 
99.97 
99.98 
99.985 
99.99 
99.995 
99.999 
99.9999 
100 

Scenario 1 

Scenario 2 

Scenario 3 

FN 
after 
capital 

FN after 
bail-in 

FN  
after 
RF 

FN 
after 
capital 

FN 
after 
bail-in 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
14.69  
50.73  
149.73  
158.02  
167.69  
178.64  
191.68  
207.04  
227.30  
255.39  
296.72  
328.28  
375.58  
475.27  
831.77  
962.16  
975.69  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.31  
0.67  
10.65  
12.10  
12.70  
14.69  
16.43  
19.58  
23.22  
28.62  
36.57  
44.40  
55.52  
78.92  
194.61  
239.58  
244.27  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.01  
24.41  
0.03  
69.30  
0.28  
182.12  
0.47  
192.15  
0.54  
204.60  
0.60  
217.36  
1.36  
230.37  
1.65  
248.15  
2.24  
272.38  
4.23  
304.79  
5.95  
350.05  
9.47  
384.65  
12.89  
437.64  
22.11  
547.75  
928.45  
119.64  
160.23   1,066.63  
164.47   1,080.96  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.39  
0.88  
13.64  
15.31  
16.02  
18.95  
20.20  
24.03  
27.96  
34.43  
43.17  
51.58  
64.34  
90.67  
220.01  
270.06  
275.28  

FN  
after 
RF 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.01  
0.03  
0.34  
0.68  
0.84  
1.09  
1.83  
2.35  
3.05  
5.25  
7.70  
11.89  
15.87  
28.29  
142.77  
189.64  
194.53  

FN after 
capital 

FN 
after 
bail-in 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
17.36  
57.82  
163.50  
172.41  
183.66  
195.48  
208.93  
225.60  
248.14  
279.12  
322.74  
356.99  
407.93  
514.54  
890.80  
1,027.66  
1,041.86  

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.34  
0.75  
10.30  
11.25  
11.74  
13.44  
15.40  
18.43  
21.60  
27.60  
35.25  
43.98  
54.10  
77.51  
196.09  
242.20  
247.01  

FN  
after 
RF 

0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.00  
0.01  
0.03  
0.32  
0.48  
0.55  
0.63  
1.10  
1.33  
1.67  
3.71  
5.07  
8.93  
11.75  
21.06  
121.18  
162.84  
167.19  

As a reference point, a crisis comparable to the last global one is approximately placed 
on percentile 99.95 when considering excess losses and recapitalization needs based on 
pre-crisis data. 

Table  A23.  Variation  in  financial  needs  when  moving  between  scenarios,  percentile 
99.95, no buffers 

Financial needs after capital 
Financial needs after bail-in 
Financial needs after RF 

Baseline 
to 
Scenario 1 
-1.40% 
-7.97% 
-14.95% 

Baseline 
to 
Scenario 2 
+21.83% 
+5.67% 
+13.30% 

Baseline 
to 
Scenario 3 
-9.19% 
-32.20% 
-47.85% 

Scenario 1 
to 
Scenario 2 
+23.55% 
+14.81% 
+33.21% 

Scenario 1 
to 
Scenario 3 
-7.90% 
-26.33% 
-38.68% 

Scenario 2  
to 
Scenario 3 
-25.46% 
-35.83% 
-53.97% 

Table  A24.  Variation  in  financial  needs  when  moving  between  scenarios,  percentile 
99.95, top up capital 

Financial needs after capital 

Baseline 
to 
Scenario 1 
+4.45% 

Baseline 
to 
Scenario 2 
+25.19% 

Baseline 
to 
Scenario 3 
+13.81% 

Scenario 1 
to 
Scenario 2 
+19.86% 

Scenario 1 
to 
Scenario 3 
+8.96% 

Scenario 2  
to 
Scenario 3 
-9.09% 

165 

 
 
 
 
 
 
 
 
Financial needs after bail-in 
Financial needs after RF 

+6.05% 
+10.19% 

+30.18% 
+56.33% 

-0.17% 
-11.24% 

+22.75% 
+41.87% 

-5.86% 
-19.45% 

-23.31% 
-43.22% 

By looking at the results for the “no buffers” scenarios at percentile 99.95, Table  reports 
the  split  of  financing  needs  into  losses  and  recapitalisation  needs,  the  amount  of  total 
financing needs absorbed by capital, bail-in-able liabilities and the RF, and the  

Table  A25.  Initial  Financing  needs  and  absorbed  by  the  safety-net  tools,  “no  buffers” 
scenarios, percentile 99.95, billion Euro 

Baseline 

Scenario 1 

Scenario 2 

Scenario 3 

Financing needs = Losses + Recap needs (FN = 
L+R) 

862.40  

of which: Losses (L) 

595.20  

of which: Recap (R) 

267.19  

FN absorbed by Capital 

FN absorbed by bail-in-able liabilities 

FN absorbed by RF 

Leftover FN after RF intervention 

516.07  

295.64  

45.18  

5.49  

862.37  

595.20  

267.17  

520.89  

294.84  

41.97  

4.67  

945.32  

595.20  

350.12  

523.41  

368.36  

47.32  

6.23  

850.84  

595.20  

255.63  

536.35  

280.13  

31.49  

2.87  

References  

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Allen, F, A Babus and E Carletti (2012): "Asset commonality, debt maturity and systemic risk", 
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167 

 
 
 
ANNEX 6. IMPLEMENTATION OF PROPOSED MEASURES 

Indicative list of amendments to the CRR, CRD IV and BRRD per topic addressed in the impact assessment  

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

CRR 
Amending 
Articles  6,  412, 
413, 414, 415 

New  RTS  on  pass-through 
models 
extendable 
maturities 

and 

New  Title  IV  in 
CRR Part 6 

New  Delegated  Act  on 
Derivatives  future  funding 
risk 

Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Core issues analysed in the main body of the impact assessment 

Funding Risk 

their 

reliance 

funding 
long 

by 
Excessive 
institutions  on  short-term 
wholesale 
to 
finance 
term 
Existing 
activities. 
requirements in the CRR do 
not    provide  an  adequate 
framework  to  ensure  that 
institutions’ 
are 
sufficiently stably funded by 
their liabilities 

assets 

the  problem: 
Origin  of 
BCBS,  review  clause 
in 
article  501  CRR,  responses 
to  the  Consultation  on  the 
impact    of  CRR  and  CRD 
IV on bank financing of the 
economy,  responses  to  the 

single 

NSFR 
A 
requirement  as  per  Basel 
with some adjustments for 
all banks. 

adjustments 
by 

are 
Some 
recommended 
the 
EBA NSFR report to take 
into  account  European 
specificities  and 
relate 
mainly 
specific 
to 
treatments for: 

-Pass-through  models  in 
covered 
and 
general 
in 
issuance 
bonds 
particular; 

finance 
-Trade 
factoring activities; 

and 

 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Call for Evidence 

-Centralised 
savings;  

-Residential 
loans; 

regulated 

guaranteed 

-Credit unions. 

of 

Other adjustments needed 
not  to  hinder  the  good 
EU 
functioning 
financial  markets  and  the 
liquidity  of 
sovereign 
bonds  markets  relate  to 
the treatment of: 

- derivatives transactions; 

-  short  term  transactions 
with 
financial 
counterparties; 

-  Level  1  High  Quality 
Liquid  Assets  as  defined 
in the LCR. 

Excessive 

Institutions' 

leverage  can 

A 

leverage 

ratio 

CRR  Articles  92, 

Maintaining  empowerment 

169 

 
 
 
Level  1  text    to  be 
amended 
and 
relevant articles 

429 to 430 and 511 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

for  delegated  act  under 
Article 456(1)(j) 

Area 

leverage 

Problem  definition  /  Origin 
of the problem 

Solution 

requirement  differentiated 
for  business  models  (e.g. 
development 
public 
the 
banks' 
to 
lending 
public  sector) 
  or 
adjusted 
exposure 
for 
types (export credits) 

increase 
to  unsustainable 
levels  and  have  a  pro-
the 
effect 
cyclical 
financial system 

on 

are 
reliable 

Existing  risk-based  capital 
not 
measures 
sufficiently 
to 
address  systemic  risk  and 
calls  for  the  introduction  of 
a  simpler  and  non-risk-
sensitive back-stop measure 

in 

introduced 

In the EU, the leverage ratio 
the 
was 
prudential 
in 
2013  but  not  as  specific 
that 
capital 
banks must meet. 

requirement 

framework 

Origin of the problem: G-20 
declarations147, 
BCBS,  

147 "Risk-based capital requirements should be supplemented with a simple, transparent, non-risk based measure which is internationally comparable, properly takes into account off-
balance sheet exposures, and can help contain the build-up of leverage in the banking system", Declaration on strengthening the financial system, London summit, 2 April 2009. 
London; "developing the leverage ratio as element of the Basel framework", Declaration on Further Steps to Strengthen the Financial System, September 5, 2009, London 

170 

 
 
 
 
 
 
 
 
                                                            
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

SME 
exposures 

to 

in  CRR, 
review  clause 
responses 
the 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

The  current  calibration  of 
the  requirement  to  address 
the  credit  risk  of  exposures 
to  SMEs  is  not  sufficiently 
risk-sensitive and reduce the 
ability  of  bank  to  lend  to 
SMEs 

to 

Origin  of 
the  problem: 
review  clause  under  CRR, 
responses 
the 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

CRR  (Articles  123, 
147, 505) 

Maintaining  the  SF  for 
exposures  in  its  current 
form  (i.e.  up 
to  €1.5 
million  for  SA  and  IRB 
banks) 
and 
complementing  it  with  a 
discount of 15% in capital 
charges for loans to SMEs 
above €1.5 million euros. 

171 

 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Integrate  TLAC  standard 
in MREL rules for EU G-
SIIs 

Loss 
absorption  and 
recapitalisation 
capacity 

on 

the  EU 

there's  no 
In 
minimum 
harmonised 
loss 
requirement 
absorption 
and 
recapitalisation  capacity,  to 
ensure  that  G-SIBs  hold  a 
sufficient amount of bail in-
able 
liabilities  and  make 
sure  that  they  can  absorb 
internally  without 
losses 
societal 
worldwide 
implications  or  a 
fiscal 
intervention in their favour. 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Level  1  text    to  be 
amended 
and 
relevant articles 

CRR  (new  Articles 
on 
eligibility 
criteria,  deduction, 
holdings 
and 
TLAC 
requirement) 

to 

Origin  of 
the  problem: 
Financial  Stability  Board, 
responses 
the 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

Market risk 

The  scope  of  application  of 
risk  capital 
the  market 
requirements  which  is  not 

Adopt  FRTB  standards 
with a) adjustments to the 
calibration  and  to  reflect 

CRR (Articles 102-
325-377), 
106, 
CRD  IV  (Articles 

New technical standards on 
technical issues 

172 

 
 
 
 
 
 
 
 
Level  1  text    to  be 
amended 
and 
relevant articles 

83-101) 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Area 

Problem  definition  /  Origin 
of the problem 

Solution 

in 
i.e. 

defined  sufficiently  clearly. 
This  allows  institutions  to 
regulatory 
engage 
they  can 
arbitrage, 
their 
allocate 
instruments 
the 
that 
regulatory 
generates  the  lower  capital 
requirements. 

to 
book 

some  of 

European specificities and 
ensure  consistency  with 
other  parts  of  the  CRR 
(e.g.  STS  securitisations 
and  sovereign  exposures 
)and  b)  a  revised  regime 
for  small  trading  book 
businesses 

Many  features  of  market 
risk  are  not  reflected  in  the 
capital  requirement.  As  a 
consequence,  the  amount  of 
capital  required  for  certain 
instruments  is  not  aligned 
with 
that 
the  real  risks 
institutions  face  for  these 
instruments. 

Internal  models  used  by 
calculate 
institutions 
to 
capital 
for 
requirements 
market  risk  may  generate 
very  different  estimates  of 
  of  capital 
the  amount 

173 

 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Remuneration 

required 
portfolios. 

Origin  of 
BCBS 

for 

similar 

the  problem: 

Excessive  compliance  costs 
for  institutions  arising  from 
the  rules  on  deferral  and 
pay-out in instruments. 

Excessive  compliance  costs 
arising from the requirement 
for  listed  institutions  to  pay 
out  part  of 
the  variable 
remuneration in shares. 

to 

the  problem: 
Origin  of 
review  clause  in  CRD  IV, 
responses 
the 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

CRD  IV  (Articles 
92, 94 ) 

from 

1) Exempt small and non-
complex  institutions  and 
staff  with  low  variable 
the 
remuneration 
rules on deferral and pay-
out  in  instruments,  based 
on harmonised exemption 
criteria  defined  at  EU 
level,  combined  with  a 
possibility  for  competent 
authorities 
to  adopt  a 
stricter approach; 

Allow 

2) 
listed 
institutions  to  use  share-
linked 
in 
addition  or 
instead  of 
shares in fulfilment of the 
requirement under Article 

instruments 

174 

 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

94(1)(l)(i) CRD IV 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Insolvency 
ranking 

MS 
implement  divergent 
approaches  to  the  statutory 
insolvency  ranking  of  bank 
create 
creditors  which 
uncertainty  for  issuers  and 
investors  alike  and  makes 
the 
difficult 
more 
application  of  the  bail-in 
cross-border 
tool 
for 
institutions. 
This 
uncertainty  can  also  result 
in competitive distortions in 
that  unsecured 
the  sense 
could  be 
debt  holders 
differently 
treated 
in 
jurisdictions  and 
different 

Creation 
preferred 
category. 

of 
a 
senior 

non-
debt 

BRRD 
108) 

(Article 

debt, 

debt: 

This 
approach  would 
result in two categories of 
both 
unsecured 
above 
ranking 
subordinated 
a 
newly created category of 
non-preferred  unsecured 
senior  and  a  preferred 
unsecured 
senior 
category.  As  opposed  to 
subordinated  debt  which 
can  be  written-down  or 

175 

 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

into 

converted 
equity 
outside  resolution  as  well 
as  during  resolution,  the 
new  non-preferred  senior 
category would be bailed-
in only in resolution 

the costs to comply with the 
TLAC 
MREL 
and 
requirement  for  banks  may 
be 
from 
different 
jurisdiction to jurisdiction. 

in 

the  problem: 
Origin  of 
issues 
consistent 
implementation  of  BRRD, 
responses  to  the  Call  for 
Evidence 

Moratorium 

to 

The  diversity  of  national 
the 
approaches 
implementation  of  the  tool 
as well as the lack of clarity 
of  certain  elements  reduces 
the effectiveness of this tool 
in 
of 
resolution  tools  in  a  cross-
border scenario. 

resolution 

and 

Further  harmonisation  of 
moratorium tools. 

BRRD (Articles 27, 
article, 
29a-new 
63) 

Origin  of 
issues 
in 
implementation of BRRD 

the  problem: 
consistent 

176 

 
 
 
 
 
 
measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Level  1  text    to  be 
amended 
and 
relevant articles 

Targeted  measures 
on  market 
risk: 
CRR  (Article  94) 
new  CRR 
plus 
article 
the 
application  of  the 
simplified 
standardised 
approach; 

for 

article 
for 

on 
New 
mandate 
the 
EBA  to  set  up  an 
IT tool; 

See 
for 
  below 
counterparty  credit 
risk 

Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Proportionality 

also 

(see 
below 
counterparty 
credit 
supervisory 
reporting  and 
disclosure) 

risk, 

reporting 

the  very 

The  current  EU  regulatory 
does 
framework 
not 
differentiate 
sufficiently 
between 
large 
institutions  and  very  small 
institutions,  particularly  as 
and 
regards 
disclosure  obligations. 
In 
addition,  compliance  costs 
due  to  the  complexity  and 
large  volume  of  rules  are 
more 
for 
burdensome 
smaller  banks.  Some  of  the 
prudential  requirements  in 
the  CRR  and  CRD 
IV 
impose  a  disproportionate 
burden  on  smaller  and  less 
complex institutions. 

to 

the  problem: 
Origin  of 
the 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 

Specific 
reporting  and 
disclosure  framework  for 
smaller  institutions  with 
reduced 
frequency  and 
content.  In  addition,  the 
EBA  would  be  mandated 
to  develop  an  IT  tool  to 
guide  credit 
institutions 
through  the  rules  which 
are  relevant  to  their  size 
and 
business  model. 
Finally,  it  is  proposed  to 
tailored 
introduce 
for  different 
measures 
metrics 
TLAC, 
(e.g. 
lending  to  SMEs,  trading 
ratio, 
leverage 
book, 
NSFR  and  remuneration) 
that  take  into  account  the 
size  and  business  model 
of credit institutions. 

177 

 
 
 
 
 
 
 
 
Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

CRR (Articles 272-
282, 
298-299, 
429a) 

Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Call for Evidence 

Issues included in the annexes 

Counterparty 
credit 
framework 

risk 

suffer 

under 
credit 

The 
standardised 
approaches  to  calculate  the 
exposure value of derivative 
the 
transactions 
counterparty 
risk 
from 
framework 
several  limitations:  they  do 
not  recognise  appropriately 
the  risk-reducing  nature  of 
collateral  in  the  exposures 
(an  issue  in  light  of  the 
forthcoming 
international 
clearing/margin 
their 
obligations); 
calibrations  are  outdated 
and  do  not  reflect  the  high 
level  of  volatility  observed 
during  the  recent  financial 
crisis; they do not recognise 
appropriately 
netting 
benefits. 

small 

risk 
under 

proposed 
Under 
the 
amendment, 
institutions 
would  use  the  SA-CCR 
recently developed by the 
BCBS in the counterparty 
framework 
credit 
revised 
while, 
institutions 
conditions, 
with 
trading 
activities  would  have  the 
possibility 
a 
revised  version  of  OEM. 
A  simplified  version  of 
SA-CCR  will  also  be 
available  for  banks  that 
would 
some 
face 
operational  difficulty  to 
implement  SA-CCR  but 
have  sizeable  derivative 
activities  that  would  not 
warrant  them  the  use  of 

use 

to 

178 

 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Disclosure 

the  problem: 
Origin  of 
BCBS, 
the 
to 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

The 
lack  of  harmonised 
disclosure  formats  hampers 
the 
of 
comparability 
disclosures 
between 
institutions  and  over  time 
reducing  market 
thereby 
discipline.  The 
existing 
disclosure  requirements  are 
mainly  a  "one  size  fits" 
for  hardly  and 
allowing 
differentiation  based  on  the 
size  of  the  institution  and 
are  therefore  not  optimally 
proportionate.   

the  problem: 
Origin  of 
the 
to 
responses 
BCBS, 
consultation  on  the  impact  

the revised OEM. 

their 

In  order  to  alleviate  the 
current  disproportionate 
operational  burden  and  to 
be 
the 
aligned  with 
revised  Basel  Pillar  3 
framework 
disclosure 
institutions 
be 
will 
categorised  on  the  basis 
of 
significance. 
Institutions  would  either 
be  significant,  small  or 
"other"  with  or  without 
The 
"listed". 
being 
disclosure 
requirements 
will  be  a  sliding  scale 
with  differentiations 
in 
and 
substance 
the 
frequency  of  disclosures 

179 

EBA 

Broaden 
ITS  
mandate  to  all  disclosure 
articles in Part Eight 

CRR  (Articles  13, 
431  –  455)  Plus 
additional 
delegated 
power 
disclosure 
requirements  CRR 
Article 456  

act 
on 

 
 
 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

whereby  for  all  types  of 
institutions 
disclosure 
templates  developed  by 
the 
be 
EBA  will 
mandatory. 

Supervisory 
reporting 

by 

smaller 
in 
and 

High  administrative  burden 
caused 
1) 
disproportionate 
reporting 
requirements  generally  and 
in 
for 
particular 
of 
reporting 
content 
2) 
frequency 
supervisors 
requiring 
additional  reporting  on  top 
of  the  regular  EU  reporting 
requirements. 

banks 
terms 

and 

to 

the  problem: 
Origin  of 
the 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 

will 

frequency 
for 

of 
The 
smaller 
reporting 
institutions 
be 
reduced  leading  to  less 
reporting  burden  without 
undermining  overall  the 
supervisory  effectiveness 
or  financial  stability  risk. 
the  extant 
Additionally 
reporting 
body 
of 
requirements  will 
be 
reduced  for  some  or  all 
institutions  depending  on 
their 
other 
size 
quantitative criteria.  

or 

CRR:  (Articles  99 
– 101), Study on ad 
hoc 
reporting 
requirements 
(Article 
EBA 
enhanced 
proportionality 
(Article 519b) 

519a), 
on 

report 

CRD 
IV  Article 
104  clarification  of 
ad  hoc 
reporting 
powers  

180 

 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Call for Evidence 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

2 

Pillar 
additional 
capital 

leads 

The current text of the CRD 
IV sets the broad parameters 
of  the  exercise  of  Pillar  2 
powers,  whilst  leaving  to 
supervisory  authorities  a 
wide  margin  of  discretion 
their 
when 
exercising 
to 
powers.  This 
discrepancies 
and 
weaknesses 
the  way 
in 
Pillar 2 capital requirements 
across 
are 
jurisdictions  and 
the 
sometimes  not  transparent 
way  supervisors'  decisions 
the  additional  capital 
on 
imposed 
individual 
banks are made. 

applied 

on 

to 

The  relevant  articles  of 
the CRD IV and CRR will 
be  modified  to  clarify  the 
nature  of  Pillar  2  capital 
in 
the  cases 
add-ons, 
which 
these  should  be 
imposed  as  requirements 
non-binding 
or 
expectations 
their 
and 
relationship  with  other 
capital 
requirements 
(buffers and Pillar 1). 

as 

CRR  (Articles  28, 
428)  –  CRD  IV 
(Articles  104,  104a 
new,  104b  new, 
113,  140a  new, 
141) 

IRRBB:  CRR  (art. 
448),  CRD  IV  (art. 
84, 98) 

New  RTS  on  additional 
own fund requirements (art. 
104a) 

RTS 

the 
New 
standardised  approach  for 
IRRBB (CRD IV art. 84); 

on 

on 

the 
RTS 
New 
calculation  of  NII 
for 
reporting  purposes  (CRR 
art. 448); 

Update  guidelines  (CRD 
IV  art.  84)  for  the  capture 
of IRRBB  

to 

the  problem: 
Origin  of 
responses 
the 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
the 
financing  of 
bank 

181 

 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

CRR  Articles  128, 
132, 152 

Equity 
investments 
into funds 

economy,  responses  to  the 
Call for Evidence 

(UCITS) 

The  current  framework  for 
the  credit  risk  attached  to 
exposures  in  the  form  of 
units  or  shares  in  collective 
undertakings 
investment 
(CIUs) 
[basically 
undertakings  for  collective 
investment  in  transferable 
securities 
and 
alternative investment funds 
(AIFs)] lacks risk sensitivity 
The 
transparency. 
and 
framework 
risk 
lacks 
sensitivity  notably  in  the 
sense that it does not require 
banks  to  reflect  a  fund's 
leverage  when  determining 
requirements 
capital 
their 
associated 
with 
investment,  even 
though 
leverage is a very important 
risk  driver.  This  creates 
incentives  by 
undesirable 

of 

A new Basel standard will 
implemented.  The 
be 
proposed 
framework 
three 
consists 
approaches,  which  would 
apply to both SA and IRB 
banks'  exposures.  The 
look-through 
approach 
(LTA)  requires  banks  to 
risk  weight 
the  fund's 
underlying exposures as if 
they  were  held  directly; 
the 
mandate-based 
approach (MBA) assumes 
underlying 
that 
portfolios  are  invested  to 
extent 
the  maximum 
the 
allowed 
mandate,  regulations,  or 
other  disclosures)  in  the 
assets 
the 
highest  risk  weights;  and 
fall-back  approach 
the 

attracting 

(as  per 

the 

182 

 
 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

encouraging  investments  in 
higher-risk  funds  and  may 
insufficient 
result 
capitalisation 
such 
of 
higher-risk exposures.  

in  an 

Also,  the  framework  does 
transparency 
not  promote 
and 
risk 
appropriate 
management  of  the  relevant 
exposures,  as  there  is  no 
clear rank ordering between 
the  different  approaches, 
with  different  degrees  of 
for  SA 
prescriptiveness 
to  IRB 
banks  compared 
banks 
insufficient 
incentives to apply the look-
through approach.  

and 

the  problem: 
Origin  of 
BCBS, 
the 
to 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
the 
financing  of 
bank 
economy,  responses  to  the 

with 

(FBA)  –  used  for  funds 
with 
insufficient 
transparency  –  requires 
the 
a 
application  of 
1,250%  risk  weight.  It 
provides  a  hierarchy  of 
approaches  as  a  function 
of 
the  degree  of  due 
diligence  performed  by 
an 
banks, 
incentive 
appropriate 
structure,  whereby 
the 
degree  of  conservatism 
each 
increases  with 
successive  approach  as 
risk 
and 
sensitivity 
decrease. 
transparency 
This promotes appropriate 
risk  management  of  bank 
to  funds  by 
exposures 
to 
incentives 
providing 
use 
risk 
the  more 
sensitive  and  transparent 
approaches. 

183 

 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Call for Evidence 

Bank 
financing 
infrastructure 
projects 

of 

existing 

capital 
The 
requirements  on  exposures 
infrastructure  projects 
for 
risk-sensitivity  and 
lacks 
the  capacity  of 
hamper 
banks 
finance  high-
quality, sound infrastructure 
projects 

to 

to 

the  problem: 
Origin  of 
responses 
the 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

The  current  general  limit  to 
large  exposures  of  25%  of 

will 

A  specific  'population'  of 
lending 
specialised 
exposures 
be 
identified  which  aim  at 
infrastructure 
funding 
projects  and  fulfil  certain 
criteria  able  at  reducing 
the  different  risks  a  bank 
would  incur  in  providing 
such  funding  (financial, 
political,  legal,  operating, 
etc.). This new asset class 
of  qualifying  specialised 
lending  exposures  would 
benefit  from  a  discount 
factor of 25% The criteria 
will 
safer 
denote 
infrastructure projects and 
ensure  that  lending  banks 
understand  the  associated 
risks. 

Three  main  measures  are 

184 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

CRR (new Article) 

(Articles 
CRR 
4(1)(71)  and  (91), 

 
 
 
 
 
 
 
 
 
measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Level  1  text    to  be 
amended 
and 
relevant articles 

390, 391, 394, 395, 
399, 400, 401, 403) 

Area 

Large 
exposure 
framework 

Problem  definition  /  Origin 
of the problem 

Solution 

institutions'  eligible  capital  
(which  is  the  sum  of  Tier  1 
capital  and  an  amount  of 
Tier  2  capital  equal  to  one 
third  of  Tier  1  capital  )  is 
not 
sufficiently  prudent, 
especially  for  larger  banks, 
since it only capture a small 
part  of  the  overall  large 
that  European 
exposures 
institutions have. Moreover, 
it  results  in  a  higher  limit 
for  smaller  banks  since 
larger  banks  have  usually 
more  Tier  2  capital  than 
smaller ones. Moreover, the 
current  limit  doesn’t  take 
into account the higher risks 
carried  by 
the  exposures 
that  globally  systemically 
important  Banks  (G-SIBs) 
have  to  single  counterparty 
or  groups  of  connected 
clients  and,  in  particular,  as 
regards  exposures  to  other 

proposed: 

-  reduced  capital  base 
for 
(only 
calculating 
large 
exposures limit; 

Tier 

the 

1) 

-  lower  large  exposures 
limit  for  exposures  of  G-
SIIs  v.  G-SIIs  (15%  of 
Tier 1 capital); 

of 

the 

new 
- 
use 
SA-CRR 
developed 
method for the calculation 
of  the  exposure  value  of 
exposures 
towards 
derivatives.  

185 

 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

G-SIBs. 

the  problem: 
Origin  of 
BCBS, 
the 
to 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
the 
financing  of 
bank 
economy,  responses  to  the 
Call for Evidence 

Exemptions on 
large 
exposures 

the 

limit. 

Article  400  (2)  of  the  CRR 
lists  a  number  of  exposures 
that  competent  authorities 
fully  or  partially 
may 
exempt  from  the  scope  of 
large 
application  of 
exposures 
These 
exposures  can  only  be 
exempted  if  the  conditions 
laid down in paragraph 3 of 
the same article are met. By 
way of derogation the  CRR 
provides  for  a  temporary 
possibility 
for  Member 
States to grant an exemption 
from  the  large  exposures 

CRR  (Articles  493, 
507) 

To  end  the  transitional 
period  allowing  Member 
States to grant exemptions 
for  certain  exposures  to 
the  large  exposure  limit 
set  out  in  Article  493(3) 
of CRR.  

186 

 
 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

out 

and 

limit for the same exposures 
listed  in  Article  400  (2)  of 
however  without 
CRR, 
the 
to  meet 
having 
conditions 
in 
set 
paragraph  3  of  Article  400 
concurrent 
of  CRR.The 
of  Members 
possibility 
competent 
States 
of 
granting 
authorities 
exemptions 
the  same 
to 
exposures  has  proved  to  be 
problematic 
the 
introduction  of  the  Single 
Supervisory  Mechanism 
(SSM)  and  can 
interfere 
with  the  ability  of  the  SSM 
to  perform  its  tasks  in  a 
consistent 
coherent 
and 
manner. 

after 

the  problem: 
Origin  of 
BCBS, 
the 
to 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
the 
financing  of 
bank 

187 

 
 
Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

CRR  Articles  300 
to  311  and  497, 
EMIR  Articles  50a 
to 50d 

Maintaining  empowerment 
for  delegated  act  under 
Article 456(1)(h), update of 
RTS  mandated  by  Article 
304(5)  of  CRR  and  update 
of ITS mandated by Article 
50c(3) of EMIR 

Area 

Problem  definition  /  Origin 
of the problem 

Solution 

economy,  responses  to  the 
Call for Evidence 

Rules 
exposures 
CCPs 

on 
to 

The 
Mark-to-Market 
Method  does  capture  risks 
sufficiently  well,  i.e.  either 
leading  to  too  low  or  too 
high 
requirements.  The 
current  framework  does  not 
take  a  sufficiently  holistic 
view  of  how  the  different 
types  of  exposures 
to  a 
Qualifying  CCP  interrelate 
not 
and 
sufficiently  sensitive  to  the 
aggregate 
those 
exposures and how that risk 
is distributed. 

therefore 

risk  of 

are 

Origin  of 
the  problem: 
BCBS, responses to the Call 
for Evidence  

standards 
The 
revised 
the  Basel 
adopted  by 
be 
will 
Committee 
Notable 
implemented. 
revisions 
the  Basel 
to 
standards  include  the  use 
of  a  single  method  for 
the  capital 
determining 
requirements 
for 
to  QCCPs 
exposures 
from  default 
stemming 
fund  contributions, 
an 
explicit  floor  for  those 
requirements,  as  well  as 
an  explicit  cap  on  the 
capital 
overall 
requirements  applied 
to 
exposures  to  QCCPs  (i.e. 
those  charges  will  not 
exceed  the  charges  that 
would 
be 
the  CCP 
if 
applicable 
were  a  non-qualifying 

otherwise 

188 

 
 
 
 
 
 
Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

BRRD (Article 55) 

Area 

Problem  definition  /  Origin 
of the problem 

Solution 

CCP). 

Contractual 
recognition  of 
bail-in  (article 
55 BRRD) 

include 

Compliance  with  Article  55 
BRRD  raises  two  types  of 
difficulties.  First,  certain 
third  country  counterparties 
a 
to 
refuse 
contractual 
clause 
recognising  a  Union  bail-in 
power  in  financial  contracts 
concluded  with  Union 
banks.    These  third  country 
entities  often  have  a  high 
degree of negotiating power 
against  Union  banks,  or 
apply  internationally  agreed 
standard  contractual  terms 
in  their  banking  contracts, 
e.g.  with 
to 
non-Union 
liabilities 
market 
financial 
infrastructures 
trade 
finance  liabilities  (letters  of 
credit,  bank  guarantees  and 
bonds). 
performance 
Secondly,  even  when  third 

respect 

or 

to 

the 

in  order 

Article  55  BRRD  will  be 
amended 
to 
enable 
resolution 
authority  to  exclude  the 
obligation  by  means  of  a 
waiver  if  it  determines 
that 
not 
this  would 
impede  the  resolvability 
of  the  bank,  or  that  it  is 
legally,  contractually  or 
economically 
impracticable for banks to 
bail-in 
include 
the 
recognition 
for 
certain liabilities. In these 
liabilities 
cases, 
should  not 
as 
MREL  and  should  rank 
to 
senior 
minimize 
risk  of 
the 
breaking the No-Creditor-
Worse-Off 
(NCWO) 
principle.  In  this  regard, 
the  proposal  will  not  to 

to  MREL 

clause 

count 

those 

189 

 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

country  counterparties  are 
prepared  to  accept  bail-in 
their 
related  clauses 
contracts with Union banks, 
in  some  cases 
local 
supervisor may forbid this.  

the 

in 

Changes 
MREL 

to 

should 

the  EU 

The  incorporation  of  TLAC 
legislative 
in 
not 
framework 
materially  affect  the  burden 
of  non  G-SIBs  to  comply 
with 
the  current  MREL 
framework.  Fundamentally, 
TLAC  and  MREL  aim  to 
achieve 
the  same  policy 
objective  of  ensuring  that 
sufficient 
banks  hold  a 
in-able 
amount  of  bail 
liabilities 
for 
quick 
smooth 
absorption  of 
losses  and 
bank  recapitalisation.  Some 
technical  differences  exist 
the  2 
however  between 
in 
frameworks 

that  allow 

regimes 

and 

BRRD  Articles  2, 
12,  13,  16,  18,  45, 
59,  60,  89);  SRMR 
Article  12 

Existing  RTS  on  MREL  to 
be  aligned  with  the  new 
level 1 provisions 

weaken the bail-in. 

criteria 

address 

create  1 

MREL  will  be  amended 
to 
some 
shortcomings,  notably  to 
set  of 
(1) 
eligibility 
for 
MREL/TLAC 
eligible 
instruments  (except  for 
subordination),  (2)  clarify 
the internal loss absorbing 
capacities  within  banking 
independent  of 
groups, 
resolution 
the 
through 
strategy 
the 
introduction 
of 
concepts  of 
resolution 
groups,  resolution  entities 
and  material  subgroups, 
and  (3)  the  alignment  of 
the  basis  for  calculation 

chosen 

190 

 
 
 
 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

the 

terms  of  eligibility  criteria 
(excl.  subordination)  and  in 
terms of basis of calculation 
of 
requirement. 
Additionally,  MREL  is  not 
specific  as  to  how  bail-in 
capacity should be allocated 
within groups depending on 
the 
resolution 
strategy. 

choses 

to 

Origin  of 
the  problem: 
Financial  Stability  Board, 
the 
responses 
consultation  on  the  impact  
of  CRR  and  CRD  IV  on 
bank 
the 
financing  of 
economy,  responses  to  the 
Call for Evidence 

on 
the 
the  RWA  and 
leverage  ratio  exposure 
measure. 

191 

 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Application  of 
IFRS  9  by  the 
EU banks 

The  move  from  IAS  39  to 
IFRS  9  will  affect  CRR 
capital  requirements.  The 
impact will depend on: 

To introduce in CRR a 
transitional regime so that IFRS 9 
changes will be phased-in 
progressively over a few years 

CRR Article 473a new 

amount 

1. the 
the 
increase in provisions due to 
the change in accounting;  

of 

type  of  regulatory 
2. the 
approach  the  bank  follows 
to 
capital 
calculate 
requirements; 

its 

3. for 
their 
IRB  banks, 
present  level  of  provisions 
compared  to  the  regulatory 
expected loss. 

There  is  uncertainty  about 
the  impact  of  the  difference 
levels  of  provisioning 
in 
between current IAS 39 and 
IFRS  9  on  CET1  capital  of 
EU Banks 

192 

 
 
 
 
 
Area 

Problem  definition  /  Origin 
of the problem 

Solution 

Level  1  text    to  be 
amended 
and 
relevant articles 

measures 
2 
Level 
(Delegated, 
implementing 
acts,  RTS,  ITS)  envisaged 
to be created or amended 

Origin of the problem: responses to 
the consultation on the impact  of 
CRR and CRD IV on bank 
financing of the economy, responses 
to the Call for Evidence 

193