COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU
Date: 2021-10-27
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU banking union, administrative sanction, banking policy, banking supervision, branch, credit institution, credit policy, financial requirements, financial risk, investment company, third country

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  EN 

   EUROPEAN COMMISSION  Brussels, 27.10.2021  SWD(2021) 321 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor    Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU                    {COM(2021) 663 final} - {SEC(2021) 380 final} - {SWD(2021) 320 final}  
 
 
Executive Summary Sheet 

Impact assessment on a proposal amending Regulation (EU) 575/2013 and Directive 2013/36/EU 

A. Need for action 

What is the problem and why is it a problem at EU level?  

In response to the financial crisis, the EU embarked on a wide-ranging reform of the prudential framework 
for  banks  aimed  at  increasing  the  resilience  of  the  EU  banking  sector.  One  of  the  main  elements  of  the 
reform  consisted  in  implementing  international  standards  agreed  by  the  Basel  Committee  for 
Banking  Supervision,  specifically  the  so-called  “Basel  III  reform”.  Thanks  to  this  reform,  the  EU 
banking  sector  entered  the  COVID-19  crisis  on  a  resilient  footing.  However,  while  the  overall  level  of 
capital in EU banks is now satisfactory on average, some of the problems that were identified in the wake 
of financial crisis have not yet been addressed. In particular, two main problems remain. First, the default 
methods that banks use to calculate their capital requirements (so-called “standardised approaches”) do not 
capture sufficiently well the risks that banks are exposed to (i.e. they are not sufficiently risk sensitive), 
leading to inadequate (either too high or too low) capital requirements. This, in turn, may negatively affect 
banks’ activities. Second, the sophisticated methods that mostly large banks are allowed to use (so-called 
“internal  model  approaches”)  produce  very  different  capital  requirements  for  similar  or  even  identical 
risks. This makes it difficult to compare capital ratios across banks and undermines the trust in those ratios 
and  hence  in  the  banks  using  internal  models.  Furthermore,  for  certain  types  of  assets,  there  are  not 
enough  data  of  sufficiently  good  quality  to  allow  for  a  reliable  and  robust  modelling  of  capital 
requirements. Banks using internal models for those assets may therefore have insufficient capital to cover 
for the associated risks. 

Beyond the need to address those deficiencies by completing the post-crisis reform agreed at international 
level, the transition to a more sustainable economy entails risks for banks that they will need to properly 
manage to  ensure financial stability. The  Sustainable Finance  Strategy highlighted the need to  include a 
better integration of climate and environmental risks into the EU prudential framework. The present legal 
requirements alone are insufficient to provide incentives for a systematic and consistent management of 
environmental, social and governance (ESG) risks by banks. 

Another area of focus is the proper enforcement of prudential rules. Supervisors play a crucial role in this 
respect.  Supervisors  need  to  have  at  their  disposal  the  necessary  tools  and  powers  to  this  effect  (e.g. 
powers to authorise banks and their activities, check the suitability of their management, or sanction them 
in  case  they  break  the  rules).  While  the  EU  legislation  ensures  a  minimum  level  of  harmonisation,  the 
supervisory  toolkit  and  procedures  vary  greatly  across  Member  States.  This  fragmented  regulatory 
landscape in the definition of certain powers and tools available to supervisors and their application 
across Member States undermines the level playing field in the Single Market and raises doubts about the 
sound and prudent management of EU banks and their supervision. This problem is particularly acute in 
the  context  of  the  Banking  Union.  Differences  across  19  different  legal  systems  prevent  the  Single 
Supervisory Mechanism from performing its supervisory functions effectively and efficiently. Moreover, 
cross-border banking groups have to deal with a number of different procedures for the same prudential 
issue, unduly increasing their administrative costs. 

Market discipline is another important tool. In order for investors to exercise their role of monitoring the 
behaviour of banks, they need to access the necessary information. The current difficulties related to the 
access  to  prudential  information  deprive  market  participants  from  the  information  they  need  about 
banks’  prudential  situations.  This  ultimately  reduces  the  effectiveness  of  the  prudential  framework  for 
banks  and  potentially  raises  doubt  about  the  resilience  of  the  banking  sector,  especially  in  periods  of 

 
 
stress. 

What should be achieved? 

There  are  two  general  objectives  pursued  by  this  initiative:  contributing  to  financial  stability  and 
contributing  to  steady  financing  of  the  economy  in  the  context  of  the  recovery  post-COVID-19  crisis. 
These can be broken down in more specific objectives: 
i)  strengthen  the  risk-based  capital  framework,  without  significant  increases  in  capital  requirements 

overall; 

ii)  enhance the focus on ESG risks in the prudential framework; 
iii) further harmonise supervisory powers and tools; and 
iv)  reduce  banks’  administrative  costs  related  to  public  disclosures  and  improve  access  to  banks’ 

prudential data.  

What is the value added of action at the EU level (subsidiarity)?  

The  objectives  pursued  by  the  envisaged  measures  can  be  better  achieved  at  Union  level  rather  than  by 
different  national  initiatives  as  they  represent  adjustments  and  updates  to  existing  EU  rules.  These 
problems  and  the  underlying  causes  are  the  same  across  all  Member  States  and  potential  differences 
pertain to the behaviour and business model of individual banks, not their location within the Union.  

B. Solutions 

What are the various options to achieve the objectives? Is there a preferred option or not?  If not, 
why? 

Baseline scenario. The baseline scenario consists in leaving the existing rules unchanged. 

Policy options. The following high level policy options are considered in the impact assessment: 
- 

in relation to the improvement of the current prudential framework for calculating risk-based capital 
requirements, options considered are: (1) to implement the final elements of the Basel IIII reform as 
literally  agreed  at  international  level;  (2)  implement  them  with  certain  adjustments  to  take  into 
account  EU  specificities,  and  (3)  implement  them  with  the  adjustments  and  the  transitional 
arrangements introduced in response to the COVID-19 crisis (preferred option); 
in  relation  to  the  dedicated  capture  of  ESG  risks  in  the  prudential  framework,  options 
considered are (1) to introduce measures for a better management of ESG risks by banks (preferred 
option), and (2) adapt minimum capital requirements to reflect ESG risks; 
in  relation  to  improving  the  consistency  in  the  application  of  supervisory  powers,  options 
considered  are  (1)  to  clarify  and  complement  certain  provisions  on  supervisory  and  sanctioning 
powers  while  leaving  ample  flexibility  to  Member  States,  and  (2)  to  ensure  a  greater  level  of 
harmonisation  of  the  provisions  on  supervisory  and  sanctioning  powers  by  narrowing  down  the 
flexibility of Member States (preferred option); and 
in  relation  to  reducing  disclosure  costs  and  improving  market  access  to  bank  prudential 
information, options considered are to require the European Banking Authority (EBA) to provide a 
single  electronic  access  to  EU  banks’  (1)  quantitative  disclosures  only  or  (2)  also  qualitative 
disclosures (preferred option). 

- 

- 

- 

What are different stakeholders' views? Who supports which option?  

Overall, stakeholders agree on the necessity to implement the final elements of the Basel IIII reform, but 

 
 
 
have diverging views on how this should be done. Supervisors take a conservative approach and prefer a 
faithful implementation of those standards, while the financial industry argues in favour of making several 
adjustments to those standards and of spreading the impacts of the reform over several years. 

Most  stakeholders  (banks,  supervisors,  civil  societies)  recognise  that  prudential  requirements  for  banks 
must  reflect  ESG  risks  and  many  agree  that  any  change  in  capital  requirements  must  be  based  on  solid 
evidence of risk differentials based on ESG factors, which they do not consider to be available at present. 

The  views  of  supervisors  and  banks  on  potential  changes  to  the  supervisory  toolkit  and  fit-and-proper 
assessment framework largely depend on their current practices but are supportive overall. 

Views are all in all also positive on the initiative to centralise supervisory reporting and public disclosure: 
a  majority  of  industry  stakeholders  supported  the  approach  while  supervisors  pointed  to  the  need  to 
address  concerns  about  wrong  expectations  that  the  European  Banking  Authority  (EBA)  would  be 
responsible for the quality of the information disclosed by banks. 

C. Impacts of the preferred option 

What are the benefits of the preferred option (if any, otherwise of main ones)?                                     

Implementing the preferred option to implement the final elements of the Basel IIII reform would enhance 
the reliability and robustness of the bank prudential framework and hence increase the resilience of the EU 
banking sector. This would have positive effects  to foster economic growth in  the EU in the medium to 
long term.  In particular,  the  reforms  would reduce the severity of future  economic downturns through  a 
reduction in both the probability and the intensity of future banking crises. 

Furthermore,  the  other  adjustments  to  the  prudential  framework  would  i)  help  ensuring  that  EU  banks 
properly manage the  transition  to a more sustainable economy, ii) facilitate the application of the single 
rulebook and iii) decrease the administrative and compliance burden for banks and their supervisors. 

What are the costs of the preferred option (if any, otherwise of main ones)?                                    

Implementing the preferred option and taking into account all the measures in the proposal is expected to 
lead to a weighted average increase in EU banks’ minimum capital requirements of +6.4% to +8.4% in the 
long term (by 2030), after the envisaged transitional period. In the medium term (in 2025), the increase is 
expected to range between +0.7% and +2.7%. 

According to estimates provided by the EBA, this impact could lead a limited number of large EU banks 
(10 out of 99 banks in the test sample) to raise collectively additional capital amounts (less than EUR 27bn 
for the 10 banks) in order to meet the new minimum capital requirements under the preferred option. To 
put this amount into perspective, the 99 banks in the sample (representing 75% of EU banking assets) held 
a total amount of regulatory capital worth  EUR 1414bn at the end of 2019 and had combined profits of 
EUR 99.8bn in 2019.  

While  banks  would  incur  one-off  administrative  and  operational  costs  to  implement  the  changes  in  the 
rules, the simplifications implied by several of the preferred options (e.g. removal of internally modelled 
approaches) are expected to reduce the recurring costs compared to today. 

What are the impacts on SMEs and competitiveness?  

The preferred policy options would confirm existing measures aimed at minimising any impact on lending 

 
 
to  SMEs.  They  also  do  not  contain  measures  that  would  have  a  significant  negative  impact  on  SME 
lending. Finally, the preferred options that contemplate measures aimed at reducing compliance costs for 
banks, in particular for smaller and less complex ones, could, if the cost reductions are passed on, reduce 
borrowing costs for SMEs. 

While the reform may increase costs for some EU banks in the short term, in the medium to long term it 
would make them more resilient in the face of economic shocks thereby restoring  confidence in the EU 
banking sector in the eyes of investors. This would in turn reduce the cost of their funding and therefore 
increase the competitiveness of EU banks with respect to their international peers. 

Will there be significant impacts on national budgets and administrations?  

No significant impacts on national budgets and administrations are expected. 

Will there be other significant impacts?  

No other significant impacts are expected. 

Proportionality?  

The  preferred  options  contain  measures  that  are  deemed  to  be  strictly  necessary  to  achieve  the 
abovementioned objectives. 

D. Follow up 

When will the policy be reviewed?  

The evaluation of the impact of this package will be conducted five years after the legislation enters into 
force, which is consistent with the methodology agreed before launching the evaluation.