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2021 EU BANKING PACKAGE

2021 EU BANKING PACKAGE. With the EU Banking Package, the draft regulation amending Regulation (EU) No. 575/2013 with regard to credit risk , the risk of adjusting the credit rating , operational risk , market risk and the output floor is published. The EU banking package comprises three important building blocks:

#1 Basel III: new rules on internal models

A new limit will be introduced to ensure risks are not underestimated when banks use their own calculation models.

#2 Better supervision

Supervisors will have stronger tools to oversee EU banks, including complex banking groups. Minimum standards will be introduced to supervise third-country branches of banks in the EU.

#3Sustainability

Banks will be required to take Environmental, Social and Governance (ESG) risks into account when managing their business.

 

2021 EU BANKING PACKAGE

 

2021 EU BANKING PACKAGE: Output floor leads to new capital requirements.

Amendments to both the CRR and the CRD introduce an output floor (OF) for risk-based capital requirements. This represents one of the most important measures of the Basel III reforms and aims to reduce the excessive variability of institutions’ own funds requirements calculated using internal models and thereby improve the comparability of institutions’ capital ratios.

The output floor sets a floor for capital requirements resulting from institutions’ internal models, namely 72.5% of the capital requirements that would apply based on standardized approaches.

The decision to introduce the output floor is based on an analysis that has shown that institutions tend to underestimate the risks and thus the capital requirements by using internal models.

The calculation of floored risk-weighted assets (RWA) is set out in Article 92 of CRR. In particular, Article 92(3) is amended to specify which total risk amount – with or without flooring – is to be used for the calculation of the minimum capital requirements (so-called “Pillar 1”).

Article 92 is amended as follows:

Paragraphs 3 and 4 are replaced by the following paragraphs

‘3. The total risk amount is calculated as follows:

a standalone institution in the EU and, for the purposes of complying with the obligations of this Regulation, based on its consolidated situation under Part I, Title II, Chapter 2, an EU parent company

Institution, an EU parent financial holding company and an EU parent mixed financial holding company calculate the total amount at risk as follows:

TREA=max {U-TREA;x∙S-TREA}

 

The following applies:

TREA = the total risk exposure amount of the entity;

U-TREA = the unfloored total risk exposure amount of the entity calculated in accordance with paragraph 4;

S-TREA = the standardized total risk exposure amount of the entity calculated in accordance with paragraph 5;

x = 72.5% ;

for the purposes referred to in points i and ii, the total risk amount shall be calculated in accordance with paragraph 6:

    • if it is a separate subsidiary institution in a Member State, for the purpose of complying with the obligations under this Regulation on an individual basis;
    • in the case of a parent institution in a Member State, a parent financial holding company in a Member State or a parent mixed financial holding company in a Member State, for the purposes of complying with the obligations under this Regulation on the basis of their consolidated situation;

The total risk amount of an institution that is neither a stand-alone institution in the EU nor a stand-alone subsidiary institution in a Member State is the total risk amount calculated in accordance with paragraph 4 without a residue, in order to comply with the obligations of this Regulation on a case-by-case basis.

4. The total risk amount without deposit is calculated as the sum of points (a) to (f) of this paragraph after considering paragraph 7:

  • the risk-weighted exposure amounts for credit risk, including counterparty risk, and dilution risk, calculated in accordance with Title II and Article 379, in relation to all business activities of an institution, with the exception of the risk-weighted exposure amounts for counterparty risk from the trading book business of the institution;
  • the own funds requirements for an institution’s trading book business for:
    • Market risk calculated in accordance with Title IV of this part;
    • Large exposures that exceed the upper limits specified in Articles 395 to 401, insofar as an institution is permitted to exceed these upper limits in accordance with Part Four;
  • the market risk own funds requirements calculated in accordance with Title IV of this Part for any business subject to foreign exchange risk or commodity risk;

(ca) the own funds requirements for settlement risk calculated in accordance with Title V of this Part, excluding Article 379;

  • the own funds requirements for credit valuation adjustment risk calculated in accordance with Title VI of this Part;
  • the own funds requirements for operational risk calculated in accordance with Title III of this Part;
  • the risk-weighted exposure amounts for the institution’s trading book counterparty risk for the following types of transactions and agreements calculated in accordance with Title II of this Part:
    • the contracts and credit derivatives set out in Schedule II;
    • repurchase agreements, lending or borrowing of securities or commodities based on securities or commodities;
    • Margin lending transactions based on securities or commodities;
    • long settlement transactions”;
  • the following paragraphs 5, 6 and 7 are added:

‘5. The standardized total risk amount is calculated as the sum of paragraph 4 letters a to f, taking into account paragraph 7 and the following requirements:

  • the risk-weighted exposure amounts for credit risk and dilution risk as referred to in point (a) of paragraph 4 and for trading book counterparty risk as referred to in point (f) of the same paragraph shall be calculated without applying any of the following approaches:
    • the internal models approach for master netting agreements referred to in Article 221;
    • the internal ratings-based approach envisaged in Chapter 3;
    • the internal ratings-based approach for securitisations (SEC-IRBA) pursuant to Articles 258 to 260 and the internal ratings-based approach (IAA) pursuant to Article 265;
    • the concept set out in this Part, Title II, Chapter 6, Section 6;
  • the own funds requirements for market risk for the trading book business as referred to in point (b)(i) of paragraph 3 and for any business subject to foreign exchange risk or commodity risk as referred to in point (c) of the same paragraph shall be calculated without using the alternative internal model approach set out in Part Three, Title IV, Chapter 1b.

 

6.The total risk exposure amount of an entity ‘i’ for the purposes set out in paragraph 3, point (b), shall be calculated as follows:

REAi= U- TREAi + DIconso ∗ Contribiconso

 

The following applies:

i = the index that denotes the entity;

TREAi = the total exposure of entity i;

U-TREAi = the total risk amount of unit i calculated in accordance with paragraph 4 without sediment;

DI conso = each positive difference between the total risk amount at risk and the unfunded total risk amount at risk for the consolidated situation of the EU parent institution, EU parent financial holding company or EU parent mixed financial holding company of the group to which entity i belongs, calculated as follows:

DI conso = TREA – U-TREA

 

The following applies:

U-TREA = the total risk-free amount at risk calculated in accordance with paragraph 4 for the relevant EU parent institution, EU parent financial holding company or relevant EU parent mixed financial holding company on the basis of its consolidated position;

TREA = the total amount at risk calculated in accordance with point (a) of paragraph 3 for the relevant EU parent institution, EU parent financial holding company or EU parent mixed financial holding company on the basis of its consolidated situation.

Contrib conso i = the contribution of unit i calculated as follows:

 

2021 EU BANKING PACKAGE

 

The following applies:

j = the index denoting all entities that are part of the same group as entity i in the consolidated situation of the EU parent institution, EU parent financial holding company or EU parent mixed financial holding company;

U-TREAj = the total risk amount at risk with no residue calculated by entity j in accordance with paragraph 4 on the basis of its consolidated situation or, if entity j is a stand-alone subsidiary institution in a Member State, on an individual basis;

F-TREAj = the assumed total risk amount of company j, calculated on the basis of its consolidated situation as follows:

F-TREA j = max (U-TREA j ; x ∙ S-TREA j )

 

The following applies:

F-TREA j = the total risk amount calculated by entity j on the basis of its consolidated situation or, if entity j is a stand-alone subsidiary institution in a Member State, on an individual basis;

S-TREA j = the total standardized exposure value calculated in accordance with paragraph 5 by entity j on its consolidated situation or, if entity j is a standalone subsidiary institution in a Member State, on its individual basis;

x= 72.5% .

 

7. The following provisions shall apply to the calculation of the total unfunded exposure amount referred to in paragraph 4 and the standardized exposure amount referred to in paragraph 5:

the own funds requirements specified in paragraph 4 letters c and ca,

(d) and (e) include the costs arising from the overall operations of an institution;

The institutions multiply the own funds requirements specified in paragraph 4 letters b to e by a factor of 12.5.”;

 

The total risk exposure amount (TREA) set out in Article 92(5) may only be used by the EU parent institution, financial holding company or mixed financial holding company of a banking group for the purpose of the group solvency ratio calculated at the highest level of consolidation in the EU .

In contrast, the TREA without floor will continue to apply to each entity in the group for the calculation of own funds requirements at an individual level, as further detailed in Article 92(4).

Each parent institution, financial holding company or mixed financial holding company in a Member State (other than where the EU parent is domiciled) must calculate its share of the imputed RWA used for the consolidated group’s own funds requirement by multiplying the consolidated group’s own funds requirement by the share of sub-consolidated RWAs attributable to that entity and its subsidiaries in the same Member State, if any.

The RWAs of the consolidated group attributable to an entity/sub-group shall be calculated as the RWA of the entity/sub-group as if the OF were applicable to its TREA, in accordance with Article 92(6). This would recognize the benefits of risk diversification across the business models of different entities within the same banking group. At the same time, any potential increase in required own funds due to the application of the OF at consolidated level would need to be distributed fairly among the sub-groups located in Member States other than the parent company, according to their risk profile.

 

2021 EU BANKING PACKAGE: Reorganization of operational risk leads to new capital requirements.

New standardized approach to replace all existing operational risk approaches : The BCBS revised the international operational risk standard to address weaknesses identified in the wake of the 2008-2009 financial crisis. In addition to the lack of risk sensitivity of the standardized approaches, a lack of comparability resulting from a variety of internal modeling practices within the framework of the advanced measurement approaches (AMA) was also identified.

With this in mind, and in order to increase the simplicity of the framework, all existing approaches to calculate operational capital requirements have been replaced by a single non-model based approach to be used by all institutions.

Institutions can continue to use their own models at their own discretion for the purposes of the internal capital adequacy process (ICAAP).

The new standardized approach will be implemented in the Union by replacing Part 3, Title III, of the CRR. In addition, further adjustments are made to several other articles of the CRR, most notably to

introduce clear and harmonized definitions of operational risk (Article 4(1), points 52a, 52b and 52c).

 

Calculation of capital requirements for operational risk

According to the final Basel III standards, the new standardized approach combines an indicator related to the

  • size of an institution’s business ( Business Indicator Component or BIC), and
  • with an indicator that takes into account the loss history of this institution.

The revised Basel Standard provides for a number of discretionary powers when implementing the latter indicator. Countries may disregard historical losses when calculating operational risk capital for all relevant institutions, or add historical loss data for institutions below a certain company size.

For the calculation of the minimum capital requirements, these discretions are exercised in a harmonized way, disregarding historical loss data for all institutions, in order to ensure a level playing field within the Union and to simplify the calculation of the operational risk capital.

The calculation of the BIC is set out in the new Chapter 1 of Title III (new Articles 312 to 315). In the Union, the minimum own funds requirements for operational risk will be based solely on the BIC (Article 312).

The calculation of the BIC, based on the so-called business indicator, is set out in Article 313, while the determination of the business indicator, including its components and possible adjustments due to mergers, acquisitions or divestitures, is regulated in Articles 314 and 315.

 

Article 312

own funds requirement

The operational risk own funds requirement is the component of the business indicator calculated in accordance with Article 313.

 

Article 313

Business indicator component

Institutions shall calculate their business indicator component using the following formula:

 

2021 EU BANKING PACKAGE

 

The following applies:

BIC         = the business indicator component;

BI = the business indicator calculated in accordance with Article 314, expressed in billions of euros.

 

Article 314

economic indicator

The institutions calculate their business indicator using the following formula:

BI = ILDC + SC + FC

 

The following applies:

BI = the business indicator, expressed in billions of euros;

ILDC = the interest, lease and dividend component expressed in billions of euros and calculated in accordance with paragraph 2;

SC = the services component, expressed in billion euros and calculated according to paragraph 3;

FC = the financial component expressed in billions of euros and calculated in accordance with paragraph 4.

 

(2) For the purposes of paragraph 1, the interest, lease and dividend component shall be calculated using the following formula:

ILDC = min(IC, 0.0225 * AC) + DC

 

The following applies:

ILDC = the interest, lease and dividend component;

IC = the interest component, which is the institution’s interest income on all financial assets and other interest income, including finance lease income and operating lease income and profits on leased assets, less the institution’s interest expense on all financial liabilities and other interest income, including interest expense on finance leases and operating leases, depreciation and amortization and operating lease losses, calculated as the annual average of the absolute values ​​of the difference over the last three financial years;

AC = the asset component, which is the sum of the institution’s total outstanding gross loans, advances, interest-bearing securities, including government bonds, and lease receivables, calculated as an annual average over the last three financial years based on the amounts at the end of each of the relevant financial years;

DC = the dividend component, which is the institution’s dividend income from investments in shares and funds that are not consolidated in the institution’s financial statements, including dividend income from unconsolidated subsidiaries, associates and joint ventures, calculated as an annual average over the last three financial years.

 

2. For the purposes of paragraph 1, the service component shall be calculated using the following formula:

SC = max (OI, OE) + max (FI, FE)

 

The following applies:

SC = the service component; OI = other operating income, ie the annual average of the last three financial years of the institution’s ordinary banking income not included in other items of the business indicator but of a similar nature;

OE = other operating expenses, ie the annual average of the last three financial years of the institution’s expenses and losses from ordinary banking activities that are not included in other items of the business indicator but are of a similar nature and from events constituting an operational risk;

FI = the fee and commission income component, which is the annual average of the last three financial years of the institution’s income from the provision of consulting and other services, including income received by the institution as a financial services outsourcer;

FE = the fee and commission expenses component, which is the annual average of the last three financial years of the institution’s expenses for the use of consulting and services, including outsourcing fees paid by the institution for the provision of financial services, but excluding those for the provision of non-financial services outsourcing fees paid.

 

(2) For the purposes of paragraph 1, the financial component shall be calculated using the following formula:

FC = TC + BC

 

The following applies:

FC = the financial component;

TC = the trading book component, ie the annual average of the absolute values ​​of the last three financial years of net profit or loss on the institution’s trading book, including trading assets and trading liabilities, hedge accounting and foreign exchange differences;

BC = the banking book component, which is the annual average of the absolute values ​​of the last three financial years of the institution’s net gain or loss on the banking book, including gains and losses on financial assets and liabilities at fair value through profit or loss, from hedge accounting Exchange differences and from realized gains and losses on financial assets and liabilities not at fair value through profit or loss.

Institutions shall not use any of the following elements when calculating their business indicator:

  • Income and expenses from insurance or reinsurance business;
  • premiums paid and payments received from concluded insurance or reinsurance contracts;
  • administrative expenses, including personnel expenses, outsourcing fees for the provision of non-financial services and other administrative expenses;
  • administrative cost recovery, including recovering payments on behalf of clients;
  • Expenses for premises and property, unless such expenses result from operational accidents;
  • depreciation of property, plant and equipment and amortization of intangible assets, excluding amortization of operating lease assets, which are included in finance and operating lease expenses;
  • Provisions and reversals of provisions, unless these provisions relate to operational claims;
  • costs due to share capital redeemable on demand;
  • impairment and reversal;
  • changes in goodwill recognized in profit or loss;
  • corporate tax.

 

2021 EU BANKING PACKAGE: Environmental, Social and Governance (ESG) Risks

The institutions play a crucial role in the Union’s aspiration to promote a long-term transition towards sustainable development in general, and in particular to support a just transition towards net-zero greenhouse gas emissions in the Union’s economy by 2050.

This transition brings with it new risks. The accelerated transition to a more sustainable economy can have a significant impact on businesses, increasing risks for individual institutions and for financial stability as a whole.

The impacts of human behavior on the climate, such as the emission of greenhouse gases or the continuation of unsustainable economic practices, are physical risk drivers that potentially increase the likelihood of environmental hazards and their socio-economic impacts. Institutions are also exposed to these physical risks, which are in tension with transition risks because, other things being equal, physical risks are expected to decrease as transition policies are implemented.

However, the opposite can also occur if no action is taken, ie if the transition risk is low and the implementation of the transition actions takes longer, the physical risks will increase.

 

You might also be interested in this.

Are you looking for an update on the MaRisk for financial companies? Which new regulatory tightenings do you have to consider? With the MaRisk update seminar:  Risk-bearing capacity – SREP – ICAA P, participants learn the following technical skills:

  • Realignment of risk-bearing capacity – capital planning process – supervisory requirements with ICAAP
  • 2021 EU BANKING PACKAGE
  • Adjustment of limit system with TLAC/MREL

Book the MaRisk update seminar: risk-bearing capacity – SREP – ICAAP online; conveniently and easily with the  online seminar form and product no. A 06.

SREP and ICAAP in practice: SREP stands for the Supervisory Review and Evaluation Process. ICAAP is the technical term for Internal Capital Adequacy Assessment Process. But what exactly is it about? Below you will find the most important  information on the implementation of the SREP and ICAAP requirements in risk management practice.

 

Target group for the MaRisk update seminar: Risk-bearing capacity – SREP – ICAAP – 2021 EU BANKING PACKAGE

  • Board members, managing directors and executives at banks, savings banks and cooperative banks
  • Executives and specialists from the areas of compliance, risk management, overall bank management and internal audit

Book the MaRisk update seminar: risk-bearing capacity – SREP – ICAAP online; conveniently and easily with the  online seminar form and product no. A 06.

 

Your benefit with the MaRisk update seminar: Risk-bearing capacity – SREP – ICAAP – 2021 EU BANKING PACKAGE

  • New requirements for the risk controlling function
  • Forward-looking capital planning process with SREP and ICAAP
  • What will change with the 2021 EU BANKING PACKAGE?
  • Agile risk management in the lending business

 

Your head start with the MaRisk update seminar: Risk-bearing capacity – SREP – ICAAP – 2021 EU BANKING PACKAGE

Every participant receives the S+P Tool Box with the seminar MaRisk update: Risk-bearing capacity – SREP – ICAAP:

+ S+P checklist “Implementation of MaRisk 2021”

+ S+P Check: Reporting-relevant requirements AT 4.1 and AT 4.2

+ S+P checklist: 105-point check of risk-bearing capacity

+ S+P Check: MaRisk regulations for the lending business

 

MaRisk 2021: New requirements for the risk controlling function

  • Proper business organization §25a KWG as a requirement for internal risk management
  • Innovations in the supervisory assessment of bank-internal risk-bearing capacity concepts
  • Extended responsibilities of the risk control function
  • Process reviews for risk-relevant limit approvals – identification of the relevant decision-making processes

Each participant receives:

 + S+P guidelines: Implementation of the new MaRisk

+ S+P Check: Reporting-relevant requirements AT 4.1 and AT 4.2

 

Forward-looking capital planning process with SREP and ICAAP

  • New requirements for the capital planning process: What are the effects on determining risk-bearing capacity?
  • What will change with the 2021 EU BANKING PACKAGE?
  • Innovations in the areas of risk measurement and limitation
  • Traffic light and warning systems: Optimal interlocking of process and control impulses
  • Structure of different scenarios in the capital planning process
  • New specifications for the limit system with TLAC/MREL

 

Every participant receives the S+P Tool Box with the seminar MaRisk update: Risk-bearing capacity – SREP – ICAAP:

+ S+P tool “Basel III Simulator” for the optimal balance sheet structure according to CRD IV and CRR

+ S+P checklist: 105-point check of risk-bearing capacity

 

Agile risk management in the lending business

  • MaRisk BTO 1.2.4: Intensive support
    • Criteria for the transition to intensive care
    • Consideration of concessions in favor of the borrower
      (“forbearance”)
  • MaRisk BTO 1.2.5: Treatment of problem loans
    • Criteria for the transition to problem loan processing
    • Examination of non-standard contracts in cases of restructuring
    • Voting for restructuring loans and commitments in reduction portfolios
  • MaRisk BTO 1.3: Early risk detection in the lending business
    • Internal information from the business relationship
    • Targeted use of external sources of information
    • Risk classification procedures and early detection of risks

 

 

Banking, MaRisk, Risk-Management