What will the new Basel III regulation mean for the EU banking world?

The European Parliament, the Member States, and the European Commission have agreed on a preliminary compromise to implement Basel III, the internationally agreed banking supervision standards, into European law. This agreement will modify the capital requirement regulations and directives for banks (CRR III and CRD IV). The banking package will also include additional regulations for crypto assets and sustainability risks. The EU is the first jurisdiction worldwide to translate all elements of the new Basel framework into its own laws, in some areas even exceeding Basel regulations to support a sustainable financial industry.

Under the compromise, the core principle of the Basel Committee’s “output floor“ will remain. This principle dictates that banks must calculate their capital requirements based on standardized models instead of their own internal models, which previously allowed banks to reduce their capital needs. The new regulations will require that banks’ capital needs calculated using internal models must be at least 72.5% of capital requirements calculated by the standard approach for credit risks. The internal model approach can therefore only yield results 27.5% lower than the standard approach. Small and medium-sized banks will have slightly less strict rules.

The new regulation will come into force in 2025. For the first year, a standard approach minimum quota of 50% is stipulated. This quota will gradually increase and only reach 72.5% at the end of 2029. Banks financing mainly businesses without credit ratings will have an extended transition period until 2032, similarly for banks with low credit risk, like in the mortgage business.

The compromise also tightens supervision regulations regarding the suitability of bank managers for leadership positions and introduces new cooling-off rules to prevent conflicts of interest when personnel move from a bank to a supervisory authority.