The European Commission’s Banking Package (CRR III, CRD VI and BRRD) by which the final elements of the Basel III framework (Basel IV) are transposed to European law was published on 27 October 2021.
The focal points of the European Banking Package mainly consist of significant adjustments to measurement methods for credit, market and operational risks. EU-specific calibrations for credit risk were taken into account for defining exposure classes and assigning the respective risk weights. Existing risk calculation approaches for the credit valuation risk were developed further to include more sensitivities. With the introduction of the FRTB approach and the new trading book boundary, own funds requirements for market risk will be calculated according to the new standards. Replacing the existing approaches for operational risk with a single, non-model-based approach aims at simplifying the calculation of operational risk capital requirements. The phasing-in of the much discussed output floor to reduce the excessive variability of institutions’ own funds requirements calculated using internal models is a key element of the European Banking Package. Moreover, EU-specific calibrations taking into account the European banking landscape, proportionality thresholds and many details around Environmental, Social and Governance (ESG) risk were included in the proposals.
A first overview of the key elements can be found here:
The modified risk measurement for credit risk, credit valuation adjustment risk, operational risk, market risk and adopting the output floor will have a significant impact on RWA. Implementing the proposed amendments will lead to significant transformation efforts.
Understanding the impacts of the new CRR III/ CRD VI/ BRRD regulatory regime on the individual business model of each bank is crucial. Only with a thorough inside knowledge of the new standards, the mechanism of the calibration methodologies and how the bank’s data records and quality influence the risk-weighted assets, optimized implementation projects can be realized successfully.
The reevaluation of individual business strategies in light of the CRR III regulatory reforms and the related stringent capital requirements, risk management considerations and enhanced reporting requirements will be challenging. Our global PwC network assists with expert knowledge and holistic implementation approaches as well as integrated best practice solutions and benchmarking experience.
We will start with a series of further insightful publications and interviews with senior experts from our international network soon. Each article and episode will be dedicated to a special topic covering the details and impacts of the new regulatory framework. Please navigate through them using the following blog posts (the links will be activated as soon as the articles and episodes have been published):