The European Commission’s proposal to amend the single rulebook, the "banking package" – the Capital Requirements Regulation (CRR), the Capital Requirements Directive (CRD) the Bank Recovery and Resolution Directive (BRRD), and Single Resolution Mechanism Regulation (SRMR) has finally reached its final stages after more than two years of negotiations.
With the agreement reached by Ecofin at the beginning of December, the Trilogue was concluded and in February the texts were approved by the Permanent Representatives Committee. Between April and May, after the final approval of the European Parliament and Council, publication in the Official Journal is expected.
Since 2013, when the Basel III capital rules (CRR and CRD4) were implemented, the European supervisory rules had never undergone such a significant change. The proposal not only incorporates some international technical standards (finalised by the Basel Committee and the Financial Stability Board) that had to be transposed into EU legislation, but also contains provisions aimed at safeguarding the principle of proportionality (i.e. the application of the rules according to the size and operational complexity of the lenders) and increasing banks’ lending capacity.
The mandate received from the Commission required that the regulatory changes should be implemented "without leading to an overall increase in capital requirements, nor damaging the ability of banks to finance the real economy, in particular small and medium-sized enterprises". The "banking package" will probably be remembered as the first post-crisis "expansive" regulatory intervention, given that it features several amendments aimed at favouring credit supply through the reduction of capital absorption required by prudential regulation.
What are the main credit support measures contained in the CRR amendment?
- The confirmation and extension of the supporting factor for exposures to SMEs is the most important rule, the one from which Italian banks are likely to benefit the most, given the structure of the national industrial system. Currently, the supporting factor allows for a reduction in the absorption of capital for loans granted to SMEs (worth less than €1.5m) and is applied regardless of the method used for risk weighting. The amendment to the CRR increases the value of the exposure on which the discount is to be applied from €1.5m to €2.5m, and, for the portion of the loan exceeding €2.5m, provides for a further 15% reduction in risk weighting. From our estimates of the credit risk exposure of the nine significant Italian groups that participated in the EBA Transparency Exercise (data as of June 2018), this measure could bring an average benefit on the CET1 ratio of more than 30 basis points.
- The same principle of the supporting factor for SMEs inspired the 25% reduction in capital absorption required for financing the construction of infrastructure (which the bank classifies as a "corporate" or "specialised lending" regulatory portfolio): the objective is to promote projects with specific characteristics and concern exposures to ad hoc entities created to finance or operate physical structures or plants, systems and networks that provide or support essential public services.
- Another expansive measure concerns loans backed by the assignment of one fifth of salary or pension (CQS and CQP), for which a reduction in the absorption of capital from 75% to 35% of risk-weighted assets is envisaged (standard method). The CQS is a form of financing that presents lower levels of risk than other forms of consumer credit, thanks to the commitment of one fifth of salary for the payment of the instalment and the presence of a compulsory insurance policy. The rule has enormous potential for the sector's revival because it guarantees important capital savings for some specialised banks and should favour the increase of competition in the industry.
The main measures to reduce capital absorption in the "banking package" and the approximate timeframe
- Particular attention is also paid to the phenomenon of technological evolution because investments in software, unlike other intangible assets and goodwill, will not be deducted from regulatory capital. The intention is to remove an absorption of capital that could affect investments aimed at the digital transformation of the banking sector.
- Other "favourable" aspects include rules to strengthen proportionality and reduce the costs of regulatory and reporting for "small and less complex" banks (with average assets of less than €5 billion in the previous four years). For these institutions, the EBA will have to decide on an overall cut in reporting measures to ensure a reduction in reporting costs of between 10 and 20%.
- Finally, for banks that adopt internal models for the calculation of RWAs, the impact of massive sales of NPLs on the update of risk parameters will be sterilised. The objective is to avoid that the calculation of the capital requirements of defaulting exposures in the portfolio is conditioned by NPL sales made in the past (This option is granted in respect of NPL sales transactions carried out between November 2016 and, presumably, 2022 and provided that the sales plan covers at least 20% of the impaired loan portfolio).
Most of these reforms will be implemented within two years of the entry into force of the law (ie from mid-2021), although with some exceptions. For example, the correction of the LGD parameter on massive sales of NPLs will be immediately operational.
After the entry into force of the amendments to the CRR, the EBA will start an intense activity, having to issue more than forty technical standards and guidelines over the next five years. These documents are necessary to implement the new provisions in a uniform manner. In the meantime, after the European elections, a new dossier is likely to arrive on the lawmakers' table: the adoption of Basel 4 rules (ie the finalisation of the Basel 3 reforms) approved by the Basel Committee in December 2017.