What is CRR3?
CRR3 was introduced by the European Commission as part of its efforts to strengthen the financial stability of banks across all European Union member states, ensuring they have enough capital to handle financial risks. The regulation introduces new rules for how much capital banks must hold, how they manage risks, and how they report their financial activities to ensure they meet these requirements.
CRR3 adapts and refines international Basel III rules for the EU, which were developed to increase the resilience of the banking sector following the 2008 financial crisis. As the name suggests, this is the third iteration of the Capital Requirements Regulation, building on the foundations laid by the previous two versions – particularly around refining capital requirements, addressing new risks, and improving transparency and proportionality.
Key objectives of CRR3
⇢ Strengthen financial stability and risk management
CRR3 emphasizes standardized models over internal ratings-based approaches to ensure consistent risk-weighted asset (RWA) calculations across institutions and prevent risk underestimation. Banks must reassess their risk models and processes to align with these new standards, which may involve significant updates to risk assessment frameworks and capital calculations.
⇢ Enhancing supervisory powers and transparency
CRR3 provides supervisors with stronger tools to monitor emerging risks, including ESG factors, through stress tests and enhanced supervisory reviews. Banks must improve their data collection, monitoring, and reporting systems to meet new disclosure requirements, particularly regarding climate-related risks.
⇢ Reducing burdens on smaller institutions and ensuring competitiveness
CRR3 aims to limit capital requirement increases and reduce administrative burdens on smaller institutions to keep the European banking sector globally competitive. Smaller banks need to implement efficient compliance measures that minimize costs while adhering to the regulatory framework, ensuring their continued competitiveness.
The ultimate aim of CRR3 is to prevent future financial crises by making banks more resilient, reducing risks to the economy and protecting depositors.
Who does CRR3 affect?
CRR3 impacts all banks and financial institutions across the European Union - from smaller financial service providers to large multinational banks and even some investment firms that fall under the CRR framework.
CROs, compliance officers, CFOs, regulatory reporting managers, internal auditors and IT managers must ensure they are prepared to implement changes in capital requirements, risk management practices and regulatory reporting.
Key challenges to CRR3 compliance
⇢ Complexity of supervisory reporting and Pillar 3 disclosures
The new regulatory requirements introduce complex reporting rules, particularly around the Pillar 3 disclosures. Banks must provide more granular data, especially on environmental, social, and governance (ESG) risks, making it necessary to upgrade systems to handle more detailed and frequent reports.
⇢ Alignment with standardized risk models
CRR3 places a strong emphasis on using standardized models for risk-weighted asset (RWA) calculations, which means that banks relying on internal models will need to reassess and potentially overhaul their processes. This shift aims to enhance comparability across institutions but can be resource-intensive to implement.
⇢ Tight deadlines and regulatory uncertainty
The final rules for CRR3 must be fully implemented by January 2025. Despite the timeline being set, the European Banking Authority (EBA) continues to refine and update specific technical standards. This ongoing evolution adds a layer of uncertainty, requiring institutions to remain flexible and continuously update their compliance strategies.