With the EU Banking Package voted banks have one last chance to get the CRR3 implementation right

At last, the European Parliament has passed the EU Banking Package, including amendments to Directive 2013/36/EU, known as the Capital Requirements Directive or CRD VI and Regulation (EU) No 575/2013, the Capital Requirements Regulation 3 (CRR3). Despite the vacillation, the requirements are much in line with the guidelines set forth when the final Basel III standards were first published in 2017. Parliament’s vote on April 24, 2024, comes not a moment too soon, with the ultimate implementation deadline, January 01, 2025, barely half a year away.

Many institutions have paused their preparations to implement the Banking Package, for understandable reasons. With confirmation now in place, there’s minimal room for error and no time to waste. Financial institutions must act now. Though the challenge is steep, it is very much achievable. Fortunately, professionals experienced in aiding firms with their Basel implementations are ready to offer assistance.

CRD VI and CRR3: New priorities, new rules

CRD VI and CRR3 seek to strengthen the toolkit of financial supervisors to give them more and better power to act, in part by enhancing their understanding of conditions in the industry. A key element that distinguishes the regimen from earlier iterations is an emphasis on standardized analytical models over internal-ratings-based models. This is seen as a way to prevent banks from underestimating risks, familiar or emerging, that exist or may arise, to provide clearer comparisons of capital ratios from one institution to another, and to harmonize rules related to branches of third-country banks operating in Europe.

Novel risks that are particularly emphasized concern environmental, social, and governance (ESG) factors. Institutions will have to identify, monitor, and disclose these risks, which will be subject to regular supervisory reviews. One feature of note is the performance of climate stress tests both by supervisors and banks.

An additional focus is on human risks, with a set of “fit-and-proper” rules by which supervisors will assess whether senior staff have the skills and knowledge to run a bank. These rules include provisions designed to keep a closer eye on fintechs, partly in response to the Wirecard scandal, in which nearly €2 billion disappeared from a German firm in 2020 while everyone was distracted by the pandemic.

The comprehensive nature of the Banking Package belies an effort by supervisors to guide the industry only as much as is necessary to achieve their objective of maintaining financial stability. The hope and promise is to limit the overall increase of capital requirements, and compliance costs, by targeting obligations more efficiently and reducing administrative burdens on smaller institutions. The ultimate goal is to keep the European banking sector competitive globally, and safer than it used to be. This is the authorities’ way of telling the industry, and themselves, to work smarter, not harder.

There is much to do, so do it right

Even so, there is still hard work ahead. The focus on ESG factors is likely to be especially challenging and time-consuming for firms to manage in their implementation projects. Institutions that rely heavily on internal models will have even more to do, although they tend to be larger businesses and therefore are more likely to have the resources to handle it.

These and other matters must be dealt with correctly, and as efficiently as possible to meet the New Year’s Day deadline and to conserve precious financial and human resources. Even the most surefooted implementation project will leave banks to contend with a supervisory regime that is more data-intensive – more reports, more granular detail, a need in some cases to run calculations using multiple analytical processes side by side – than any regimen under which they have operated. The Basel rubrics also call for more sophisticated analyses that can assess each risk in the context of others, not just in isolation.

Meeting these demands, and being able to do it right away, requires the right technological architecture. That means an end-to-end, integrated solution, from calculators to reporting and internal to prudential, with a common data warehouse and strong audit trails and data lineage capabilities. This will ensure consistency for Pillar 1, 2, or 3 requirements and for known or emerging risks.

Another essential element is a presence in the cloud, limiting the hardware and software that must be placed on a bank’s premises; this will speed up implementation and minimize disruptions to a firm’s ongoing activities. There also should be a robust regulatory update service because Parliament’s vote does not signal the finalization of all regulatory requirements. CRR3 assigns the European Banking Authority (EBA) about 140 mandates in a broad range of technical areas, including updates to the reporting framework. As announced in its December roadmap, the EBA will deliver most of this in the next two years, in a two-step sequential approach, giving banks a new set of requirements to adapt to. Implementation will not be a one-off event, but an ongoing process for some time, that banks must prepare for.

With so much work still ahead for many banks, they must not tackle it on their own. If your institution is grappling with this challenge, you require an experienced partner renowned for technological excellence and adept at managing complex Basel II, III, 3.1 & IV implementation projects under tight schedules. For over two decades, Wolters Kluwer has assisted clients with Basel solutions. With our OneSumX for Basel, we are the only vendor that offers solutions with all of the features mentioned above. As financial institutions pore over the fine print of the Banking Package, they must remember that success in both implementation and day-to-day operations hinges as much on comprehending the data as it does on understanding the regulations.