Amendments to the banking union rules

On 15 February, EU ambassadors endorsed an agreement reached between the Council presidency and the Parliament on a set of revised rules aimed at reducing risks in the EU banking sector.

The package agreed by the Council and the Parliament comprises two regulations and two directives, relating to:

• bank capital requirements (amendments to regulation 575/2013 and directive 2013/36/EU);
• the recovery and resolution of banks in difficulty (amendments to directive 2014/59/EU and regulation 806/2014).

The decision concludes a negotiating process which began in November 2016. A first agreement was achieved on the main elements of the banking package and confirmed by the Council on 4 December 2018. EU ambassadors have now endorsed the deal on all risk reduction measures. 

The risk reduction package is intended to implement reforms agreed at international level following the 2007-2008 financial crisis to strengthen the banking sector and address outstanding challenges to financial stability. Presented in November 2016, they include elements agreed by the Basel Committee on Banking Supervision and by the Financial Stability Board (FSB).

Among the core measures agreed to reduce risk in the banking system, the package enhances the framework for bank resolution. It requires global-systemically important institutions ('G-SIIs') to have more loss-absorbing and recapitalisation capacity by setting the requirements as regards the amount and quality of own funds and eligible liabilities (MREL) to ensure an effective and orderly "bail-in" process. It also provides provisional safeguards and possible additional actions for resolution authorities.

The package also strengthens bank capital requirements to reduce incentives for excessive risk taking, by including a binding leverage ratio, a binding net stable funding ratio and setting risk sensitive rules for trading in securities and derivatives.

In addition, the banking package contains measures to improve banks' lending capacity and to facilitate a greater role for banks in the capital markets, such as:

• reducing the administrative burden for smaller and less complex banks, linked in particular to reporting and disclosure requirements;
• enhancing the capacity of banks to lend to SMEs and to fund infrastructure projects;

The banking package also contains a framework for the cooperation and information sharing among the various authorities involved in the supervision and resolution of cross-border banking groups. The agreed measures preserve the balance achieved by the Council position between the powers of home and host supervisors in order to facilitate cross-border flows of capital and liquidity, while ensuring an adequate level of protection for depositors, creditors and financial stability in all member states. The agreement also introduces amendments to improve cooperation between competent authorities on matters related to the supervision of anti-money laundering activities.

• Banking Union: EU ambassadors endorse full package of risk reduction measures (press release, 15/2/2019)

Finance ministers endorsed the agreement achieved between the Austrian Council Presidency and the European Parliament on key measures of a comprehensive legislative package aimed at reducing risks in the EU banking sector.

The proposals are intended to implement reforms agreed at international level following the 2007-2008 financial crisis to strengthen the banking sector and address outstanding challenges to financial stability. Presented in November 2016, they include elements agreed by the Basel Committee on banking supervision and by the Financial Stability Board (FSB).

Roadmap on completing the banking union

The agreed measures deliver on three of the key objectives set out by the Council roadmap on completing the banking union agreed in June 2016:

• enhancing the framework for bank resolution, in particular the necessary level and quality of the subordination of liabilities (MREL) to ensure an effective and orderly "bail-in" process.
• introducing the possibility for resolution authorities to suspend a bank's payments and/or contractual obligations when it is under resolution - the so-called "moratorium tool" -, so as to help stabilise the bank's situation.
• strengthening bank capital requirements to reduce incentives for excessive risk taking, by including a binding leverage ratio, a binding net stable funding ratio and setting risk sensitive rules for trading in securities and derivatives.

In addition, the banking package contains measures to improve banks' lending capacity and to facilitate a greater role for banks in the capital markets, such as:

• reducing the administrative burden for smaller and less complex banks, linked in particular to reporting and disclosure requirements;
• enhancing the capacity of banks to lend to SMEs and to fund infrastructure projects;
• reducing the costs of issuing/holding certain instruments, such as high quality securitisation instruments or covered bonds;

The banking package also contains a framework for the cooperation and information sharing among the various authorities involved in the supervision and resolution of cross-border banking groups.

The agreed measures preserve the balance achieved by the Council position between the powers of home and host supervisors in order to facilitate cross-border flows of capital and liquidity, while ensuring an adequate level of protection for depositors, creditors and financial stability in all member states.

The agreement also introduces amendments to improve cooperation between competent authorities on matters related to the supervision of anti-money laundering activities.

The Economic and Financial Affairs Council agreed its stance on proposals to reduce risk in the banking industry, strengthening rules on capital requirements and on bank recovery and resolution. Ministers asked the presidency to start negotiations with the European Parliament as soon as the the Parliament is ready to negotiate. Based on the progress achieved on risk reduction, they reiterated their commitment to making progress on all components - including on risk sharing - cited in the Council's roadmap on banking union from June 2016.

• Council agreement on measures to reduce risk (press release, 25 May 2018)
• Economic and Financial Affairs Council, 25 May 2018

Ministers looked at progress made on the banking package.

• Economic and Financial Affairs Council, 5 December 2017

On 16 June 2017, the Council agreed its negotiating position on a draft proposal which amends the capital requirements regulation for EU banks. The amendment introduces transitional measures to mitigate the potential negative impact on banks' regulatory capital that may occur after the introduction of IFRS 9.

The agreement enables the Council presidency to start negotiations with the European Parliament on the proposal once the Parliament has agreed its negotiating stance.

IFRS 9 improves accounting of financial instruments by requiring early loan loss provisioning. It addresses the weaknesses in the accounting framework identified during the financial crisis. However, larger provisions are likely to result in banks' regulatory capital falling. 

Once adopted, the proposal would allow banks to add back to their 'common equity tier 1' capital a portion of the increased loan loss provisions as extra capital during a five-year transitional period. That added amount will progressively decrease each year of the transitional period down to zero at the end of it.

The proposal also provides for a three-year phase-out of an exemption from the large exposure limit for banks' exposures to public sector debt of member states denominated in the currency of any other member state.

IFRS 9 will come into force on 1 January 2018, the Council therefore decided to split and fast-track to that date the entry into force of the IFRS 9-related transitional provisions from the November 2016 Commission proposal amending regulation 575/2013 on bank capital requirements.

• Draft regulation on the transitional period for mitigating the impact of the introduction of IFRS 9 - Presidency compromise, May 2017

On 16 June 2017, the Council agreed its negotiating position on a draft directive which amends the bank recovery and resolution framework by introducing rules for the ranking of unsecured debt instruments in insolvency proceedings (i.e. bank creditor hierarchy). The agreement enables the Council presidency to start talks with the European Parliament as soon as the Parliament has approved its own negotiating stance.

The proposal amends and enhances article 108 of the bank recovery and resolution directive which previously related to the ranking of deposits in insolvency hierarchy. 

It introduces a requirement for member states to establish a clear subordination of unsecured deposits that would have to be 'bailed-in' if a bank fails or is likely to fail. 

These rules concern, among others, large deposits that are not covered by a guarantee scheme, i.e., the share above the €100 000 limit protected by the deposit guarantee scheme.

Member states would be required to establish a class of 'non-preferred' senior debt, as the current directive only established preferences for natural persons and small and medium-sized enterprises, without clarifying preferential treatment in detail.

• Draft directive on the ranking of unsecured debt instruments in insolvency hierarchy - Presidency compromise, May 2017

The Council's Working Party on Financial Services, made up of national experts from the EU member states, started working on the set legislative proposals to amend existing banking union rules.

• Working Party on Financial Services

The Economic and Financial Affairs Council exchanged views following a presentation by the European Commission on its package of legislative proposals that aim to further improve the resilience of EU's banking sector and its capacity to support the real economy.

The amendments, published on 23 November 2016, cover the single rulebook, namely the capital requirements for the banking sector and the bank recovery and resolution rules and the rules relating to the single resolution mechanism.

• Economic and Financial Affairs Council, 6 December 2016

The Council adopted conclusions "Roadmap to complete the banking union" at its meeting on 17 June. The document gives an overview of the next steps in the banking union and invites the European Commission to work on proposals to amend the banking union rules.

• Roadmap to complete the Banking Union - Council conclusions, 17 June 2016