On 9 July 2024, with the entry into force of the new banking package, the EU completed its implementation of the Basel III standards into EU law. This is a key milestone towards further strengthening the stability and resilience of the EU banking sector. Only resilient and healthy banks can contribute to economic growth and competitiveness.
Basel standards implementation in the EU
The Basel standards are the set of international banking regulations developed by the Basel Committee on Banking Supervision for minimum bank capital adequacy, stress testing and liquidity risk. The goal of these standards is to enhance banks’ ability to withstand financial shocks and reduce the likelihood of a new global financial crisis.
The EU is implementing the Basel III framework beginning 1 January 2025, remaining faithful to the international commitment it made. As with previous Basel standards, the prudential requirements will apply in the EU to all EU banks (n.b. approximately 4 500), at both solo and consolidated level, providing an important additional layer of resilience to the banking system. The merits of this strategy were highlighted by the 2023 banking turmoil in the US, in which several medium‑sized US banks not subject to the full Basel III framework failed, but which did not give rise to contagion in the EU banking sector.
As anticipated in the publicly available impact assessment studies carried out by the European Banking Authority, the impact of the latest banking package reform on the minimum capital requirements will be manageable in aggregate, also because it will be phased in over time. The impact will be more significant for some EU banks, depending on their business model and on whether they use internal models to calculate their minimum capital requirements.
Indeed, the EU implementation introduces phase‑in periods and adjustments, reflecting different banking system structures, bank practices, and bank business models across Member States. This will also smoothen the impact of the capital requirement increases over the coming years. Importantly, almost all of these new adjustments are temporary with clear end dates and/or framed (i.e. requiring supervisory approval).
Postponement of the application of the market risk rules by one year
The fundamental objective of the Basel standards is to ensure consistent prudential requirements across jurisdictions, which is essential to maintain a global level playing field and foster global financial stability: delays and deviations in implementation in major jurisdictions undermine the effectiveness and credibility of the standards and might result in cross‑jurisdictional regulatory arbitrage.
To avoid a misalignment in the implementation of the Basel rules having a negative impact on EU banks, markets and customers, the European Parliament and Council empowered the Commission to monitor the implementation of the Basel standards across jurisdictions. They also gave the Commission the power to adopt, where necessary, delegated acts to preserve the international level playing field in the area of capital markets activities.
The implementation of the Basel standards in the US and UK is likely to be delayed since the final rules in the US and UK have not been published, and both jurisdictions have yet to communicate on a definite timeline for implementation (in the US, it is possible that the draft implementing rules will be re‑proposed, at least in part, causing further delays in the finalisation).
The Commission has therefore adopted a delegated act to delay by one year the application of the new market risk rules. The act is subject to the scrutiny of the European Parliament and Council for a period of three months.
Monitoring international developments
In the coming months, the Commission will continue to monitor international developments and reassess the situation, including regarding whether further measures are necessary. The empowerment allows the Commission to further delay the entry into application of the market risk standard by one more year, or to introduce it with modifications.
Notwithstanding the targeted use of the empowerment for a delegated act in the specific area of market risk, the broader application of the Basel standards from the beginning of next year sends a strong signal about the Commission’s commitment to the internationally agreed Basel standards.
Related links
Press release – Postponement of the market risk prudential requirements
Banking package – Questions and answers
Details
- Publication date
- 25 July 2024
- Author
- Directorate-General for Financial Stability, Financial Services and Capital Markets Union