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A few days ago, we announced our series of ‘DEVLHON Consulting Decrypts’ articles on the ACPR’s 2023 Annual Report.
Here is our first article on Basel III.
Transposition of Basel III: Towards a More Resilient Banking Sector
In 2023, the European Union took a decisive step with the finalization of the transposition of Basel III standards. After several years of negotiations, the CRR3/CRD6 package was adopted, promising to strengthen the stability of the European banking sector from January 2025.
Strengthening Capital Requirements
Basel III, born in response to the 2008 financial crisis, primarily aims to increase the resilience of banks by raising capital requirements and introducing new risk management measures. Integrating these standards into European legislation harmonizes banking practices across the EU, ensuring a high level of financial stability.
The CRR3/CRD6 package introduces several major reforms, the most significant being the increase in capital requirements. Banks will now have to comply with a strict leverage ratio (a regulatory ratio that limits banks’ indebtedness by imposing a minimum threshold of equity relative to their total assets), limiting their debt relative to their equity. Additionally, a capital floor will be established for institutions using internal models for risk calculation, ensuring a minimum level of equity to withstand potential financial shocks.
ESG Risk Management
Another essential reform concerns the management of environmental, social, and governance (ESG) risks. Banks will now have to integrate these risks into their management and financial reports. This measure responds to the growing need to consider climate and social impacts in banking activities, thereby aligning the financial sector with sustainability goals.
Enhanced Transparency
Transparency is also reinforced with new disclosure obligations. Banks will have to provide detailed information on their risk exposure and the measures taken to manage them. This increased transparency aims to reassure investors and the public about the solidity and prudent management of financial institutions.
Implications for the Banking Sector
These reforms are crucial for strengthening the resilience of European banks. By increasing capital requirements and integrating ESG risks, banks will be better prepared to absorb losses and manage future crises. However, implementing these measures involves considerable challenges, particularly in terms of compliance costs and risk management. Smaller banks may feel the pressure of these new requirements.
Competitiveness of European Banks
The impact on the competitiveness of European banks is also a concern. While the transposition of Basel III is essential for financial stability, it is crucial that the application of the rules is fair across different jurisdictions. A transition period and targeted adjustments are planned to help European market and investment banks adapt without losing their competitiveness.
Conclusion
In summary, the transposition of Basel III marks a significant advance for the European banking sector. The new requirements aim to increase resilience and transparency, but their implementation will require substantial efforts from financial institutions. In the long term, a harmonized and fair application of these standards will be essential to maintain the stability and competitiveness of the European banking sector.
These reforms are detailed in the 2023 annual report of the ACPR, which highlights ongoing efforts to ensure a strong and resilient financial sector in the face of potential crises.
