Crafting the final supervisory reporting and Pillar 3 disclosure rules based on CRR3 has been a painstaking and seemingly interminable process for financial authorities and the institutions that answer to them. Requirements have been continually changed or left uncertain or unclear, and deadlines have been pushed back.
But terminate it must, and soon. The deadline to implement the Banking Package – Capital Requirements Directive VI (CRD VI) and Capital Requirements Regulation 3 (CRR3) – is 1 January 2025, earlier than in some other jurisdictions. That remains firm, even as the European Banking Authority (EBA) continues to refine the requirements.
If you are behind schedule in your preparations, you certainly are not alone. Many institutions decided, for quite understandable reasons, to hold off on a full commitment to their implementation plans. A Wolters Kluwer Financial Services survey from December 20231 found that only 6 percent of institutions had started implementation of their Basel projects and 25 percent had not even made a start. The rest had made some intermediate measure of progress. With ten months to go, the time for dither and delay is over – financial institutions cannot afford not to be compliant! Here we discuss how banks can put CRR3 into practice most effectively to meet the deadline and then to live with the new requirements once they are in place.
EBA’s two-step path of amending and clarifying requirements
Basel metrics are a series of analytical rubrics designed to assess a bank’s risk more accurately by making calculations in greater detail and emphasizing the influence of each risk on others. Having established the framework’s key elements, and with the implementation deadline drawing near, the EBA is turning its attention to finetuning the rules that institutions must follow to comply. The authority is seeking industry input, via two consultations due to run through mid-March, one on amendments to the implemented technical standards (ITS) on Pillar 3 disclosures and one on supervisory reporting. The EBA will submit amendments to the European Commission for approval, around the start of the third quarter, to have them apply beginning January 01, 2025, with the first reference date of March 31, 2025, aligned with the application of the CRR3. Further, the EBA will also develop the data-point model (DPM), XBRL taxonomy, and validation rules based on the final draft ITS.
The EBA will follow a two-step sequential approach to amend both the Pillar 3 disclosures and supervisory reporting ITS, prioritizing, in step 1, those changes necessary to implement and monitor Basel III requirements in the EU. Later in 2024, as part of step 2, the EBA will develop those reporting and disclosure requirements that are not directly linked to Basel III implementation, together with those requirements with an extended implementation timeline. To facilitate integration, consistency, and alignment between reporting and disclosure requirements, the EBA has developed a mapping tool consisting of a comprehensive set of Excel sheets. These sheets enable the mapping of most quantitative disclosure templates with the relevant reporting data points.
Those changes that are covered in Step 1 are brand new to the Basel process. The EBA has prioritized them to ensure banks have enough time to collate the data points and prepare for the first application of reports that are based on the March 31, 2025 data.
In particular, this draft ITS seeks to implement changes related to the output floor, credit risk, including immovable property (IP) losses, capital valuation adjustment (CVA), market risk, and leverage ratio. This ITS also includes the changes to the boundary between the trading book and banking book that will affect all banks. The amendments related to the new operational risk are not covered by these consultation papers but will be consulted on together with some policy products in early 2024.
