EU legislators have adopted a new legislative package to strengthen banking regulation. Published in the Official Journal of the European Union on 19 June 2024, this package is made up of the revised Capital Requirements Regulation (CRR) and the revised Capital Requirements Directive (CRD), and largely comprises the final elements of the global Basel III standards. It is sometimes referred to as the banking package or CRR III/CRD VI. 

The bulk of the Basel III standards from 2010 have already been implemented in the EU. These have increased financial stability, strengthened banks’ resilience and laid the foundations for the stable financing of the real economy. The final elements now complete the Basel framework by adjusting the methodology used in the calculation of capital requirements.

Besides implementing global standards, the banking package contains a number of other new features. One is that it incorporates environmental, social and governance (ESG) risks into banking regulation. Furthermore, it lays down clear rules for third-country banks operating in the EU, strengthens banking supervision, and tightens governance requirements.

The new regulations contained in the CRR are directly applicable and must be complied with by banks in the EU as of 1 January 2025. The amended CRD first has to be transposed into national law and is applicable as of 11 January 2026. Implementation work has been underway in Germany since the end of 2023.

The banking package, as it is known, was published in the Official Journal of the European Union on 19 June 2024 and entered into force 20 days later. It is made up of the revised Capital Requirements Regulation (CRR) and the revised Capital Requirements Directive (CRD). 1 As of 1 January 2025, banks in the EU will have to comply with the new CRR (CRR III) rules. The revised CRD (CRD VI), meanwhile, first has to be transposed into national law and is applicable as of 11 January 2026.

The main topic covered by the banking package is the implementation of the finalised Basel III standards adopted by the Basel Committee on Banking Supervision (BCBS) in December 2017. 2 These finalised standards form part of a package of measures addressing the weaknesses in the banking system that came to light during the 2007‑09 financial crisis. The BCBS’s first action came in 2010, when it laid down stricter capital rules (definition of capital, capital ratios, introduction of buffers), agreed on uniform liquidity standards and introduced a leverage ratio. 3 These standards were implemented into EU law back in 2013. 4 5 The second package of measures, from 2017, aimed to reduce unwarranted variability in RWA calculations across banks. 

To achieve this goal, the standardised approaches used to calculate RWAs were revised and the scope given to individual banks to use their own internal model approaches was curtailed. These measures are complemented by the introduction of an output floor requirement for the calculation of RWAs. This limits banks further in the extent to which they can model their own risks and capital requirements.

Besides implementing the finalised Basel III standards, the banking package contains other measures that can be regarded as a response to political challenges of the current era. These include the United Kingdom’s withdrawal from the EU (Brexit) as well the adoption of the European Commission’s Strategy for Financing the Transition to a Sustainable Economy. 6 In response to Brexit, EU legislators decided to subject banks established outside the EU to more harmonised and, in some parts, stricter supervision and regulatory treatment. Financing the transition to a sustainable economy is to be achieved, in part, by banks actively managing their sustainability (ESG) risks and this being monitored by the supervisory authorities. 

The individual components of the banking package are presented below. Part one discusses new legislation that originated from implementation of the finalised Basel III standards. Part two then presents the measures adopted in the context of political circumstances and issues of global relevance (such as climate change).

The standardised approach for credit risk (SA-CR) is a methodology used for calculating the minimum capital requirements for credit risk in a bank’s banking book, with the minimum capital requirements being determined based on prudential requirements. The revised SA-CR introduced more granular risk weights as a way of making the standard more risk-sensitive overall. Furthermore, the calibration was adjusted to the losses experienced during the financial crisis years, and efforts were made to achieve greater consistency with internal model approaches. One reason why this is important is that banks that use the internal ratings-based (IRB) approach to calculate their minimum capital requirements for credit risk in the banking book will also be required, going forward, to use the SA-CR to determine the RWA output floor (see the section entitled “Output floor: lower limit for capital requirements”). Another reason for updating the SA-CR is to reduce the reliance on external ratings, or to ensure that banks perform due diligence upfront to ensure the appropriateness of those ratings. 

The manner in which capital requirements for interbank exposures are determined will change in terms of the importance and use of external ratings. Two techniques will be available for calculating these capital requirements: the External Credit Risk Assessment (ECRA) approach and the Standardised Credit Risk Assessment (SCRA) approach. As part of the implementation of the finalised Basel III standards, EU legislators agreed to continue to permit the use of external ratings provided these do not incorporate assumptions of government support. This measure aims to mitigate the nexus between banks and sovereigns and send the appropriate signal to market participants. 7 8 The SCRA is intended for exposures without an external rating. Under this approach, the lending bank, with due regard for the prudential capital metrics and having performed due diligence, is required to assign the obligor bank to one of three risk weight buckets (grades), which indicates the appropriate risk weight to be applied. The risk weights used here range from 40 % (grade A) to 150 % (grade C). A risk weight of 30 % is also possible, subject to certain conditions (i.e. the leverage ratio meets or exceeds 5 % and the CET1 ratio meets or exceeds 14 %).

The option of using external ratings has been retained in the corporate exposure class as well. Risk weights will be made more risk-sensitive. 9  As hitherto, a flat 100 % risk weight will be assigned in the absence of an external rating. Specialised lending exposures are subdivided into three subcategories: object finance, project finance, and commodity finance. If certain conditions are met, unrated project finance exposures and, on a transitional basis, unrated object finance exposures as well, can be given privileged treatment. 10 EU legislators likewise decided to leave the supporting factor for small and medium-sized enterprises (the “SME SF”), which already exists in the EU, unchanged. 11 The new 85 % risk weight envisaged in the Basel standards for SMEs that cannot be assigned to the retail exposure class was not (additionally) implemented. 

Subordinated debt and equity exposures will be grouped in separate exposure classes. The risk weights have been increased to take into account the greater risk of loss compared with senior loan exposures. In future, risk weights can be as high as 400 % for certain exposures (speculative equity exposures, for example). CRR III grandfathers what it calls strategic equity holdings – that is to say, equity investments that a bank has already been holding for at least six years and over which it can exercise a certain degree of control and influence continue to be exempt from the adjustment of risk weights. Furthermore, exemptions (still) apply to equity exposures to institutions covered by the same institutional protection scheme. 12 In general, subordinated debt exposures will receive a risk weight of 150 %. 

In the retail exposure class, 13 a distinction will be made in future between normal exposures used to finance a retail customer and revolving exposures that result from payment transactions (such as credit card payments).  The latter are assigned a more favourable risk weight of 45 % (instead of 75 %) if the banks can demonstrate regular repayments and thus a lower risk of loss. 

Far-reaching changes will be made concerning real estate exposures. Overall, this exposure class will be rendered more granular, thus making the capital requirement more risk-sensitive. In the first step, a distinction is made between exposures secured by a residential property and those where a commercial property is used as collateral. In the second step, banks are required to assess whether the mortgage loan can be repaid out of the borrower’s income (“classic” real estate exposure) or whether repayment is materially dependent on cash flows generated by the property (for example, rental income). CRR III continues to permit the use of the loan-splitting approach to calculate the capital requirement for “classic” real estate exposures. In this approach, the exposure is divided into a secured portion (loan-to-value ratio (LTV) of up to 55 %) and an unsecured portion (LTV above 55 %). The secured portion is assigned a flat risk weight of 20 % (secured by a residential property) or 60 % (secured by a commercial property), while the unsecured portion is assigned the obligor’s risk weight (for example, 75 % for a retail obligor in a residential property exposure). The weighted average of the two portions is then the risk weight of the entire exposure. In future, exposures where repayment depends materially on the cash flows generated by the property will be subject to higher capital requirements because experience has shown that these have a higher risk of loss given default (LGD). CRR III introduces a new procedure for determining the risk weights for these exposures (the “whole loan” approach). This provides for individual ranges to which the total claim is assigned depending on the loan-to-value ratio. The higher the LTV, the higher the risk weights and thus the higher the capital requirements. Real estate exposures of this kind may, however, be subject to the same rules as “classic” real estate exposures if the national loss rates from real estate lending overall do not exceed certain ceilings, based on what is known as the hard test. The national competent authority (in Germany, the Federal Financial Supervisory Authority (BaFin)) conducts hard tests annually to assess whether this condition has been met. In addition, CRR III introduces a third category of mortgage loans. This category contains loans to companies and special-purpose vehicles (SPVs) financing land acquisition, development and construction (ADC) exposures. ADC exposures are normally risk-weighted at 150 %, regardless of the obligor’s creditworthiness. If certain conditions are met, ADC exposures to residential properties may be risk-weighted at 100 %. 14  

Moreover, CRR III amends the definition of “value” for immovable property collateral and eliminates the distinction between market value and mortgage lending value. Banks have to ensure that the value of a property is not based on possible future price increases, but is sustainable in the long term. This measure is intended to help ensure that the value of the collateral contains no speculative elements. EU legislators did, however, decide that, subject to certain conditions, increases in the value of immovable property would be permitted during the life of a loan, as long as these do not exceed the average value measured over the previous years. 15

Another new measure is the introduction of a risk weight multiplier for unhedged foreign currency exposures. These are exposures denominated in a currency which is different from the currency of the obligor’s source of income. This risk weight multiplier is applicable to exposures to natural persons assigned to the retail and residential real estate exposure classes. The idea behind it is to cover the risk of default that could arise if the currency in which the loan is denominated appreciates significantly. 

Off-balance-sheet items will also be affected by changes to the SA-CR. These changes will affect unconditionally cancellable commitments (UCCs), for example. In future, 10 % of the committed but undrawn amount of such commitments will be recognised as an exposure and have to be backed by capital. Exempting these exposures from the capital requirement has proven unwarranted in practice. Unlike the Basel standard, however, CRR III allows this arrangement to be phased in up until the end of 2032. 

The supervisory haircuts applied when counting financial collateral have also been updated to reflect newer market data and will have to be applied in future by all SA-CR banks that use the financial collateral comprehensive method. Institutions are no longer permitted to use their own haircut estimates as part of the financial collateral comprehensive method.

Banks that have received supervisory approval to use the IRB approach may estimate some of the parameters for calculating capital requirements for credit risk themselves. There are two different methods: the foundation IRB approach (F-IRB) and the advanced IRB approach (A-IRB). Banks using the F-IRB approach are allowed to provide their own estimates of the probability of default (PD), while the other risk parameters are specified by supervisors. Under the A-IRB approach, banks also provide their own estimates of loss given default (LGD) and the credit conversion factor (CCF) for off-balance-sheet exposures.

CRR III contains some changes aimed at limiting the unwanted variability in RWA calculations. The BCBS had found that banks were arriving at different results when determining capital requirements for the same risks, 16 resulting in a lack of transparency and comparability of capital requirements. This could be because of insufficient data for estimating the parameters or overly aggressive modelling. 

To address this, the scope of application was adjusted and parameter estimates were limited, making the foundation IRB approach and SA-CR more meaningful. In future, it will not be permitted to use either the foundation or the advanced IRB approach to calculate the capital requirements for equity exposures. These must then be treated using the SA-CR. Under CRR III, portfolios in types of exposures that exhibit only low levels of default over time (“low-default portfolios”) may only be treated using the foundation IRB approach. These include exposures to large corporates (i.e. with annual sales of more than € 500 million) and to banks and financial sector entities. The reason given for this measure is that reliable estimates of LGD are only possible when there is sufficient data on defaults. A separate exposure class is introduced for exposures to regional governments, local authorities and public sector entities. The advanced IRB approach is still permitted for these. Exposures in the retail, specialised lending, and central governments and central banks exposure classes can likewise continue to be treated using the advanced IRB approach. However, input floors will apply in future for the risk parameters. This measure is intended to prevent capital requirements falling below a certain level and risks being underestimated. However, this comes at the price of reduced risk sensitivity and an incentive for banks to potentially take on greater risks given the same capital requirements. EU legislators have adopted the minimum values set by the BCBS. Going forward, the existing input floor for PD of 0.03 % will go up to 0.05 %. 17 The input floors for the credit conversion factors are based on the regulatory values applied in the SA-CR. They have to be at least 50 % of these values. When calculating the input floors for LGD, a distinction must be made between secured and unsecured exposures. The values are based on the exposure class for unsecured exposures, and on the type of collateral for secured exposures. 18  

The regulatory LGD and conversion factor values in the foundation IRB approach have also been adjusted, which will result in slightly reduced capital requirements in future. Other changes relate to the scaling factor of 1.06 previously contained in the risk weight function. This no longer applies in CRR III, meaning that the capital requirements will be around 6 % lower in future, all other things being equal.

Upon application of CRR III, banks will also be allowed to decide anew which exposure classes to use the IRB approach for and which to use the SA-CR for. Previously, the IRB approach had to be “rolled out” to all exposure classes subject to supervisory approval. There were only exemptions for certain exposures (“partial use”). Partial use rules are still in place but will relate in future to the individual exposure classes for which banks have received approval to use the IRB approach. In addition to the regular procedure for reverting to less sophisticated approaches, CRR III sets out a simplified procedure. Banks have three years to apply. The 92 % coverage ratio for the IRB approach that previously applied in Germany will also no longer apply in this form in future. However, the exemptions for use of the SA-CR will largely remain in place. These include, for example, immaterial exposures within an exposure class for which a bank actually has approval to use the IRB approach, or exposures to central governments and central banks within the EU. In these cases, banks may use the SA-CR.

There are currently three approaches to calculating capital requirements for operational risk. Two of these, the basic indicator approach and the standardised approach, are standardised procedures that use the credit institution's average gross income over the past three years as the basis for the calculation. Multiplying this average income by a regulatory percentage yields the capital requirements. The third approach, the advanced measurement approach (AMA), is an internal method that allows institutions to use their own estimates and assumptions. As regulation was reviewed in the wake of the financial crisis, however, it became clear that gross income was not a suitable indicator of a bank’s operational risk. The BCBS also found that – much like with credit risk – there are large differences in the calculation of RWAs. This is because no uniform methodology for applying the AMA has become established among banks and supervisors. In addition, there were doubts as to whether an internal method, in the sense of greater risk sensitivity in this area, could create real added value. 

As a result, the BCBS agreed to completely overhaul the calculation of the capital requirements. The three previous approaches were replaced by a new standardised measurement approach (SMA). While the SMA is similar to the basic indicator approach in how the calculations are made, it does not use gross income but something called the business indicator (BI) as the relevant variable. This is made up of three components: 

Also new in the revised framework is that positive values of all components feed into the calculation. This means that a negative net trading result, for example, also increases the basis for the calculation. Another new rule is that banks are divided into three categories according to their size. Larger banks are assumed to be exposed to higher levels of operational risk, and therefore also have to apply a higher percentage to calculate their capital requirements (18 % instead of the 12 % used by smaller banks). Finally, the calculation also includes a loss component, the internal loss multiplier (ILM). This is intended to further increase risk sensitivity and at the same time to give banks a stronger incentive to avoid operational risk. If a bank’s losses are higher than average over the long term, the capital requirements increase. If they are lower than average, the capital requirements can be reduced by up to just under one-half.

EU legislators have incorporated the SMA, as adopted by the BCBS, into CRR III. Since the BCBS left its members free to choose whether or not to include the loss component and because, during the negotiations on CRR III, the dominant view was that historical operational losses are not a reliable basis on which to estimate future losses, the loss component was not implemented. However, large banks in the EU are required to record their operational losses and report them to supervisors. 

CVA risk arises when the counterparty’s credit quality is jeopardised and its creditworthiness may deteriorate. This risk assessment focuses on over-the-counter (OTC) derivatives. These harbour not only market risk, but also credit risk. If, for example, the credit quality of the derivative counterparty worsens, this negatively affects the value of the derivative. The higher the price of the derivative, the greater the absolute loss in value. In order to measure this interplay between market risk and credit risk, two identical portfolios are considered, with only one assumed to exhibit potentially changing credit quality. The resulting difference in value is termed the credit valuation adjustment (CVA). Banks have to measure their CVA risk and calculate the relevant capital requirements. Aside from a change in counterparty credit quality (credit risk), CVA risk is also caused by a change in the absolute price of the derivative (market risk) or by a combination of both. 

As banks incurred significant CVA losses during the financial crisis, CVA risk was included in the Basel III framework. In the EU, therefore, there is already a capital requirement for OTC derivatives. If a materiality threshold is exceeded, capital requirements for CVA risk also apply to securities financing transactions (SFTs). There are EU exemptions, however. For example, this rule does not apply to OTC derivatives transacted with EU Member States (public sector entities) and non-financial corporations. This derogation is a deviation from the Basel framework. EU legislators decided to keep this rule in CRR III as well. However, in future, banks will have to report their hypothetical CVA capital requirements for exempted transactions to supervisors. 

The finalised Basel III framework revised the calculation approaches. As with operational risk, regulators decided to no longer allow internal models for calculating CVA requirements. Instead, there will be a new standardised approach (SA-CVA) that will lead to more methodological consistency with the Fundamental Review of the Trading Book (FRTB). This approach (SA-CVA) corresponds to a variance-covariance approach with correlations specified by supervisors and is intended for banks with more sophisticated derivatives portfolios. Use of this approach is therefore subject to supervisory approval. The new standardised approach also ensures that the market risk as well as the credit risk of derivatives are hedged.

In order to take the principle of proportionality into account, two further calculation methods are also introduced in CRR III. The basic approach (BA-CVA) is a method for calculating CVA capital requirements that may be used without supervisory approval. It is much simpler than the standardised approach and uses data already intended for calculating counterparty credit risk, which means banks have access to them without having to go to any extra effort. However, this approach does not hedge the market risk of derivatives.

The third approach is the simplified approach. It is intended for banks that have a comparatively small OTC derivatives portfolio. CRR III includes a threshold for this, which also applies for use of the original exposure method for counterparty credit risk (threshold for original exposure method: volume of derivatives business does not exceed 5 % of the institution's total assets and € 100 million). 19 However, implementation of this is stricter than in the Basel standard. 20 The capital requirements for CVA risk under this approach correspond to the capital requirements for counterparty credit risk. Supervisors can withdraw approval to use this approach, however, if CVA risk contributes materially to the bank’s overall risk. 

As regards market risk measurement approaches, the banking package also introduces the simplified standardised approach, the alternative standardised approach and the alternative internal model approach for capital purposes. Among the changes from CRR II, CRR III introduces new rules on the boundary of the trading book and the reclassification of positions. Moreover, it also defines requirements for internal risk transfers between the non-trading book and the trading book. At the same time, the European Commission is empowered to adopt a delegated act allowing it to delay the entry into force of the market risk rules by up to two years and, initially, to adjust the level of the capital requirements. 21

The use of internal models to determine RWAs generally results in lower capital requirements than the use of regulatory standardised approaches. The gap between capital requirements is especially pronounced for lower-risk portfolios. In addition, when applying internal models of different banks to identical portfolios, there is strong dispersion in the resulting capital requirements. This leads to a lack of comparability for capital requirements and runs counter to the objective of creating a level playing field and an internationally harmonised set of rules. 

Against this backdrop, there are differing views internationally on the benefits of using internal models to calculate capital requirements. While some jurisdictions, including the EU, generally consider their use to be beneficial as they increase risk sensitivity, other jurisdictions, including the United States for example, have less confidence in banks’ own estimates. This led to lengthy and complicated deliberations during the negotiations on finalising the Basel III package. The upshot was that the BCBS agreed to continue to permit the use of internal models. However, the maximum possible reduction in capital requirements compared with use of the standardised approaches was limited. This means that RWAs cannot fall below a certain value when using internal models. This threshold is also referred to as the output floor. The output floor is measured as a percentage (72.5 %) of RWAs calculated using the standardised approaches. Banks that use internal models must therefore additionally calculate RWAs using the standardised approaches, multiply them by 72.5 % and, if necessary, increase their RWAs to that level if their model-based RWAs and thus the capital requirements are lower. The potential reduction in capital requirements compared with the use of standardised approaches is thus capped at 27.5 %. 

EU legislators incorporated this rule into CRR III and CRD VI. However, there will be some idiosyncrasies in the calculation of additional capital add-ons, such as the existing capital buffers and Pillar 2 add-ons. In addition to the minimum capital requirement of 8 % of RWAs, there are further capital requirements for banks depending on their economic situation (e.g. the systemic risk buffer and the countercyclical capital buffer), their size and complexity (e.g. the buffers for other systemically important institutions (O-SIIs) and global systemically important institutions (G-SIIs)), and their individual risk situation (e.g. Pillar 2 add-on). Some of these add-ons may also address risks arising from the use of internal models. This is true of the systemic risk buffer and the Pillar 2 add-on, for instance. As the risk of potentially insufficient capital requirements based on models will already be limited by the output floor in future and a double capital requirement should be avoided, these add-ons are initially being reviewed by banking supervisors. An automatic increase which would arise from the RWA increase given a binding output floor cannot take place until this review. The same applies to the capital add-ons for O-SIIs and G-SIIs, as an RWA increase gives the size component a greater weight in the calculation. 

Another idiosyncrasy is the level of application of the RWA output floor for banking groups in the EU. In the EU, capital requirements also apply at the single entity level. In other words, subsidiaries of banking groups must comply with the requirements, just the same as the parent institution. Accordingly, the output floor will likewise have to be complied with at the single entity level. Going forward, however, EU Member States will be able to decide for themselves whether banking groups within their national borders need to comply with the output floor only at the highest level of consolidation. This rule will not apply across borders, though, because in a crisis situation a transfer of capital across national borders does not seem sufficiently safe.

In addition to these permanent idiosyncrasies in the implementation of the output floor, CRR III includes a number of temporary derogations from the Basel standard. One is that the output floor will be phased in from 1 January 2025 to 31 December 2029. It will therefore only come into full force (72.5 %) two years after the international implementation deadline. Another is that CRR III provides for various reduced requirements for the calculation of RWAs under the standardised approaches. However, these only apply to those banks that are required to calculate the output floor. 22 They include the following, in particular:

Since 2011, the BCBS, in cooperation with national supervisory authorities, has been conducting a comprehensive global data collection initiative to assess the impact of the new standards on banks’ capital requirements. 40 German banks are also participating in the initiative, primarily larger banks that use the IRB approach for credit risk. Once the transitional arrangements stipulated in the legislation come to an end in 2033, the EU implementation of the Basel III finalisation will lead to an increase of around 10.3 % 23 in capital requirements 24 in this sample. During the transitional period, a large part of this increase will thus be cushioned by the transitional arrangements. In 2030, the additional capital requirement will still be only around 3.1 %. However, as this sample is dominated by larger banks, the results cannot be extrapolated one-to-one to the German banking market as a whole. The Bundesbank estimates that the total capital requirement of all German banks could rise by around 2 % in 2030 and by 7 % in 2033. This corresponds to around € 25 billion up to 2033. This is manageable for the German banking market, as it is equipped with sufficient capital over and above the minimum requirement. 25  

Compared with a strict implementation of the requirements in the Basel III finalisation, these effects are significantly smaller. One-to-one implementation would have led to an increase of 18.5 % in minimum requirements in the sample and an extrapolated 15 % for the German market as a whole.  

In the EU, the output floor will be phased in from 2025, starting at 50 %. Initially, it will not be binding for any of the German banks in the sample. The transitional arrangements referred to in the section on the output floor are intended to mitigate the impact of the output floor on the capital requirement of banks using internal models. In particular, the relief for non-externally rated corporate positions is of particular importance here. Banks that apply the SA-CR will benefit most from EU-specific CVA exemptions, which were already included in CRR II and are maintained in the new legislation. 

Both climate change and the transition to a sustainable and, in particular, climate-neutral economy are presenting the European banking system with major challenges. 26 For this reason, sustainability risks, especially ESG risks, 27 play a pivotal role not only in the public perception but also in the supervisory debate and, with the new provisions, are now being more closely integrated into the CRD and the CRR;

The changes to the CRR mainly concern disclosure and supervisory reporting. The aim is to ensure that supervisory authorities have at their disposal data that are sufficiently granular, comprehensive and comparable to ensure effective supervision. ESG-related disclosure requirements will be extended to all institutions. Until now, they were only applicable to large, publicly traded banks. In addition, the requirements will be specified in more detail and expanded. For example, institutions must disclose information on ESG risks, distinguishing environmental, social and governance risks, and physical risks as well as transition risks for environmental risks. 28 Moreover, banks must disclose how they integrate the identified ESG risks in their business strategy and processes, governance and risk management. 

The new ESG-related provisions in CRD VI can be broken down into two categories: new obligations for banks and additional powers for supervisory authorities. In addition, they envisage various new mandates for the EBA (see Table 4.2).

In future, banks will have to take ESG risks into account in their internal capital planning and in their regular strategy review, considering the short, medium and long term. Another new element is the obligation for management bodies to set out specific plans outlining the ESG risks their bank is exposed to and how it will address them. These also include risks arising from the transition towards a climate-neutral economy, such as policy measures that could drive up costs in certain sectors and thus increase default risk for the banks financing them. Furthermore, a bank’s remuneration rules and practices must be aligned with its ESG strategy. This applies, in particular, to the level of variable remuneration.

In line with banks’ new obligations, supervisory authorities can demand a reduction in the exposure to ESG risks on a case-by-case basis. In addition, they can require institutions to adjust the targets, measures and actions in the above-mentioned plans. 

The revised CRR and CRD introduce provisions on the prudential treatment of crypto-asset exposures for the first time. In December 2022, the BCBS adopted a global standard on this subject, 29 which has now been incorporated into the legislative text in the form of transitional arrangements.

Within this framework, crypto-assets are broken down into three groups for the purposes of calculating capital requirements. These are based in part on some of the crypto-asset categories introduced by the Markets in Crypto-Assets Regulation (MiCAR). 30 For the riskiest group of crypto-assets, the total permissible holdings are limited to 1 % of a bank’s tier 1 capital. In addition, CRR III and CRD VI contain relevant definitions and reporting and disclosure requirements, as well as requirements for banks’ risk management and supervisory processes. The European Commission has until mid-2025 to submit a separate legislative proposal addressing the other elements of the Basel standard (for example, specific liquidity requirements).

At present, supervising branches of banks established outside the European Economic Area (EEA is largely a national matter. 31 As a result, national requirements for third-country branches range from minimal rules to broadly similar treatment to any other (subsidiary) institution. CRD VI now establishes a single framework for the supervision of third-country branches. The rules of the framework are structured as minimum requirements. This means that Member States will be able to impose stricter requirements on third-country branches and maintain their existing framework (in whole or in part), provided that their national requirements are aligned with those applicable to a credit institution as defined in the CRR. As a general rule, a bank domiciled in a third country that operates within a Member State of the EEA may do so only via a third-country branch authorised by the competent supervisory authority. Unlike in the case of subsidiaries, however, this authorisation applies only to the Member State in which the branch is authorised. The provision of cross-border services by a third-country branch within the EEA is not permitted. Exemptions from these principles exist for intra-group transactions both between the third-country institution and its branches and among the branches themselves, as well as for interbank transactions. Reverse solicitation is also permitted, provided that it is at the own exclusive initiative of the client.

Supervisory powers will be expanded in some areas and new notification requirements will be introduced. For example, a bank will be obliged to notify the competent authority if it acquires material holdings in financial or non-financial sector entities. A holding is considered to be material if it exceeds 15 % of the eligible capital of the proposed acquirer. In future, banks and entities defined as (mixed) financial holding companies, as well as entities within the same group, will also have to notify the competent authority in advance of material transfers of assets and liabilities. In addition, the competent authorities must be notified of far-reaching business decisions such as mergers or divisions. 

Periodic penalty payments are another new element in the legislation. The competent authorities are now authorised to impose periodic penalty payments per day of breach for infringements of rules resulting from the CRR and CRD or of decisions taken by a competent authority on the basis of those rules. This is to ensure that banks return to compliance with supervisory requirements as quickly as possible. In future, there will be a uniform definition of total annual net turnover, which will be used as the basis for calculating the maximum amount of administrative penalties and periodic penalty payments that can be imposed on a legal person. The maximum amount for periodic penalty payments that can be imposed on a natural person per day of breach is € 50,000. 

The new rules introduced by CRD VI will also strengthen the governance requirements for banks. Among other elements, with regard to suitability assessments they introduce an ex ante suitability notification for “large firms”. 32 In future, large firms will be required to notify the competent authority if they intend to appoint members of the management body in its management function or the chair of the management body in its supervisory function at least 30 working days before the prospective member takes up the position and submit the documents necessary for the suitability assessment.

The new legislation introduces a suitability assessment by the competent supervisory authorities for the heads of internal control functions 33 and the chief financial officers (CFO) of large institutions. If supervisors do not consider such candidates to be suitable for the position, they have the power to prevent them from taking up the position, remove them from the position or require additional measures to ensure their suitability. Another important innovation is the inclusion of direct reporting lines from the heads of internal control functions to the institution's management body in its supervisory function and the requirement that they can be removed from their function in the future and with the prior approval of the management body in its supervisory function. 

The implementation of global standards will further strengthen the resilience of global financial markets. By adopting CRR III and CRD VI, the EU has sent an important signal to the global financial supervisory community. Moreover, banking regulation will thus be adapted to the challenges of today and supervisors will be given new powers to better monitor new risks. 

German banks have sufficient capital. The Bundesbank therefore does not expect that banks will need to raise additional capital in order to fulfil the new requirements. Nor does it see the financing of the real economy as being jeopardised by the implementation of the new rules. 34 This is partly thanks to the long phase-in period up to December 2032. 
 

Basel Committee on Banking Supervision (2022), Prudential treatment of cryptoasset exposures. 

Basel Committee on Banking Supervision (2017), Basel III: Finalising post-crisis reforms.

Basel Committee on Banking Supervision (2010), Basel III: A global regulatory framework for more resilient banks and banking systems.

Deutsche Bundesbank (2023), Sustainability risks in banking supervision, Monthly Report, April 2023, pp. 75‑95.

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