The European banking package – revised rules in EU banking regulation

The European banking package – revised rules in EU banking regulation To rectify the shortcomings exposed during the 2007-08 global financial crisis, comprehensive regulatory initiatives relating to financial services were undertaken in multiple stages. At the global level, the Basel II regime tightened banks’ capital requirements and introduced new liquidity standards. As early as 2013, first elements of the Basel III standards were transposed into European law in the shape of the newly enacted Capital Requirements Regulation (CRR) and an amendment to the Capital Requirements Directive (CRDIV). The banking package now implements further material elements of the Basel III framework, which was finalised at the end of 2017, at the European level by way of amendments to the CRR (CRR II) and CRD (CRDV). The Bundesbank wel￾comes the fact that the standards are being implemented largely in line with international agree￾ments and that any deviations are intended to take account of specificities of the European market. The EU banking package also amends and augments the new resolution regime introduced in the EU at the start of 2015 by implementing the total loss-absorbing capacity (TLAC) requirement developed by the Financial Stability Board (FSB) for global systemically important institutions only. Furthermore, it adjusts the minimum requirements for own funds and eligible liabilities (MREL) for all European banks. The more stringent new rules increase the bail-inable capital available in case of a bank resolution, thus improving resolvability. This reduces the risk of public funds being used for bank resolutions and thus creates a closer balance between liability and control. The banking package is a well-balanced compromise and strengthens the stability and resilience of the European banking system. It is to be welcomed that the banking package aims at signifi￾cantly reducing the administrative burden on small, non-complex institutions, without exempting them from quantitative requirements. Given the growing complexity of banking regulation and the increase in compliance costs, this is an important step towards more proportionate and better suited regulation. Building on this basis, the outstanding implementation of the BaselIII reform package from the end of 2017 should continue to pursue this objective. Deutsche Bundesbank Monthly Report June 2019 31

Introduction The banking package represents another key milestone in the process of eliminating the regulatory gaps and weaknesses identified dur￾ing the financial crisis. Furthermore –  in line with the European Council conclusions adopted in June 2016 – risk reduction measures in the banking sector continue to pave the way for the completion of the banking union. The new rules implement elements of the changes and additions to the regulatory frame￾work agreed by the Basel Committee on Bank￾ing Supervision (BCBS) and the Financial Stabil￾ity Board (FSB). These include more risk-sensitive capital requirements, particularly with regard to market risk, and the introduction of a binding leverage ratio and a binding net stable funding ratio. In addition, banks will be required to hold a minimum amount of capital that is available to cover losses in the event of recovery or reso￾lution, with the intention of avoiding the need for government support measures. The bank￾ing package also puts a much greater focus on proportionality than has so far been the case. These measures will reduce the operational burden on small, non-complex institutions, pri￾marily in terms of the requirements for report￾ing, disclosure and remuneration. The banking package additionally comprises a series of other measures, including, for example, the re￾quirement that third-country institutions with significant activities in the EU must have an EU intermediate parent undertaking, as well as specific details on the scope of application of Pillar 2 capital requirements and macropruden￾tial instruments. In order to implement the adjustments detailed above, extensive amendments to the CRR,1 the CRD,2 the Bank Recovery and Resolution Dir￾ective (BRRD)3 and the Single Resolution Mech￾anism Regulation (SRMR)4 were required.5 Material changes to the CRR and CRD Market risk Having revised the rules on calculating the cap￾ital requirement for market risk, the Basel Com￾mittee published the new fundamental review of the trading book (FRTB) framework in Janu￾ary 2016.6 The FRTB substantially reworked the concept and methodology of both the stand￾ardised and the models-based approach as well as adjusted and specified the trading book def￾inition.7 At the same time that the Basel III re￾form package was adopted in December 2017, the FRTB implementation date targeted by the Basel Committee was postponed by three years to 1 January 2022. In January 2019, the new Basel market risk framework was endorsed and published in up￾dated and expanded form.8 It contains tech￾nical changes to the FRTB internal models￾based approach affecting the eligibility criteria of a model as well as the type and amount of capital backing for illiquid risk factors, technical changes to the FRTB standardised approach in￾cluding an altered, less conservative calibration as well as the introduction of a simplified stand￾ardised approach in the form of the (newly cali￾brated) Basel II standardised approach for insti￾tutions with smaller-scale trading activities. The new FRTB rules will be phased in across the EU. While the basic rules form part of the bank￾ing package, a number of amendments to the Banking pack￾age augments post-crisis agenda in banking sector Publication of the revised FRTB framework Phase-in 1 Regulation (EU) No 575/2013 of 26 June 2013. 2 Directive 2013/36/EU of 26 June 2013. 3 Directive 2014/59/EU of 15 May 2014. 4 Regulation (EU) No 806/2014 of 15 July 2014. 5 See Official Journal of the European Union L150 of 7 June 2019: The amendments to the CRR are to be ap￾plied for the first time two years after entry into force, which is on the twentieth day following publication in the Official Journal of the European Union (i.e. 27 June 2019). The new CRDV rules are to be applied 18 months after entry into force. 6 https://www.bis.org/bcbs/publ/d352.pdf 7 For details of the key elements of the FRTB, see Deutsche Bundesbank (2018). 8 https://www.bis.org/bcbs/publ/d457.pdf Deutsche Bundesbank Monthly Report June 2019 32

Basel framework made in 2019 still have to be implemented this year by way of a European Commission delegated act.9 The first step in the application of the FRTB by institutions will simply be a reporting require￾ment. This is to begin one year after the afore￾mentioned delegated act is enacted in the case of the FRTB standardised approach, and three years after for the models-based approach. However, the capital requirement itself will continue to be calculated using the rules cur￾rently in force for a certain transitional period. This transitional period for the calculation of capital requirements will end when the FRTB enters into force. The specific design of the capital requirement will be the subject of a le￾gislative proposal to be presented by the Euro￾pean Commission by mid-2020. As the FRTB will initially be introduced simply as a reporting requirement, banks will need to use previous procedures in parallel with new FRTB approaches. This will cause added work, on the one hand, but on the other, it will allow banks and supervisors to gain more experience in the use of the new approaches ahead of the intro￾duction of the actual FRTB capital requirement. Leverage ratio The banking package also adapts the existing EU provisions on the leverage ratio (LR) to the revised Basel requirements. The leverage ratio is intended to complement the risk-based capital requirements and ensure that banks have a minimum amount of capital that is independ￾ent of the riskiness of their exposures. Like the Basel requirements, in the EU the leverage ratio is determined as the ratio of a bank’s regula￾tory tier 1 capital (numerator) and its total ex￾FRTB applica￾tion – reporting First application of FRTB capital requirement Introduction of a binding LR minimum requirement of 3% Market risk (fundamental review of the trading book) Overview of the BCBS fundamental review of the trading book (FRTB) Introduction in the EU – New SA and IMA to be phased in – Initially as reporting requirement only (SA from 2020; IMA from 2023) – No date yet for implementation of new trading book definition and capital requirement Deutsche Bundesbank Boundary between trading book/banking book: – Key criterion for assigning instruments to the trading book is still trading intent – There are also predefined assignments of specific instruments to the trading and banking books – Reclassification of instruments is restricted and cannot result in a capital benefit Expected shortfall (ES) Default risk capital (DRC) requirement Non-modellable risk factors (NMRF) Sensitivities-based method to measure linear and non-linear risks Default risk capital (DRC) requirement Residual risk add-on

• In addition to the new FRTB-SA, the current market risk standardised approach is retained as a simplified standardised approach for small banks with a small trading portfolio. Internal models approach (IMA) Standardised approach (SA)* FRTB Pillar 1 capital requirement 9 The Commission is to enact the delegated act by 31 De￾cember 2019. The new definition of the trading book is not included in the scope of this delegated act. Deutsche Bundesbank Monthly Report June 2019 33

posure measure essentially comprising all bal￾ance sheet and off-balance-sheet items (de￾nominator). The leverage ratio, which currently only has to be reported to the supervisory authorities and disclosed publicly, will become a binding minimum requirement in the EU – a bank will have to have a leverage ratio of at least 3% in future. If the supervisory authority considers the lever￾age ratio minimum requirement insufficient to address the institution-specific risk of excessive leverage, the authority can impose an add￾itional leverage ratio requirement under the new CRDV rules. In addition to the leverage ratio minimum re￾quirement and, if applicable, the additional le￾verage ratio requirement, a bank classified as a global systemically important institution (G-SII) will be required to hold an additional leverage ratio buffer in future. This buffer amounts to 50% of the risk-based G-SII capital buffer. The leverage ratio buffer is designed to account for the greater risks to financial stability emanating from G-SIIs. If a G-SII does not have enough tier 1 capital to maintain its leverage ratio buf￾fer, it will be subject to restrictions on distribu￾tion and must submit a capital conservation plan to supervisors. While the calculation method for the leverage ratio is broadly consistent with the Basel frame￾work, implementation in Europe deviates from the Basel regime by including a large number of specific exemptions for certain types of busi￾ness and business models. Examples are the non-inclusion of specific export financing trans￾actions and of pass-through promotional loans, as well as reduced requirements for building and loan associations. All changes to the European leverage ratio framework deriving from CRR II as well as the new minimum requirement are to be applied for the first time two years after CRRII enters into force. Only the additional leverage ratio buffer for G-SIIs will be introduced in line with Introduction of the option of additional LR requirements at supervisors’ discretion Introduction of an LR buffer for G-SIIs: 50% of the risk-based G-SII buffer ratio EU-specific deviations from Basel LR stand￾ard for eco￾nomic policy reasons Leverage ratio: additional tasks for the European Banking Authority and the European Commission Mandates have been put in place for the European Banking Authority (EBA) and the European Commission to revise the EU’s framework on the leverage ratio (LR). In this context, the EBA has been tasked with adjusting the technical standards for reporting and disclosing the LR. A key focus will be on exposures particu￾larly vulnerable to what is known as window dressing, which in this case in￾volves banks changing their business ac￾tivities as at the reporting and disclosure dates in order to report improved pru￾dential metrics. It has therefore already been decided that large banks will in fu￾ture have to calculate such exposures more frequently than at the three￾month intervals currently stipulated. In addition, the European Commission has to assess by 31  December 2020 whether the LR buffer requirement should also be introduced for other sys￾temically important institutions. Deutsche Bundesbank Monthly Report June 2019 34

the Basel implementation date of 1  January 2022. Net stable funding ratio The net stable funding ratio (NSFR) establishes as a minimum standard the existing general re￾quirement10 for an adequate level of stable funding, which was initially implemented in the CRR purely as a reporting obligation. The NSFR rules published by the Basel Committee in Oc￾tober 2014 are thus transposed into EU law. The NSFR complements the liquidity coverage requirement (LCR) applied in the EU since Octo￾ber 2015 to ensure short-term ability to pay, adding the requirement for a stable match be￾tween the maturity structures of assets and li￾abilities over the longer term. Accordingly, the sum of available stable funding (liabilities) must at least match the sum of required stable fund￾ing (assets).11 The NSFR is based on a time hori￾zon of one year,12 meaning that liabilities with longer residual maturities are classed as “avail￾able stable funding” and assets where liquidity is tied up for a longer period as “required stable funding”. The NSFR’s objective is to avoid excessive ma￾turity mismatches between assets and liabilities and dependence on short-term funding. The intention is to limit the risk of the funding basis eroding in longer stress situations due to exces￾sive outflows. The implementation of the NSFR took on the EU-specific elements of the LCR (e.g. the defin￾ition and weighting of liquid assets). Addition￾ally, there are selected deviations from the Ba￾sel rules regarding calibration13 and a number of specific provisions on certain instruments.14 On the one hand, these deviations take into ac￾count European specificities, and on the other, where the relevant rules are transitional or sub￾ject to a review clause, they are intended to give institutions sufficient time to adapt to the Basel calibration, which is considered to be very strict. In keeping with this, the European NSFR is calibrated less conservatively on the whole to begin with. In the interest of proportionate regulation, an￾other special feature in the EU is the option of allowing small, non-complex institutions to apply an alternative simplified NSFR in future. The simplified NSFR’s main objective is to re￾duce the work that goes into generating the data needed for the NSFR reports. This is achieved mainly by combining reporting cat￾egories and maturity bands. As a result of the recalibration of weighting factors this necessi￾tates in isolated cases, the simplified NSFR is stricter than the general NSFR on balance. Standardised approach for counterparty credit risk Counterparty credit risk (CCR) is the risk that the counterparty to a transaction (especially in derivatives) could default before the final settle￾ment of the transaction’s cash flows. There are currently three standardised approaches to measuring the default risk of derivatives trans￾actions for counterparty credit risk: the original exposure method, the mark-to-market method and the standardised method. Whereas the ori￾ginal exposure method may only be used by institutions with a small trading book, nearly all German trading book institutions apply the Full implementa￾tion of the new Basel liquidity standards NSFR regulatory approach Avoidance of excessive matur￾ity mismatches Deviations from Basel framework Simplified net stable funding ratio for small, non-complex institutions New standard￾ised approach for counterparty credit risk, SA-CCR, replaces existing standardised approaches 10 See Article 413 CRR. 11 Liabilities and assets are weighted according to their long-term availability or liquidity characteristics, taking into account the medium-term funding needs from off-balance￾sheet exposures. 12 A distinction is made between the maturity bands “less than six months” and “at least six months and less than one year”, particularly on the assets side. 13 In particular, the stable funding requirements for Level 1 assets and for short-term (i.e. with residual maturities of less than six months) exposures to financial customers are lowered. 14 In particular, the classification of assets and liabilities in connection with specific products and services (e.g. pass￾through of promotional loans or certain own issues of covered bonds) as interdependent, which are effectively excluded from the NSFR by receiving a flat weighting of 0% (or zero weighting). Deutsche Bundesbank Monthly Report June 2019 35

mark-to-market method; the standardised method is not used. CRRII introduces a new standardised approach for counterparty credit risk (SA-CCR) to meas￾ure exposure at default, which will replace the three existing standardised approaches. The Basel Committee developed the SA-CCR to in￾crease the sensitivity of risk measurement and to eliminate known deficiencies in the current standardised approaches. In particular, margin agreements (margining) are taken into account for the first time and offset agreements (net￾ting) are given much more adequate attention. Moreover, the new approach is applicable to a large number of derivatives transactions and is simple to implement. Like the mark-to-market method, the SA-CCR uses two components to measure exposure at default (see the chart above). The first compon￾ent is the current replacement cost (RC), which corresponds to the current positive market value of the exposures to a counterparty. The second component is the potential future ex￾posure (PFE), which reflects the risk of the con￾tract increasing in value between the default of a counterparty and entry into a new contract with another counterparty. A lump-sum add-on of 40% to cover potentially underestimated risks is applied to the sum of the two compon￾ents. Here, too, the rules are designed with propor￾tionality in mind. Institutions with a small or very small trading book are permitted to use simplified variants of the SA-CCR for their cal￾culations, relieving them of the operational burden. Changes to the large exposures regime The implementation of the Basel framework for large exposures results in the following main changes. In future, only tier 1 capital can be applied as the capital base. This reduces the scope to grant large exposures. The previous provision, whereby a certain percentage of tier 2 capital could also be recognised when setting large exposure limits (eligible capital), no longer applies. Consequently, a large exposure will be defined as an exposure to a client or a group of connected clients that amounts to 10% or more of tier 1 capital (threshold definition for large exposures). The limit on large exposures15 will remain at 25% in future, however, also in SA-CCR takes into account margining and netting Proportionality Standardised approach for counterparty credit risk (SA-CCR) Deutsche Bundesbank EAD = 1.4 x (replacement costs + potential future exposure) Add-on for interest rate derivatives Add-on for foreign exchange derivatives Add-on for credit derivatives Add-on for equity derivatives Add-on for com￾modity derivatives Residual add-on AddOnaggregate = ∑ AddOnasset class PFE = multiplier x AddOnaggregate 15 The limit which an institution must not exceed with an exposure to a client or a group of connected clients. Deutsche Bundesbank Monthly Report June 2019 36

relation to the institution’s tier 1 capital. The limit on large exposures of G-SIIs to other G-SIIs will be lowered to 15%. In addition, institutions that have applied a credit risk mitigation tech￾nique when calculating capital requirements for credit risk must, in future, also apply it when calculating an exposure under the large expos￾ure regime. Further changes Exception for promotional banks One element of the banking package is that certain banks are specifically exempted from the scope of application of the CRDV. This includes all German legally independent promotional banks,16 including the three development banks that are directly supervised by the ECB. To date, the only German promotional bank to be ex￾empted from the scope of application of the CRD was Kreditanstalt für Wiederaufbau (KfW). When the CRDV enters into force (20 days after publication in the Official Journal of the European Union, i.e. on 27 June 2019), the ex￾emption for promotional banks from the scope of application of the CRDV will become legally enforceable. As a consequence, these banks will then no longer be CRR credit institutions17 and will no longer fall under the scope of appli￾cation of the SSM Regulation either. Therefore, these German legally independent promotional banks named in the CRDV will in future be supervised by the Federal Financial Supervisory Authority (BaFin) and the Bundesbank on a purely national basis. This also applies to the three German promotional banks currently still under the direct supervision of the ECB. Ac￾cording to Section 1a(1) of the German Bank￾ing Act (Kreditwesengesetz), the exempted promotional banks18 will nonetheless continue to be governed by the CRR rules. However, once they are no longer classified as CRR institutions, they will no longer be subject to the scope of application of the SRM Regula￾tion, the Recovery and Resolution Act (Sanie￾rungs- und Abwicklungsgesetz) and the Re￾structuring Fund Act (Restrukturierungsfonds￾gesetz). The duty to draw up recovery and resolution plans as well as to contribute to the Single Resolution Fund (SRF) thus ends. In addition, these institutions leave the scope of application of the Deposit Guarantee Act (Einlagensiche￾rungsgesetz), as the latter specifies that only CRR credit institutions are subject to the pro￾tection requirement. When the CRDV is imple￾mented, legislators will have to decide whether adjustments to German law, in as far as it re￾lates to promotional lending business, should be made for the German promotional banks that are now exempted. Changes relating to credit risk With the CRR II, various rules on determining the minimum capital requirements for credit risk will be changed. For instance, the 2013 rec￾ommendations of the Basel Committee on cap￾ital requirements for equity investments in funds will be transposed into EU law. Accord￾ingly, institutions will, in future, have to deter￾mine capital requirements either by looking through to the exposures contained in the fund assets or, where this is not possible, based on the fund’s investment mandate. Where an in￾stitution lacks the information to do either, a risk weight of 1,250% must be applied. An im￾portant novelty is that a fund’s potential lever￾age must be recognised as increasing risk when determining capital requirements. All German legally inde￾pendent promo￾tional banks are exempted from the scope of the CRDV Shift of supervis￾ory responsibility to BaFin and Bundesbank Duty to draw up recovery and resolution plans and to contrib￾ute to the SRF ends New rules for determining capital require￾ments for equity investments in funds 16 See also Article 2(5) number 5 CRD V. 17 See Article 1 CRR; according to Article 4(1) number 1 CRR, a CRR credit institution is defined as an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own ac￾count. 18 With the exception of the KfW, to which Section 1a(1) of the Banking Act does not apply. Deutsche Bundesbank Monthly Report June 2019 37

In addition, the scope of application of the existing supporting factor for exposures to small and medium-sized enterprises (SMEs) will be expanded19 and a new supporting factor will be introduced for exposures to entities that operate or finance physical structures or facil￾ities, systems and networks that provide or support essential public services.20 Overall, this results in a reduction in prudential capital re￾quirements for the exposures in question. Both supporting factors are consequently intended to set incentives for expanded lending to these areas of the economy. From a banking super￾visory perspective, neither the supporting fac￾tor for SMEs nor that for infrastructure finance exposures is unproblematic, as the general re￾duction in capital requirements that their use entails does not necessarily also signify that the exposures are less likely to default. Further details relate, for instance, to the rules for determining capital requirements for min￾imum payment commitments of institutions for guarantee fund products, which are now expli￾citly specified in the CRR. This is necessary in order to limit to an appropriate level capital re￾quirements for guarantee commitments on equity investments in funds used for old-age provision (Riester pension plans). Another nov￾elty relates to the rules for the internal ratings￾based approach: institutions will, in future, be able to disregard in their risk parameter esti￾mates some of the losses incurred in a massive disposal of defaulted exposures. Regulatory own funds Several changes to the rules defining regulatory own funds in the CRR were made. For instance, the eligibility criteria of common equity tier 1 (CET1) instruments were adjusted: going for￾ward, the requirements for CET1 instruments will be considered to be met notwithstanding an obligation to transfer under a profit and loss transfer agreement, provided certain criteria are satisfied. For example, the parent undertak￾ing in question must own 90% or more of the voting rights and capital of the subsidiary; in addition, the parent undertaking and the sub￾sidiary must be located in the same Member State. Moreover, the profit and loss transfer agreement must have been concluded for tax￾ation purposes and institutions must have dis￾cretion to strengthen their CET1 capital by allo￾cating profits to reserves before making a pay￾ment to the parent undertaking. The definition of “available distributable items” is adjusted such that all reserves formed under national legislation (in Germany, pursuant to the German Commercial Code (Handelsgesetz￾buch) and relevant company law)21 are de facto available to the institution for distribution to additional tier 1 (AT1) capital.22 This was previ￾ously not the case. Finally, a new exemption is included in terms of the assets that need to be deducted from own funds. In future, prudently valued software assets, which in the past have had to be de￾ducted from CET1 capital like all intangible assets, will be exempt from deduction. Pre￾cisely what software will be included and what concrete conditions will have to be met is yet to be defined by the European Banking Author￾ity (EBA) in a technical standard. Pillar 2 The CRDV clarifies a number of points relating to the supervisory review and evaluation pro￾cess (SREP) as well as the supervisory measures Expansion of SME supporting factor and new supporting factor for infra￾structure finance exposures Eligibility of common equity tier 1 instru￾ments in the presence of a profit and loss transfer agree￾ment Adjustment to the definition of available distrib￾utable items Exemption from deductions for certain software assets 19 The current SME supporting factor of 0.7619 can, in future, be applied up to a total amount owed by the bor￾rower of €2.5 million (currently €1.5 million), with a re￾duced factor of 0.85 applying to any exposure over and above this amount. 20 For infrastructure finance exposures that meet the cata￾logue of criteria outlined in the new Article 501a CRR, insti￾tutions may apply a supporting factor of 0.75. 21 For instance, the statutory reserves formed pursuant to Section 150 of the Stock Corporation Act (Aktiengesetz). 22 That means banks can use reserves that are not avail￾able for distribution pursuant to Section 268(8) of the Commercial Code or the statutory reserves to be formed pursuant to Section 150 of the Stock Corporation Act for distributions to AT1 capital. Deutsche Bundesbank Monthly Report June 2019 38

based on it. There is now a clear separation of bank-specific supervisory measures and the macroprudential capital buffers. In future, it will no longer be permissible for the capital add-ons resulting from the SREP to include components to cover systemic risks; the latter are to be addressed using macroprudential measures only. In addition, guidelines are put in place for determining bank-specific capital add￾ons (Pillar 2 requirement, or P2R) in order to further harmonise EU administrative practice. Going forward, the minimum requirements for credit quality under Pillar 1 are to apply to cap￾ital add-ons. That means that at least 56.25% of the requirement must generally be met with CET1 capital and at least 75% with tier 1 cap￾ital. The supervisory authority must give rea￾sons if it demands a more conservative capital composition. Supervisors will also be given the opportunity to issue bank-specific recommendations to hold additional capital (Pillar 2 guidance, or P2G). This higher level of own funds should allow institutions to cover losses incurred dur￾ing stress periods without breaching prudential minimum capital requirements, consisting of Pillar 1 capital requirements and the capital add-ons (P2R). The results of supervisory stress tests are to be used to determine this recom￾mendation. In addition, the stacking order of the various capital requirements is also described. Accord￾ing to this, the own funds that institutions are required to hold must be used as follows to cover any losses as a result of risk materialising. Initially, the additional own funds held based on a supervisory recommendation (P2G) are to be used, then capital buffers such as the capital conservation buffer and the macroprudential capital buffers. Further losses are to be covered by additional capital requirements (P2R) and, finally, by the minimum capital requirements under Pillar 1. In terms of interest rate risk in the banking book, another step towards implementing the Basel Committee’s 2016 rules was made fol￾lowing the EBA Guidelines published in 2018. The EBA will receive mandates to develop tech￾nical standards involving, amongst other things, developing a standardised method to calculate interest rate risk based on the economic value of equity. This method can be used by institu￾tions or mandated by supervisory authorities if the internal procedures are not satisfactory. However, the Bundesbank believes that the use of institutions’ established internal systems should remain the norm. The current indicator for elevated interest rate risk (decline in economic value of more than 20% of own funds) is being tightened. Going forward, both a decline in the economic value of equity of more than 15% in one of six super￾visory interest rate shock scenarios and a sharp drop in net interest income in one of two of these scenarios will be considered indicators of elevated interest rate risk. Separation of supervisory measures and macroprudential capital buffers Capital add-ons governed by minimum requirements under Pillar 1 Bank-specific recommenda￾tion as a supervisory instrument Stacking order of various cap￾ital requirements Expanded requirements for interest rate risk Pillar 2: stacking order of the various capital requirements Deutsche Bundesbank P2G Stress buffers – no automatic supervisory measures Combined buffer requirement Macro buffers – restrictions on distributions if not met P2R “Hard” capital requirements – must be met Pillar 1 at all times (minimum requirements) Deutsche Bundesbank Monthly Report June 2019 39

New requirement to set up intermediate parent under￾takings A new requirement is introduced for third￾country banking groups that have at least two subsidiaries established in the EU and whose assets within the EU exceed a threshold of €40 billion: they must set up an intermediate parent undertaking (IPU) in the EU for the EU subsid￾iaries. This requirement means that all activities of subsidiaries established in the EU must be supervised on a consolidated basis under this EU parent. The objective here is to make it eas￾ier to supervise third-country banking groups in the EU and to resolve their EU activities. In spe￾cial cases, supervisors may allow structures with two intermediate EU parent undertak￾ings.23 Project of an integrated reporting system Reporting requirements for credit institutions derive from the respective prudential or statis￾tical data collection purposes and are, to date, issued by the respective regulators independ￾ently of one another. This has meant that data for different reporting purposes were, in some cases, collected twice, as there were instances of parallel reporting methods and contents de￾veloping over time. Against this backdrop, the European System of Central Banks (ESCB) and the EBA are currently working on initiatives for an integrated European reporting system, in which existing reporting formats are to be re￾placed by granular reports that can be used to fulfil various reporting purposes. In a first step, the EBA is to draw up a feasibility study for an integrated reporting system that encompasses both prudential and statistical re￾porting requirements as well as the reporting requirements of the resolution authorities. Review of the macroprudential rules Macroprudential instruments will, in future, be separated more clearly from microprudential powers. In addition, overlaps between the macroprudential buffers are to be eliminated. There are now no overlaps between the areas in which the systemic risk buffer can be used and those where the capital buffers for system￾ically important institutions (O-SII/G-SII buf￾fers)24 are deployed. These capital buffers will therefore have to be used additively, going for￾ward. As of a cumulative buffer rate of 5%, ap￾proval by the European Commission is neces￾sary. Moreover, the scope of application of the systemic risk buffer was expanded and ren￾dered more flexible, meaning that it can ad￾dress all systemic risks that are not already covered by the capital buffers for systemically important institutions, the countercyclical cap￾ital buffer or CRR measures.25 It is now expli￾citly intended that it should, in future, also be used for sectoral exposures and subsets of these exposure categories, thus allowing sec￾toral risks to be addressed in a more targeted manner. The option of using several systemic risk buffers for different exposures at the same time increases the tool’s flexibility. The cap on the O-SII buffer rate of 2% has been lifted. As of a buffer rate of 3%, however, approval by the European Commission is ne￾cessary. National authorities have more leeway when determining the O-SII buffers than with the G-SII buffer. This tool is therefore currently used in very different ways within Europe. The EBA will consequently receive a mandate to as￾New require￾ment for third￾country banking groups to set up an IPU Adjustments to reporting system being considered EBA mandate in expanded context Clearer separ￾ation between microprudential and macropru￾dential powers Changes to sys￾temic risk buffer Cap on O-SII buffer lifted 23 For instance, if ringfencing rules in the third country include a mandatory requirement for separation of activ￾ities and are therefore incompatible with the consolidation of all EU business activities under a single intermediate EU parent. 24 Capital buffers for other systemically important institu￾tions (O-SIIs) and for global systemically important institu￾tions (G-SIIs). 25 However, national measures to tighten CRR require￾ments (Article 458 CRR) remain secondary to the systemic risk buffer. Deutsche Bundesbank Monthly Report June 2019 40

Investment fi rms Alongside the banking package, a new European- level supervisory regime for in￾vestment fi rms (IFs) within the meaning of MiFID II1 is also being drawn up. This new package seeks to create a simpler and more suitable set of rules for these institutions (securities trading banks and fi nancial ser￾vices institutions within the meaning of the German Banking Act),2 and its main object￾ive is to take the specifi c business models of this very heterogeneous group of institu￾tions into account. Once the new supervis￾ory regime has been introduced, these IFs are to be divided into three groups, with specifi c supervisory requirements applying to each group. For instance, IFs whose busi￾ness activities give them a risk profi le similar to that of credit institutions will, in future, be categorised as CRR3 credit institutions and supervised on the basis of CRR II if their business reaches a certain volume. This cat￾egory will include IFs that engage in own￾account trading and in underwriting. As from a business volume threshold of €30 billion, IFs are to be supervised by the ECB under the SSM.4 In this way, adequate con￾sideration is to be given to the systemic im￾portance of these institutions, which quite commonly are parts of large international fi nancial corporations (class 1). All the other IFs will be supervised outside the sphere of application of the SSM Regulation by the respective national supervisory bodies, based on a specifi c, newly developed super￾visory regime where the calculation of an institution’s capital requirements is geared to its business model (class 2). Additional exemptions are envisaged in the case of IFs with only a limited business volume or busi￾ness model (class 3). This new supervisory regime for class 2 and class 3 IFs consists of several elements, the most important one being the calculation of proportionate cap￾ital requirements on the basis of each IF’s business model and business volume. For example, capital requirements will be calcu￾lated according to the volume of customer assets under management, the volume of processed customer orders and the volume of trading in fi nancial instruments. In add￾ition, the new supervisory regime also stipu￾lates minimum requirements with regard to the liquidity of institutions and rules cover￾ing the areas of governance and compensa￾tion for staff members. The fi rst- time appli￾cation of the new regime is expected in 2021.5 1 Markets in Financial Instruments Directive. 2 Gesetz über das Kreditwesen. 3 Capital Requirements Regulation. 4 European Single Supervisory Mechanism. 5 It is expected that the legislative package (directive and regulation) will be published in the Offi cial Journal of the European Union in autumn 2019. Deutsche Bundesbank Monthly Report June 2019 41

sess, by the end of 2020, what form a potential harmonisation might take. In terms of the method used to identify G-SIIs, the EU will in future deviate from the inter￾national standard. It will introduce an alterna￾tive way to calculate the G-SII buffer, in which transactions within the euro area are treated as domestic transactions and thus not considered. This deviation from the international standard is at odds with its objective of securing a global level playing field and is therefore to be viewed critically. Proportionality Ever since the European Commission unveiled its draft CRRII in November 2016, the Bundes￾bank has been comprehensively looking into ways of minimising the regulatory burdens on small credit institutions without impairing their solvency and soundness. A look at the struc￾ture of Germany’s banking sector serves to drive home the relevance of this question. There are nearly 1,500 smaller institutions in Germany, making up around 40% of all such institutions in the euro area. It is therefore a welcome development that the principle of proportionality has been taken into account at the EU level in the banking package. Article 4 CRR has been amended to include the category of “small and non-complex institu￾tions”, to which the following criteria apply: – the institution is not large;26 – the value of its total assets is, on average, equal to or less than €5 billion over a four￾year period;27 – the institution is not subject to any obliga￾tions, or is subject to simplified obligations, in relation to recovery and resolution plan￾ning; – the institution has only a small trading book and low derivatives business; – more than 75% of both the institution’s consolidated total assets and liabilities relate to activities conducted within the EEA; – the institution does not use internal models.28 Moreover, supervisors and the institution both have an opt-out clause, i.e. the option to de￾cide that the institution shall not be classified as a “small, non-complex institution”. The principle of proportionality29 is deepened in supervisory reporting, in particular. In this context, the EBA has been tasked with con￾ducting a cost-benefit analysis of the current European supervisory reporting system, par￾ticularly as it relates to small and non-complex institutions. The EBA has a deadline of 12 months after CRRII enters into force to present a report and recommendations on how report￾ing requirements can be simplified, at least for small, non-complex institutions. The desired objective is to reduce reporting costs by, on average, at least 10%, but ideally by 20%. Within these parameters, and ensuring that supervision remains effective, it is being ana￾lysed, in particular, whether certain reporting requirements can be waived below certain thresholds and whether the frequency of re￾ports can be reduced for small and non￾complex institutions. Competent authorities will also be empowered to waive the require￾ment for supervisory reports provided the rele￾Article 4 CRR amended to include new definition of a “small and non-complex institution” Taking greater account of proportionality in prudential reporting 26 Article 4 CRR has also been amended to include a def￾inition of a “large institution”. An institution is deemed “large” if it is systemically important, if it is one of the three largest institutions in its Member State, or if the total value of its assets is equal to or greater than €30 billion. 27 A Member State is permitted to reduce this threshold. 28 This does not apply to subsidiaries using internal models developed at the group level and if the group is subject to the disclosure requirements for large institutions. 29 The scope and frequency of reporting hinge crucially on the complexity of the approaches used to measure own funds requirements and on certain thresholds being ex￾ceeded. An inherent proportionality therefore already exists. Deutsche Bundesbank Monthly Report June 2019 42

vant data points are already available else￾where. In addition, the exchange of data be￾tween the various authorities should be en￾abled to the greatest possible extent. Disclosure is an additional focal point of pro￾portionality. Since the purpose of disclosure re￾quirements is to strengthen market discipline, they are relevant to large, capital market￾oriented institutions, in particular. The disclosure requirements will therefore in fu￾ture be graduated according to banks’ size and capital market orientation;30 the relief will cover both the frequency and scope of disclosures. Whereas large, capital market-oriented institu￾tions will have to meet all disclosure require￾ments, all other banks will have reduced re￾quirements. For small, non-complex and non￾capital market-oriented institutions, the re￾quirements will be reduced to the annual disclosure of a very few regulatory “key met￾rics”, such as information on the applicable ac￾counting standard, capital ratios, risk-weighted assets (RWAs) and capital buffers. New legislation in the area of bank resolution One key element of the revision of EU bank resolution legislation is the implementation of globally agreed rules and the need to align existing rules as a consequence. In 2015, the FSB published its TLAC standard, which is now being transposed into European law. The TLAC standard is applicable only to G-SIIs and re￾quires them to hold a sufficient amount of liabilities that can be written down or con￾verted into liable capital in the event of a reso￾lution. The purpose is to enable a systemically important bank to be resolved without resort￾ing to public funds (bail-out). As the TLAC standard was being published, European legis￾lators had, as part of the BRRD, already intro￾duced a similar requirement – the minimum requirement for own funds and eligible liabil￾ities (MREL).31 The purpose of this requirement is likewise to force banks to maintain a min￾imum volume of bail-inable liabilities. MREL, however, was designed for all European banks irrespective of their size or systemic import￾ance. The requirement also has to be set specif￾ically for each institution by the resolution au￾thority, without a default statutory minimum requirement. European resolution legislation has now been amended to align these two re￾quirements. Implementation of a minimum MREL requirement and intro￾duction of a new category: “top-​tier” banks Consistent with the TLAC standard, a minimum MREL requirement for G-SIIs will be introduced and calibrated at the same level as intended in the TLAC standard. The calibration parameters are thus based on two variables: a risk-based ratio based on risk-weighted assets (RWAs), and the non-risk-based ratio based on the le￾verage ratio exposure (LRE), which represents a hard floor. It will be introduced once the bank￾ing package enters into force: the requirements will be gradually increased in two stages (see the table on p. 44). Moreover, European legislators have also de￾cided to enlarge the group of banks for which a statutory minimum requirement is applicable beyond G-SIIs. The BRRDII (and SRM Regula￾tion II) accordingly created a new category known as “top-tier” banks. These comprise non-G-SIIs with total assets in excess of €100 billion. Institutions not meeting this criterion can still, under certain conditions, be classified by the resolution authority as a top-tier bank Proportionality especially pronounced as regards disclosure Requirements graduated according to size and capital market orientation Implementing the FSB’s TLAC standard and aligning the requirements of TLAC and MREL Implementation of TLAC for G-SIIs New category: “top-tier” banks 30 Capital market orientation, i.e. whether or not the insti￾tution has issued debt in the regulated market of a Mem￾ber State, is an additional criterion for disclosure. 31 See Deutsche Bundesbank (2016). Deutsche Bundesbank Monthly Report June 2019 43

(fishing option)32 if they are considered by the resolution authority33 as being likely to pose a systemic risk in the event of failure. A European specificity is the additional intro￾duction of a minimum requirement of 8% of total liabilities and own funds (TLOF) applicable to G-SIIs and top-tier banks as from 2024. This is not contained in the TLAC requirements. The rationale to this is that, according to the rules of the European resolution framework, use of resources from the Single Resolution Fund (SRF) is generally permissible only if shareholders and creditors have contributed an amount equiva￾lent to at least 8% of the institution’s TLOF. This additional requirement ensures that large, sys￾temically important banks (are able to) fulfil the requirements for accessing the SRF, thereby im￾proving the ability of banks to be resolved and consequently the functional viability and thus the credibility of the resolution regime. The highest of the three requirements described above (RWA, LRE and TLOF) ultimately exerts binding force on the institution. As a general rule, the resolution authority de￾termines an institution-specific MREL for all European banks. This means that the resolution authority also has the option of imposing on G-SIIs and top-tier banks institution-specific re￾quirements that exceed the existing statutory minimum requirements. For all non-G-SIIs and non-top-tier banks, there will be (as before) no statutory minimum MREL requirement. 8% of TLOF as additional backstop Institution￾specific MREL for non-G-SIIs and non-top-tier banks Overview of MREL G- SIIs “Top- tier” banks (> €100 billion total assets and “fi shing” option Other banks subject to resolution1 From entry into force of banking package 16% of RWAs 6% of LRE Higher institution- specifi c requirement as appropriate2 Institution- specifi c requirement2 Institution- specifi c requirement2 From 2022 18% of RWAs 6.75% of LRE Higher institution- specifi c requirement as appropriate2 13.5% of RWAs 5% of LRE Higher institution- specifi c requirement as appropriate2 Institution- specifi c requirement2 From 2024 See above, additionally 8% of TLOF3 See above, additionally 8% of TLOF3 (but not more than 27% of RWAs) Institution- specifi c requirement2 additionally 8% of TLOF3 at discretion of resolution authority Subordination requirement4 In principle, yes5 Case- by- case decision (assessment based on “no creditor worse off” principle) 1 For banks subject to insolvency proceedings, the resolution authority will set MREL at the level of the loss absorption amount (= min￾imum capital requirements). 2 Starting formula for calculating the institution- specifi c requirement: 2 * P1 + 2 * P2 + CBR + market confi - dence charge or 2 * LRE. 3 Total liabilities and own funds. 4 The subordination requirement is capped by law; the resolution authority can only demand fulfi lment of the institution- specifi c MREL requirement using subordinated instruments up to a maximum of 8% of TLOF or a statutory formula (“prudential formula”: 2P1 + 2P2R + CBR). 5 Exceptions are possible under Article 72b (3) to (5) CRR. Deutsche Bundesbank 32 As regards the top-tier banks for which the fishing op￾tion has been exercised, the provisions in BRRDII and the SRM Regulation II differ in that, under BRRDII, the reso￾lution authority, after consultation with the supervisory au￾thority, can determine whether the minimum requirements for top-tier banks can be applied to an institution with total assets of less than €100 billion, whereas under the SRM Regulation II it is the Single Resolution Board (SRB), upon a request from the national resolution authority, which clas￾sifies a bank as a top-tier bank. 33 After consulting with the supervisory authority. Deutsche Bundesbank Monthly Report June 2019 44

Creditor protection Rules protecting retail investors Over the past years, crisis situations in the European Union have shown that including retail investors in loss absorption can be an impediment to the application of the bail- in tool. Thus, the BRRD II1 provides for certain protection requirements with respect to re￾tail investors who wish to invest in MREL2- eligible instruments. For example, Member States can, inter alia, decide to set a min￾imum denomination amount of €50,000 for the sale of subordinated liabilities. New creditor hierarchy in bail­ in procedure The partial amendments to the creditor hierarchy were also part of the banking package, but had already been published in the Offi cial Journal of the European Union at the end of 2017 in a directive amending the BRRD.3 As a number of Member States had adopted different national approaches to creating the new class of non- preferred senior debt, which is subordinated to other debt (ordinary senior debt), EU legislators deemed it necessary to amend the Euro￾pean legislation.4 They followed the French approach in establishing the concept of contractual subordination for the new class of debt. According to this, non- preferred senior debt must meet the following condi￾tions: 1 Bank Recovery and Resolution Directive. 2 Minimum requirement for own funds and eligible li￾abilities. 3 See Offi cial Journal of the European Union L 345/ 96 (2017). 4 See Deutsche Bundesbank (2016). New creditor hierarchy in a bail-in procedure Deutsche Bundesbank Unstrukturierte Senior Unsecured Bonds (Altbestand gesetzlicher Nachrang) Unstrukturierte Senior Unsecured Bonds (Altbestand gesetzlicher Nachrang) CET1 AT1 Tier 2 Other junior liabilities Unstructured senior unsecured bonds (Outstanding bank bonds with statutory subordination) Derivatives Deposits from households and SMEs

€100,000 Liabilities excluded from bail-in, e.g. covered deposits ≤ €100,000 Deposits from enterprises €100,000 Structured senior unsecured bonds Unstructured senior unsecured bonds (new issues) Unstructured senior unsecured bonds (New issues with contractual subordination, initial contractual maturity ≥ 1 year) Creditor hierarchy in a bail-in ”Non￾preferred“ ”Preferred“ Deutsche Bundesbank Monthly Report June 2019 45

– The initial contractual maturity of the debt instruments is of at least one year; – The debt instruments do not contain em￾bedded derivatives and are not deriva￾tives themselves; – The contractual documentation explicitly refers to the lower ranking. With effect from 21 July 2018, Section 46 f (5) to (7) of the German Banking Act5 was amended accordingly to implement this amending directive. In line with the amend￾ing directive, grandfathering arrangements are in place for outstanding German bank bonds with statutory subordination under the previous rules6 (see the chart on p. 45). Excursus: Common backstop A common backstop for the Single Reso￾lution Fund (SRF) was already decided upon in December 2013 by the ministers of the Eurogroup and ECOFIN. The common back￾stop aims to increase the effectiveness of the SRF, amongst other things by facilitating borrowing for the SRF and thus ensuring its viability. In December 2018, the Eurogroup agreed that the European Stability Mechanism (ESM) should provide the common back￾stop for the SRF. This agreement entails conditions for a possible early introduction of the common backstop, with risk reduc￾tion in the banking sector (including with regard to NPLs) playing a key role here. Early introduction of the backstop can be considered provided that suffi cient progress has been made in risk reduction, which is to be assessed in 2020.7 The ESM provides the common backstop in the form of a revolving credit line to the SRF. It is also intended to replace the ESM direct recapitalisation instrument. The size of the common backstop is to be capped at the size of the SRF (at least 1% of covered deposits; currently estimated at roughly €65 billion). A political agreement was also reached clarifying the principle of fi scal neu￾trality over the medium term. The repay￾ment of public funds is to be made via extraordinary ex post contributions from the banking sector within three years, with a potential extension of up to two years. In principle, the creation of a common backstop for the SRF is to be welcomed. However, any early introduction should be contingent on a suffi cient level of risk re￾duction being achieved. This should be carefully assessed in order to prevent the mutualisation of legacy risks. 5 Gesetz über das Kreditwesen. 6 Section 46 f (5) to (7) of the Banking Act in the ver￾sion valid until 20 July 2018 continues to apply to debt instruments issued prior to 21 July 2018. 7 The assessment is to examine (at a minimum) the build- up of MREL in relation to the 2024 targets and the trend in the reduction of non- performing loans (NPLs) (aim: 5% gross NPLs or 2.5% net NPLs and ad￾equate provisioning) for all SRB banks. Deutsche Bundesbank Monthly Report June 2019 46

With regard to institutions subject to regular in￾solvency proceedings (owing to the absence of public interest in resolution), the resolution au￾thority can set MREL at the level of the loss ab￾sorption amount, i.e. the prudential minimum capital requirement.34 Amendments to the existing rules for setting MREL The revision of the BRRD will also entail more specific rules for setting MREL. MREL consists of a loss absorption amount and a recapitalisa￾tion amount, both of which are calibrated on the basis of RWAs and LRE. Thus, both a risk￾based ratio and a non-risk-based ratio variable are taken into account for the calibration of MREL. Such calibration rules were previously lo￾cated in the delegated regulation on MREL.35 They will now be amended and prospectively transferred to the BRRD. For the calibration of MREL based on RWAs, both the loss absorption amount and the re￾capitalisation amount components are based on own funds requirements (i.e. Pillar 1 and Pil￾lar 2 capital requirements). Above and beyond this amount, the resolution authority can im￾pose an additional buffer (market confidence buffer)36 to absorb potential additional losses or restore market confidence. For calibrating MREL on the basis of the LRE, the loss absorption amount and the recapital￾isation amount will each be subject to a re￾quirement of 3% of LRE, or a total of 6% of LRE. The LRE-based MREL does not include a market confidence buffer. When setting an institution-specific MREL, the resolution authority can take into account not only the two above-mentioned metrics but also the 8% TLOF requirement,37 thereby ensuring a level of MREL that might allow access to the SRF which could potentially be necessary in a resolution case. Subordination38 One significant element of the TLAC require￾ments is what is known as the subordination criterion. Alongside an institution’s own funds, only those liabilities which are junior to certain other liabilities (e.g. deposits, derivatives) are eligible. Exceptions are permitted only under certain conditions.39 Given that the TLAC stand￾ard applies only to G-SIIs, the negotiations sur￾rounding the banking package raised the ques￾tion as to whether – and if so, to what extent – a binding subordination criterion should be introduced for all banks. On balance, a distinction will be made in future between the above categories. G-SIIs and top￾tier banks will be generally required to use sub￾ordinated instruments to meet the future MREL. For all other banks the resolution au￾thority will decide the amount up to which the institution-specific MREL will have to be met using subordinated capital (i.e. own funds and subordinated, MREL-eligible liabilities).40 RWA calibration: That 2* P1 + 2* P2R + CCBR + market confidence charge LRE calibration: 2* LRE Benchmark: 8% bail-in for access to SRF Cap on subor￾dination to meet institution￾specific MREL 34 This also applies to institutions covered by an institu￾tional protection scheme. 35 Commission Delegated Regulation (EU) 2016/1450 of 23 May 2016. 36 The market confidence buffer is defined as the amount of the combined buffer requirement less the countercycli￾cal capital buffer. In the EU, the combined buffer require￾ment can consist of the following buffers: capital conserva￾tion buffer, countercyclical capital buffer, buffer for global or other systemically important institutions and systemic risk buffer. 37 Use of the SRF is fundamentally conditional on the ini￾tial bail-in of 8% of TLOF for loss absorption and recapital￾isation purposes. 38 See Deutsche Bundesbank (2016). 39 Thus, pursuant to Article 72b(3) CRRII read in conjunc￾tion with Article 494(2) CRRII, G-SIIs would be permitted to include liabilities which meet all criteria other than that of subordination up to 2.5% (or, as from 2022, 3.5% of RWAs) as MREL instruments. In addition, the “de minimis” exception provided for in the TLAC standard has been im￾plemented in Article 72b(4) CRRII; here, the subordination criterion is not mandatory provided liabilities excluded as “eligible liabilities” within the meaning of Article 72a(2) CRRII which are pari passu or junior to “eligible liabilities” make up less than 5% of the institution’s total own funds and eligible liabilities (TLOF). This means that, if the amount of excluded eligible liabilities that rank pari passu with eli￾gible instruments is limited, an exemption to the subordin￾ation requirement can be made. 40 This discretionary scope will depend to a material de￾gree on the risk of a breach of the “no creditor worse off” principle (i.e. a creditor must not be worse off under a resolution procedure than in insolvency proceedings). Deutsche Bundesbank Monthly Report June 2019 47

will also be the case for the institution-specific requirements for G-SIIs and top-tier banks in excess of the mandatory minimum require￾ments. However, the resolution authorities’ dis￾cretionary scope will be capped. Outlook The entry into force of the EU banking package represents by no means the end of the process of revising European banking regulation. In fact, the European Commission has already launched work on CRR III and CRDVI. The elements of the Basel III reform package41 adopted in December 2017 by the Basel Com￾mittee on Banking Supervision are to be trans￾posed into European legislation. These include the new approaches to calculating RWAs and thus capital requirements for credit risk (credit risk standardised approach and internal ratings￾based approaches), the abolition of the use of the models-based approach to calculate oper￾ational risk and the remaining new standard￾ised approach, the floor for capital require￾ments (output floor) of 72.5% for institutions which use internal models to calculate their risk, and the revised procedure for calculating credit valuation adjustments (CVAs) in deriva￾tives business. In order to prepare a relevant legislative pro￾posal, in May 2018 the European Commission tasked the EBA with assessing the impact of the Basel reform package on the European banking industry and real economy and explor￾ing potential regulatory options for transposing Basel III into EU law. On the basis of the EBA report, the European Commission will prepare a legislative proposal to amend the CRR. This proposal will probably be submitted in the first half of 2020. Mitigating existing risks on the balance sheets of European banks and completing the banking union remain elements of the effort in Europe to deal with the effects of the financial crisis. However, the banking package is just one of the components of appropriate risk mitigation being called for. Harmonisation of insolvency legislation and regulation of sovereign risk ex￾posures, which had been left out of the final￾isation of Basel III, are still unresolved. In add￾ition, it is important to deliver genuine progress in reducing NPL ratios and building up bail-in buffers. Preliminary work on CRRIII and CRDVI already under way EBA impact analysis Completing the banking union List of references Basel Committee on Banking Supervision (2019), Minimum capital requirements for market risk, January 2019 (rev. February 2019). Basel Committee on Banking Supervision (2018), Consultative Document – Revisions to the min￾imum capital requirements for market risk, March 2018. Basel Committee on Banking Supervision (2017), Basel III: Finalising post-crisis reforms, December 2017. Deutsche Bundesbank (2018), Finalising Basel III, Monthly Report, January 2018, pp. 73-89. Deutsche Bundesbank (2016), Bank recovery and resolution – the new TLAC and MREL minimum requirements, Monthly Report, July 2016, pp. 63-80. 41 See https://www.bis.org/bcbs/publ/d424.htm Deutsche Bundesbank Monthly Report June 2019 48

Dir. (EU) 2019/879, Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC. Dir. (EU) 2019/878, Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding com￾panies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures. Dir. (EU) 2017/2399, Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 on amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy. Dir. (EU) 2014/59, Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/ 25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 of the European Parliament and of the Council. Dir. (EU) 2013/36, Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institu￾tions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. European Commission (2016), Commission Delegated Regulation (EU) 2016/1450 of 23 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities. Reg. (EU) 2019/877, Regulation (EU) 2019/877 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 806/2014 as regards the loss-absorbing and recapit￾alisation capacity of credit institutions and investment firms. Reg. (EU) 2019/876, Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012. Reg. (EU) 806/2014, Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit in￾stitutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010. Reg. (EU) 575/2013, Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26  June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. Deutsche Bundesbank Monthly Report June 2019 49