1. Clarification of the list of entities to be included in the scope of prudential consolidation
Recent events have highlighted the need to clarify the provisions on prudential consolidation in order to ensure that financial groups headed by financial technology companies or comprising, in addition to institutions, other entities that directly or indirectly carry out financial activities are subject to consolidated supervision.
For this purpose, key financial consolidation terms such as “ancillary services company”, “financial holding company” and “financial institution” have been clarified.
Thus, ancillary services companies must be considered as financial institutions and therefore be included in the scope of prudential consolidation.
2. Changes in capital requirements
2.1. Clarification of the Definitions of “indirect holding” and “synthetic holding
Banks are required to deduct indirect and synthetic holdings of certain eligible liability instruments. However, the current definitions of “indirect holding” and “synthetic holding”, respectively, only cover holdings of capital instruments. Therefore, these definitions are amended in CRR3 to also cover holdings of relevant liabilities such as capital instruments of mutuals, cooperative societies, savings institutions or similar institutions.
2.2. Threshold exemptions for deduction of CET1 items
In applying some of the capital deductions, banks must calculate thresholds based on their CET1 elements after applying prudential filters.
In order to maintain consistency in the calculation of the relevant thresholds and to avoid asymmetry in the treatment of certain thresholds, the new CET1-related deductions are taken into account in the calculation of the relevant CET1 items in CRR3.
At the same time, in order to allow for the elimination of deductions from CET1 of equity exposures under an internal model approach, CRR3 has been adapted accordingly.
2.3. Treatment of Minority Interests in the context of third country subsidiaries
The IFR on investment firms envisaged changes to the terms “institution” and “investment firm”. A new article is inserted in CRR3 to ensure that subsidiaries located in a third country can nevertheless still be taken into account in the determination of minority interests, provided that these subsidiaries meet the revised definitions in the same way if they had been established in the Union.
The various amendments do not change the current calculation of minority interests, but aim to clarify the legal text.
3. Introduction of the Output Floor from 2025 instead of 2023 as foreseen by the Basel Committee
3.1. Definition and objective
The Output Floor for risk-based capital requirements is introduced in CRR3 and CRDVI. It is one of the key measures in the finalisation of Basel III and aims to reduce excessive variability in banks’ capital requirements calculated using internal models, and thus improve the comparability of banks’ capital ratios.
The Output Floor sets a lower limit on the capital requirements produced by banks’ internal models, at 72.5% of the capital requirements that would apply on the basis of the standard approaches. The decision to introduce the Output Floor is based on an analysis that shows that banks’ use of internal models makes them prone to underestimating risks, and therefore the associated capital requirements.
3.2. How the Output Floor is calculated
The CRR3 presents the methodology for calculating the output floor. Thus, the total amount of risk exposure (TREA) – floor or not floor – which must be used for the calculation of the minimum capital requirements is specified:
- The tiered AER is to be used only by the EU parent institution, financial holding company or mixed financial holding company of a banking group for the purposes of the group solvency ratio calculated at the highest level of consolidation in the EU.
- In contrast, the unfloored AER continues to apply to any group entity for the calculation of capital requirements at the individual level.
Each parent institution, financial holding company or mixed financial holding company in a Member State (different from the EU domicile of the parent company) must calculate its share of the AER floor used for the consolidated group capital requirement by multiplying the capital requirement of that consolidated group by the proportion of sub-consolidated RWAs attributable to that entity and its subsidiaries in the same Member State, if any.
The consolidated group’s RWAs that are attributable to an entity/subgroup should be calculated, as the entity/subgroup’s RWAs, as if the Output Floor applied to its AER. This would recognise the benefits of risk diversification between the business models of different entities within the same banking group.
At the same time, any potential increase in own funds required as a result of the application of the Output Floor at the consolidated level should be allocated fairly to sub-groups located in other Member States than the parent company, according to their risk profile.
3.3. Transitional provisions for the Output Floor from 2025
EU parent institutions, EU parent financial holding companies or EU parent mixed financial holding companies, autonomous institutions in the EU or autonomous subsidiary institutions may apply the following “x” factor when calculating the AER:
- 50% during the period from January 1, 2025 to December 31, 2025.
- 55% during the period from January 1, 2026 to December 31, 2026.
- 60% during the period from January 1, 2027 to December 31, 2027.
- 65% during the period from January 1, 2028 to December 31, 2028.
- 70% during the period from January 1, 2029 to December 31, 2029.
Details of all transitional provisions are set out in section 465 of the CRR3.
4. Evolution of the framework for calculating the leverage ratio
4.1. Calculation of the exposure value of derivatives cleared by the client
In line with the Basel Committee’s reforms, the framework for calculating the leverage ratio has been modified in the CRR3 :
- To facilitate the provision of client clearing services, the treatment of client-cleared derivatives for leverage ratio purposes has been changed in 2019.
- The treatment of these derivatives is aligned with the Standard Approach to Counterparty Risk (SA-CCR).
The Commission adjusted the calculation of the total exposure measure accordingly to align the treatment of customer-cleared derivatives with SA-CCR.
4.2. Calculation of the exposure value of off-balance sheet items
In light of the proposed amendments in CRR3, a minimum conversion factor of 10% for certain off-balance sheet items is no longer required as part of the leverage ratio.
Consequently, the derogation concerned is deleted.
4.3. Regular way purchases and pending sales
The provisions on pending settlement purchases and sales are amended to bring these rules more in line with Basel III standards, notably by specifying that these provisions apply to all financial assets, not just securities.
Abbreviations and glossary
TREA: Total risk-weighted exposure amount