Marking a significant step in strengthening the stability and resilience of its banking sector, the European Union completed its adoption of Basel III standards on 9 July 2024. This aligns with the Basel committee on banking supervision’s regulations, which aim to ensure minimum levels of bank capital, stress testing and liquidity risk management. The new Basel III rules are set to come into effect on 1 January 2025.
The Basel III framework is designed to enhance banks’ ability to withstand financial shocks and reduce the likelihood of a global financial crisis. Approximately 4,500 banks across the EU will be required to adhere to these new prudential requirements at both individual and consolidated levels. This implementation is expected to fortify the EU banking system, a need highlighted by the 2023 banking turmoil in the United States, where several mid-sized banks without causing significant disruption in the EU sector.
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According to impact assessments by the European Banking Authority, the reform’s effect on minimum capital requirements will be manageable due to its phased introduction. While the overall impact is anticipated to be moderate, some EU banks may experience a more significant effect based on their business models and the use of internal models for calculating capital requirements. The regulations include phased adjustments tailored to the diverse banking systems and practices across member states, aiming to ease the transition. Most adjustments are temporary and will either have clear end dates or require supervisory approval.
However, on 24 July 2024, the European Commission to delay the introduction of new market risk rules by one year. This postponement seeks to maintain a consistent global regulatory environment and prevent discrepancies that could undermine the Basel standards’ effectiveness. The European Parliament and European Council have empowered the European Commission to oversee the Basel standards’ implementation across different jurisdictions and to take necessary actions to ensure uniformity. This includes the ability to further delay or amend the market risk rules if required.
The US and UK have yet to finalise their Basel III regulations, and any delays in these jurisdictions could influence the timing of the new market risk rules, anticipates the commission. The commission’s decision to postpone the market risk rules by a year reflects concerns about potential misalignment and its implications for EU banks, markets and customers. The delegated act delaying the market risk rules will be subject to a three-month scrutiny period by the European Parliament and Council.
Moving forward, the European Commission will continue to monitor international developments and reassess the need for additional measures. The commission retains the authority to further delay or modify the market risk standards if necessary.