On 4 December 2018 the European Parliament and the Council of the European Union reached a political agreement on the 2016 banking package. This marks a major milestone in the implementation of international standards, and the completion of the post-crisis regulatory agenda. It increases the resilience of EU banks and improves their lending capacity to support the EU real economy. 

New amendments

The agreement amends the capital requirements regulation and the capital requirements directive, which set out prudential requirements for banks and investment firms and rules on governance and supervision. It also amends the bank recovery and resolution directive and the single resolution mechanism regulation, which set the rules on the recovery and resolution of failing banks and establish the single resolution mechanism. 

The rules agreed incorporate essential elements of the international regulatory approach, including:

• more risk-sensitive capital requirements;
• limiting the risk of excessive leverage;
• reducing the over-reliance on short-term wholesale funding;
• revised disclosure rules to increase transparency;
• a single moratorium power;
• a requirement for large banks – or 'global systemically important institutions' – to hold minimum levels of capital and other loss-bearing instruments. This requirement, known as 'total loss-absorbing capacity', is integrated into the existing minimum requirement for own funds and eligible liabilities (MREL) system. This system applies to all banks and strengthens the EU's ability to resolve very large failing banks while protecting financial stability and minimising risks for taxpayers. 

In order to make it easier to resolve banks through a credible bail-in tool, an MREL subordination policy in several steps was set, depending on the size of banks. For this purpose, a new category of large banks was created, the so-called 'top-tier banks' with a balance sheet size greater than € 100 billion.

The rules on the loss-absorption capacity between the home and host (i.e. subsidiaries) parts of a banking group will also facilitate the effective resolution of banks. These rules include:

• ensuring that subsidiaries in host countries have resolution resources (MREL);
• the ability of host authorities to request a higher internal MREL which would not be subject to European Banking Authority mediation between home and host authorities;
• the deletion of collateralised guarantees in cross-border situations and no cross-border waivers;
• the exclusion of intra-group liabilities from the bail-in of the parent.

In addition to risk-reduction measures, specific provisions aim to improve banks' lending capacity to support the EU economy, notably by enabling them to lend to SMEs and fund infrastructure projects. The administrative burden related to reporting, disclosure and remuneration has been reduced. Meanwhile, alternatives to some reporting rules, notably in the areas of liquidity, market risk, counterparty credit risk and interest rate risk have been introduced.

Sustainable finance

A sustainable finance dimension has also been brought to bank prudential regulation. The European Banking Authority will have to report on the possibility of introducing a more advantageous capital treatment for assets that have a favourable environmental and social impact. It should also consider whether supervisors should monitor environmental and social risks in their regular reviews. Large, listed banks will also have to disclose their exposure to environmental and social risks.

The governance and supervision of banks has been enhanced. The requirement for non-EU institutions with large operations in the EU to establish an 'intermediate parent undertaking' that oversees their EU business will facilitate the consolidated supervision and enhance the resolvability of those groups. Provisions were also included to help fight money laundering.

Read more the banking package