CRR III – The end of a long journey

CRR III

2,386 days – almost 6.5 years – that is the time that has passed between the finalisation of the post-crisis reforms by the Basel Committee and the publication of CRR III in the Official Journal of the European Union in mid-June 2024. After extensive, back and forth negotiations, the industry finally has clarity.

On the other hand, the remaining time until the changes have to be implemented is significantly shorter, as significant parts of CRR III will come into force as early as 1 January 1st, 2025. For the majority of institutions, the most significant effects will be felt in the following 6 areas:

  1. Credit Risk Standardized Approach (CRSA) – While the basic principle of the CRSA methodology remains unchanged, CRR III introduces substantial changes that impact both the assignment of exposure classes and the determination of risk weights. They also have an impact on the necessary capital requirements. Higher capital requirements are likely, particularly for exposures to institutions, transactions secured with immovable property, and equity participations.
  2. Internal Ratings-based Approach (IRBA) – For IRBA, some of the changes are more related to the details of the risk parameters, while others are related to completely eliminating the application of IRBA for certain individual exposure classes. The focus will shift to covering specific, (almost) complete exposure classes in IRBA, as a minimum coverage ratio at institution level is no longer necessary. On the one hand, this creates new opportunities for institutions currently using the CRSA, while on the other hand, institutions using IRBA should assess the efficiency and effectiveness of their internal model landscape.

  3. Operational Risk (OpRisk) – For OpRisk, all institutions now have only one approach available based on the Business Indicator Component (BIC). Due to the elimination of the internal modelling approach and increased profitability on the back of recent interest rate hikes – at many institutions – these changes are likely to have a negative impact. That is, the introduction of a standardized approach, the Basic Indicator Approach (BIA), is likely to lead to an increase in Risk Weighted Assets (RWA).

  4. Market Risk (FRTB) – After a longer observation phase under CRR II without any impact on capital requirements, CRR III introduces both the Revised Trading Book Boundary, with in some cases a mandatory, allocation of specific products to the trading or the banking book, and the new market risk calculation approaches. However, the EU Commission announced its intention to use a clause allowing for a delay of up to 2 years for the implementation of market risk rules with capital allocation impact.

  5. Credit Valuation Adjustment (CVA) Risk – When calculating the CVA premium for positions with counterparty risk, the use of internal models is eliminated on the one hand, and on the other hand, a CVA-sensitivity-based standard approach based on the FRTB is introduced. For smaller institutions, the previous basic approach will be revised in various details.

  6. Output Floor – Last but not least, the new regulation also limits the use of internal models by introducing an output floor that covers all risk categories. Due to long-drawn-out transitional regulations, the effects for affected institutions will only be felt gradually until 2033, but they could be of significant impact.

In summary, on the one hand there is finally clarity on the final CRR III, on the other hand the remaining time until the changes have to be implemented is extremely short. Given the significant impact on capital requirements, the challenge is not only to ensure regulatory compliance within the remaining time, but also to derive the necessary management adjustments. As an experienced consultancy in the regulatory environment, zeb supports institutions in both regulatory compliance and management, guiding them from conceptual design to prioritization and implementation.

Further reading

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