The new EU Capital Requirements Regime

The proposed legislative amendments to the EU capital requirements framework, detailed in an October 2021 legislative package by the European Commission, represent a significant step forward in aligning banking practices with the evolving needs of the finance and real estate sectors. These amendments, encapsulated in the Capital Requirements Directive (CRD VI) and the Capital Requirements Regulation (CRR III), are pivotal in ensuring the framework's alignment with international standards, including those set by the Basel Committee on Banking Supervision (BCBS), and in addressing identified deficiencies within the system.

The forthcoming adjustments to the EU capital requirements are designed to refine the framework's efficacy, incorporating critical updates such as the revision of the standardized approach to credit risk, the establishment of a new operational risk framework, and a mitigation of the variability in banks' capital requirements as calculated through internal models. This is highlighted by the introduction of the output floor, which establishes a minimum threshold for the risk-weighted assets calculated using these models. Furthermore, the integration of the BCBS's 2019 amendments for market risk standards, known as the Fundamental Review of the Trading Book (FRTB), underscores the EU's commitment to a comprehensive implementation, albeit with modifications to acknowledge EU-specific considerations.

RICS views the enhancements aimed at regulating third-country branches as particularly relevant, responding to concerns over the consistent application of prudential standards and the prevention of regulatory and supervisory arbitrage. This development is indicative of a broader regulatory shift towards more stringent oversight and transparency in banking operations, with potential implications for cross-border investment and financing within the real estate sector.

Moreover, the heightened focus on sustainable finance underscores the pivotal role of credit institutions in driving the transition towards a more sustainable economy. Initiatives such as the European Green Deal and the Corporate Sustainability Reporting Directive are instrumental in steering bank regulations to support this transition, emphasizing the criticality of integrating Environmental, Social, and Governance (ESG) risks into financial decision-making. For RICS and its members, these changes are not just regulatory adjustments but opportunities to foster a more resilient and sustainable real estate market, aligning financial practices with the urgent need for environmental stewardship and social responsibility.

For more information, please contact Fausta Todhe, EU Public Affairs Manager, at ftodhe@rics.org.