EU implementation of Basel III reform completed

Since January 1, 2025, the amendment to the Capital Requirements Regulation (CRR III) to implement the Basel III reform – referred to in the industry as Basel IV due to its significant impacts – has largely been applicable. This has notably changed the calculation of capital requirements, especially for real estate financing. This affects both institutions that use the standardised approach for credit risk and those that use internal models (IRBA) for the calculation. Institutions using internal models must also consider the newly introduced output floor which is calculated based on the standardised approaches.

Although all institutions face significant efforts in implementing the new requirements, the impacts on the level of capital requirements vary greatly. On average, institutions using internal models are burdened with significant increases in capital requirements. Institutions with a large proportion of particularly low-risk residential real estate financing are particularly affected. The cause is the output floor, which will represent the binding capital requirement for the majority of institutions under current business models. Since the output floor started in 2025 with a reduced percentage of 50% of the capital requirements from the standardised approaches, the impacts are not yet relevant this year. The percentage will gradually increase to 72.5% by 2030. Additionally, transitional arrangements are provided for the output floor calculation, which mitigate the strongest impacts of the output floor and initially apply partially until the end of 2032. This allows significant capital increases to be avoided on average during this period.

Such a transitional arrangement is designed as a member state option and concerns the output floor calculation for residential real estate financing if the institution can prove that these are low-risk. Another member state option concerns the application level of the output floor, so that the output floor is only applied at the highest consolidation level of the (sub)group in Germany and not at the level of individual German subsidiaries. Both options were brought through the legislative process in the Bundestag in January 2025, despite the prematurely ended 20th legislative period, treated in the Bundesrat in February 2025, and published in the Federal Law Gazette in March 2025. Both options came into force retroactively on January 1, 2025.

Numerous mandates in the CRR authorise the European Banking Authority (EBA) and the EU Commission to establish various technical standards and guidelines that further specify the CRR requirements. The first mandates have already been addressed, such as the first part of the reporting requirements. Other mandates are in the finalisation phase, such as the EBA guidelines that determine the criteria for using reduced risk weights in the standardised approach for financing the commercial construction of residential real estate (ADC). Other less urgent mandates will be addressed in the coming months and years.

The first reporting reference date considering the new CRR requirements is already March 31, 2025. The report must be submitted by June 30, 2025. For the part of the new market risk requirements (FRTB), a postponement of the initial application to early 2026 has already been legally regulated. Due to the still unclear implementation of the Basel III reform in the USA and UK, negotiations are ongoing on whether the EU Commission will again use the granted CRR mandate and postpone the application start by another year to early 2027 or introduce easing transitional arrangements.

Given the significant impacts of the Basel III reform and the uncertainty about its implementation in other jurisdictions, a comprehensive validation of the new regulations should already be started to initiated in appropriate adjustments.

In addition to CRR III, the amendment to the Capital Requirements Directive (CRD VI) is also part of the legislative package, which includes further elements of the EU implementation of the Basel III reform, as well as other aspects, particularly regarding the requirements for managing ESG risks. As an EU directive, CRD VI requires national implementation into German law (particularly amendments to the Banking Act, KWG, and the Solvency Regulation, SolvV). This legislative process was delayed and will now start in the upcoming 21st legislative period. A draft bill for this law can be expected from summer this year. Whether the implementation deadline set in CRD VI by January 11, 2026, can still be met remains to be seen.