Strengthening the

Banking Sector through

Basel III, CRD, and CRR
Reforms
Overview

The Basel III standards, crafted by the Basel Committee on Banking

Supervision (BCBS), set the global benchmark for prudential banking
regulations. Aimed at internationally active banks, these standards ensure
consistent financial regulation worldwide. The European Banking Authority
(EBA), as a contributing observer to the BCBS, plays a vital role in the
regulation, supervision, and risk management of the banking sector within the
European Union.
Basel III, CRD & CRR: Enhancing the Prudential Framework for Global
Banking

The Basel III standards, developed by the Basel Committee on Banking Supervision
(BCBS), represent a universally recognized set of prudential norms. These
standards, which set forth minimum requirements, are directed at internationally
active banks to promote uniform financial regulation worldwide. The European
Banking Authority (EBA) participates as an observer in the Basel Committee,
actively partaking in the development of regulations, supervision, and risk
management of the banking sector.

In the European Union, the Basel standards are incorporated through the Capital
Requirements Regulation (CRR) and the Capital Requirements Directive (CRD).
Entrusted with the authority provided by CRR and CRD, the EBA is instrumental in
implementing detailed technical aspects concerning liquidity, capital instruments,
internal models, as well as reporting and disclosure mandates.

Originating from 1988, the Basel framework has evolved with its latest update,
known as Basel III, crafted in the aftermath of the 2007/2008 Global Financial Crisis.
Finalized by the Basel Committee in 2017, Basel III aims to reinforce the banking
sector, equipping banks to withstand financial turmoils and continue supporting
economic activities and growth.

The EU remains committed to fully integrating Basel III standards and has
thoroughly evaluated their implications on EU banks. The assimilation process
began with the "CRD IV" package, which adopted the initial elements of Basel III on
17 July 2013. Following this, new liquidity requirements, such as the Liquidity
Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), were embedded
into the EU's legal framework. The latest update came in 2021 with the introduction
of a new legislative proposal for the CRR/CRD, known as the "Banking Package."
Revised Proposal for Strengthening the Capital Framework for Credit,
Market, and Operational Risk

The proposed legislative changes by the European Commission, with technical

guidance from the European Banking Authority (EBA), introduce significant
revisions to the capital framework for credit, market, and operational risk. This
initiative is in line with the ongoing evolution of the Basel III standards within the
European Union.

Credit Risk Enhancements

Under the Basel III agreement, the credit risk framework will undergo major
reforms. Changes include improving the standardized approach and narrowing
the use of Internal Ratings-Based (IRB) modeling. The EBA is set to handle
numerous mandates centered on credit risk. These tasks are crucial for the clear
implementation of the new standardized approach and the necessary
modifications to the IRB framework.

Market Risk Adjustments

The CRR 2 amendments have already transposed the key elements of the Basel III
market risk framework into EU law. The EBA has been pivotal in crafting multiple
Silicon
technicalValley Bank:
standards A Regulatory
and Perspective

guidelines, providing detailed procedures for institutions

to implement
Silicon the Fundamental
Valley Bank, Review ofknown
a financial institution the Trading
for its Book (FRTB)
support methods
of the for
tech startup
calculating was
ecosystem, capital
therequirements for market
16th largest bank risk. The
in the United current
States by CRR mandates
assets under
further direct the EBA to complete the FRTB framework's incorporation.
management at the beginning of March. On March 10, it became the largest bank
Additionally,
failure CRRsince
in the U.S. now assigns the EBA
the Lehman the task
Brothers of detailing
collapse the revised
in September framework
2008, which
sparked the subprime mortgage crisis. This event led to a banking panic, with risk
for Credit Valuation Adjustment (CVA) risk capitalization. Counterparty credit
sees only minor
customers modifications
rapidly within and
losing confidence this regulatory
withdrawing update.

their funds, prompting U.S.

authorities
Operational to shut
Riskdown the bank to stem the outflow.

Standardization

The
The collapse of Silicon
CRR introduces Valley
a new Bank has reignited
standardized approach discussions on financial
to operational risk, phasing out
regulation. Following the 2008 crisis, regulations were
the option for the advanced measurement approach. The EBA's mandatestightened both in the cover
U.S.
and Europe.elements
the pivotal However,needed
some regulations
to calculate were loosened
capital under theconcentrating
requirements, Trump on
administration, notably the asset threshold for stringent regulatory
the business indicator, the establishment and maintenance of an operational risk oversight was
increased fromand
loss database, $50 directives
billion to $250 billion.
for the With a balance
governance and risksheet of $212 billion at
management
the end of 2022,
framework Silicon
pertinent to Valley Bank would
operational risk. have been under closer scrutiny under
the former rules. Reports suggest that the San Francisco Federal Reserve had
identified issues with the bank's risk management practices more than a year
prior to its collapse, particularly its interest rate exposure and liquidity
management. Despite these early warnings, the bank's assets had grown fourfold
since 2017, surpassing
Streamlining Reporting two hundred billion dollars.
and Disclosure underThe CRR:Dodd-Frank Act, passed
The EBA's Mandate for
after
Marketthe Transparency

2008 crisis to impose stricter banking regulations, was rolled back in

2018, which raised the scrutiny threshold from $50 billion to $250 billion in assets,
In thereducing
thus context ofthereporting
oversightand disclosure,banks
of mid-sized the Capital Requirements
like Silicon Regulation
Valley Bank.
(CRR) continues to champion frameworks that are efficient, integrated, and
proportionate, ensuring that they deliver value for supervisors and other
stakeholders. The European Banking Authority (EBA) is dedicated to harmonizing
reporting and disclosure requirements, aligning them with international
standards. The EBA's approach includes a cost-benefit analysis of these
requirements to balance regulatory objectives with industry impact, as required
by the CRR.

Furthermore, the EBA has been entrusted with the task of aggregating and
centralizing prudential disclosures on its website, as stipulated in the CRR. The
establishment of the EBA Pillar 3 Data Hub is a strategic initiative to provide
stakeholders with easy access to Pillar 3 information, thereby strengthening
market discipline. This project is a top priority for the EBA.

The CRR/CRD-driven changes will be implemented by the EBA in a two-phased

approach. Initially, the EBA will swiftly engage in consultations on reporting and
disclosure elements that require immediate action by institutions and supervisors,
to facilitate prompt application following the banking package's enactment in the
EU. Subsequently, within the 12-month timeframe specified in the Level 1 text, the
EBA will deliberate on additional reporting and disclosure requirements, especially
those not directly tied to Basel III reforms.
Silicon Valley Bank: A Regulatory Perspective

Silicon Valley Bank, a financial institution known for its support of the tech startup
ecosystem, was the 16th largest bank in the United States by assets under
management at the beginning of March. On March 10, it became the largest bank
failure in the U.S. since the Lehman Brothers collapse in September 2008, which
sparked the subprime mortgage crisis. This event led to a banking panic, with
customers rapidly losing confidence and withdrawing their funds, prompting U.S.
authorities to shut down the bank to stem the outflow.

The collapse of Silicon Valley Bank has reignited discussions on financial

regulation. Following the 2008 crisis, regulations were tightened both in the U.S.
and Europe. However, some regulations were loosened under the Trump
administration, notably the asset threshold for stringent regulatory oversight was
increased from $50 billion to $250 billion. With a balance sheet of $212 billion at
the end of 2022, Silicon Valley Bank would have been under closer scrutiny under
the former rules. Reports suggest that the San Francisco Federal Reserve had
identified issues with the bank's risk management practices more than a year
prior to its collapse, particularly its interest rate exposure and liquidity
management. Despite these early warnings, the bank's assets had grown fourfold
since 2017, surpassing two hundred billion dollars. The Dodd-Frank Act, passed
after the 2008 crisis to impose stricter banking regulations, was rolled back in
2018, which raised the scrutiny threshold from $50 billion to $250 billion in assets,
thus reducing the oversight of mid-sized banks like Silicon Valley Bank.