The EU ratifies its flagship bank capital package

EU’s Risk Reduction Measures (RRM)

On 16 April, the European Parliament formally ratified the EU’s Risk Reduction Measures (RRM) package on bank capital and liquidity, clearing the way for the finalisation of one of the most significant pieces of EU-level banking regulation in years.

This has been more than two-and-a-half years in the making, with a long period of difficult political negotiations following the RRM’s proposal by the European Commission in November 2016. The RRM is a combination of the EU’s fifth Capital Requirements Directive (CRD5), the second Capital Requirements Regulation (CRR2), and the second Bank Recovery and Resolution Directive (BRRD2).

The RRM contains a number of important additions to the EU regulatory framework for banks, including the introduction of Total Loss Absorbing Capacity requirements (TLAC), the Net Stable Funding Ratio (NSFR), the binding Leverage Ratio, and a partial introduction of the Fundamental Review of the Trading Book (FRTB), among several other initiatives.

While this is undoubtedly an important milestone in the EU’s adoption of post-crisis standards on bank capital and liquidity from the Basel Committee on Banking Supervision (BCBS), it is far from the end of the line. Several more years of secondary rulemaking lie ahead before the RRM can be fully implemented, and EU-level work is already underway to propose legislation to implement the remaining elements of the finalisation of Basel III (referred to by some as Basel IV).