The Banking Directive Implementation and Bureaucracy Relief Act (Bankenrichtlinienumsetzungs- und Bürokratieentlastungsgesetz, or BRUBEG) marks a key milestone in German banking regulation. It transposes the extensive amendments to the Capital Requirements Directive (CRD VI) into German national law, and means that Germany meets the requirements of the EU banking package. The stated aim is to implement the requirements with a minimum of bureaucracy and to not go beyond the European supervisory requirements, the Bundesbank writes in its latest Monthly Report. In an article dedicated to the BRUBEG, the Bank’s experts outline the key changes that supervisors regard as particularly relevant.

New supervisory powers and reporting requirements

One major component of the BRUBEG are the broader powers it grants to supervisory authorities. Going forward, credit institutions and (mixed) financial holding companies will need to notify supervisors of proposed operations such as acquisitions or divestitures of material holdings or mergers and divisions, which will then be assessed by supervisors.

The introduction of periodic penalty payments as an enforcement measure underlines the seriousness of the new rules. This provision gives Bafin the power to impose periodic penalty payments in the event of an ongoing breach of the Banking Act or the statutory orders adopted in connection therewith, of the CRR or of enforceable orders issued by Bafin, the authors explain. For natural persons, periodic penalty payments can be as much as €50,000 per day of breach. Legal persons, meanwhile, may face periodic penalty payments of up to 5 % of the average net daily turnover.

ESG risks: focus on sustainability

Another key aspect of the BRUBEG are environmental, social and governance (ESG) risks, which banks are required to comprehensively integrate into their risk management.

Small and non-complex institutions (SNCIs) and the like have been granted relief. For one thing, they will only have to start drawing up their ESG risk plans as of 2027. For another, during an initial period (ending in 2029) those plans only have to cover the financial risks arising from climate change. The message is clear: sustainability isn’t a trend – it’s a strategic necessity. Banks need to incorporate ESG risks into their risk management, Alexander Schulz, Standing Deputy Director General Financial Supervision at the Bundesbank, said about the amendments in the CRD VI.

Output floor

The introduction of the output floor is another important component of the BRUBEG. This instrument limits the extent to which risk-weighted assets (RWAs) calculated with the aid of internal models are allowed to deviate from the own funds requirements computed using standardised approaches. As from 2030, the output floor will be set at 72.5 %. A number of transitional arrangements will expire in 2032. In other words, an own funds requirement calculated with an internal model can be, at most, 27.5 % lower than the level based on the Standardised Approach. The aim here is to limit the extent to which internal model calculations underestimate risks.

Supervision of third-country branches

The new Capital Requirements Directive states that banks from non-EU countries (third countries) are not permitted to directly provide “core banking services” such as loans, deposits or guarantees into an EU Member State. Banks intending to provide those services which do not already operate a subsidiary institution within the EU will now have to establish a special branch in that EU Member State.

The CRD VI establishes, for the first time, a framework containing minimum requirements for the supervision of CRD third-country branches across the EU, the Monthly Report writes.

The rules classifying third-country branches into two risk classes and introducing minimum capital and liquidity requirements are major features of the new legislation.

Corporate governance and transactions with related parties

The BRUBEG strengthens the role of internal control functions and the management board in its supervisory function at institutions. In future, the heads of internal control functions shall have sufficient authority and be able, where appropriate, to report directly to the management board in its supervisory function, independently of the management board in its management function. Moreover, all institutions and superordinated undertakings are now required to ensure the suitability of key function holders. Bafin may otherwise take corrective actions in the case of particular key function holders. Other new features include a prudential suitability assessment for particular key functions at large undertakings and an early notification procedure for members of the management board in its management function and the chair of the management board in its supervisory function at such entities. The new minimum frequency of two years for reviewing and updating business and risk strategies takes the principle of proportionality into consideration.

Transactions with related parties are subject to new rules as well. The de minimis thresholds for in-scope loans and transactions have been increased to relieve the economy of unnecessary red tape.

Reforms an important step

The new rules will strengthen banks’ corporate governance, anchor ESG more deeply in risk management, and harmonise the requirements for third-country branches across Europe, Karlheinz Walch, Director General Financial Supervision, explained. These reforms mark an important step towards state-of-the-art and sustainable financial supervision.