A significant development that aims to align EU banks with the international Basel III standards while considering the unique characteristics of the European economy.

Key highlights of this agreement:

• Strengthening Capital Requirements: Negotiators agreed that banks using internal models should apply the "output floor" at the entity level. However, a review of the banking system's overall situation will be conducted by the Commission in close collaboration with the European Banking Authority (EBA) and the European Central Bank (ECB) by December 2028. This review will assess the appropriateness of the EU's regulatory and supervisory frameworks for banks, including the impact of the output floor on capital and liquidity requirements.
• Addressing Environmental and Crypto Risks: The agreement reflects the EU's commitment to carbon neutrality by 2050 and sustainable goals. Financial institutions will now need to consider environmental, social, and governance (ESG) risks when evaluating collateral. The EBA is tasked with assessing the need for a dedicated prudential treatment for exposures to ESG risks. Furthermore, to combat climate change and support the green transition, negotiators agreed on lower risk weights (40%) for exposures to the EU Emissions Trading System. To mitigate potential risks, banks will also be required to disclose their exposure to crypto-assets. The EU Commission will propose a relevant legislative framework for the implementation of future Basel standards and define the prudential treatment of crypto-asset exposures during the transitional period.
• Enhancing Governance and Diversity: To ensure the suitability and diversity of management boards in large financial institutions, provisions have been included in the CRD. Information sharing regarding the suitability assessment of board candidates will be required at least 30 days before their appointment. Competent authorities will have the power to prevent or remove members who do not meet suitability requirements.
• Third Country access to EU Markets:  The deal also establishes a framework for third country banks to access EU markets. Third country credit institutions will be required to establish a branch in the EU and seek authorisation unless they qualify for an exemption. Existing contracts with third country entities will remain unaltered to maintain legal certainty.

The provisional deal represents an important step toward strengthening the EU's banking system, making it more resilient to future crises, and aligning it with the EU's climate goals. By implementing the international Basel III standards while considering the particularities of the European economy, the agreement aims to lower the risk of banking crisis that could have far-reaching economic and social consequences. The political agreement will undergo further approval processes before it can be implemented, demonstrating the EU's commitment to ensuring the stability and sustainability of its banking sector.

European Parliament’s press release can be found here