CRR: Financial Disclosure Requirements Under Regulation (EU) 2024/3172

Commission Implementing Regulation (EU) 2024/3172: How it redefines CRR ?

The Commission Implementing Regulation (EU) 2024/3172, adopted on November 29, 2024, redefines public disclosure requirements for financial institutions under the Capital Requirements Regulation (CRR), fostering greater transparency, resilience, and sustainability across the European financial sector. This regulation aligns with the global Basel III Standards and introduces advanced methodologies, most notably the Fundamental Review of the Trading Book (FRTB). The FRTB framework addresses persistent deficiencies in market risk calculations by ensuring institutions employ precise and consistent methods for risk measurement and capital allocation.

The Fundamental Review of the Trading Book introduces a granular and rigorous structure for calculating market risks, distinguishing between trading book and banking book exposures. Key updates include the adoption of:

• Simplified Standardized Approach: Tailored for smaller institutions with less complex portfolios, ensuring proportionality in compliance.
• Alternative Standardized Approach (ASA): Designed for more intricate trading operations, providing a detailed and refined risk quantification methodology.
• Internal Model Approach (IMA): Reserved for institutions demonstrating robust internal frameworks, capable of meeting stringent qualitative and quantitative standards.

These methodologies require institutions to disclose both qualitative and quantitative data, offering insights into their approach to mitigating market risks. The emphasis on sensitivity testing, stress scenarios, and value-at-risk (VaR) measures ensures that stakeholders, regulators, and investors gain a comprehensive understanding of an institution’s ability to withstand adverse market conditions. Institutions must also demonstrate consistency in their capital adequacy calculations, enabling better comparability across the sector.

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Implementing regulation - EU - 2024/3172 - EN - EUR-Lex

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EU Commission Regulation 2024/3172 on Disclosure Standards for Financial Institutions

Commission Implementing Regulation (EU) 2024/3172, effective from January 1, 2025, establishes new technical standards for public disclosures by financial institutions under Regulation (EU) No 575/2013, specifically in relation to disclosures outlined in Part Eight, Titles II and III. This regulation repeals the previous implementing regulation (EU) 2021/637 and incorporates amendments to ensure compliance with Basel III standards. It mandates clear disclosure of institutions’ capital, risk exposure, liquidity metrics, and environmental, social, and governance (ESG) risks, among other financial metrics. The regulation aims to enhance market transparency and aligns the disclosure requirements with recent banking regulatory reforms introduced in the EU.

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Regulation (EU) 2024/3172: Aligning with Basel III Standards

The Capital Requirements Regulation (CRR), formally known as Regulation (EU) No 575/2013, serves as a foundational pillar of the European Union’s financial regulatory architecture. Its 2024 revisions integrate the internationally recognized Basel III Standards, established by the Basel Committee on Banking Supervision (BCBS), to strengthen the global financial system. These standards are pivotal in enhancing financial stability, mitigating systemic risks, and ensuring a higher level of transparency across institutions.

The 2024 updates, which supersede the Implementing Regulation (EU) 2021/637, introduce advanced disclosure frameworks tailored to address emerging challenges such as market volatility, sustainability imperatives, and the growing significance of crypto-assets. By adopting uniform disclosure templates, this regulation ensures that financial institutions consistently communicate their risk profiles, resilience strategies, and alignment with environmental, social, and governance (ESG) objectives. These reforms not only promote comparability across the sector but also solidify the EU’s commitment to a robust and transparent financial ecosystem.

Capital Requirements Regulation: Key Updates Under Regulation (EU) 2024/3172

1. Core Metrics Disclosure

Institutions are required to disclose key prudential metrics under the revised Capital Requirements Regulation. These include:

• Available Capital: A detailed breakdown of regulatory capital, comprising Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), and Tier 2 capital. This breakdown ensures stakeholders can evaluate the quality, quantity, and composition of capital available to absorb losses.
• Risk-Weighted Assets (RWAs): Comprehensive data on exposure profiles, categorized by asset class, region, and risk level, to provide an accurate assessment of the institution’s risk profile and capital requirements.
• Leverage Ratios: Insights into leverage risk, including on-balance sheet and off-balance sheet exposures, highlighting the institution’s ability to withstand financial shocks and avoid excessive leverage.
• Liquidity Metrics: Reporting on key liquidity indicators such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), which assess short-term liquidity buffers and long-term funding stability, respectively.

2. Fundamental Review of the Trading Book (FRTB)

The Fundamental Review of the Trading Book (FRTB), a pivotal component of the updated Capital Requirements Regulation (CRR), addresses long-standing challenges in the measurement and management of market risks. This framework introduces a comprehensive structure to ensure financial institutions can accurately assess their trading book exposures while maintaining sufficient capital buffers to withstand adverse market conditions. The FRTB provides clarity and consistency by delineating trading book assets from banking book assets, reducing the potential for regulatory arbitrage.

Key methodologies introduced under the FRTB include:

• Simplified Standardized Approach (SSA): Designed for smaller institutions with less complex trading books, the SSA balances simplicity and effectiveness, offering a straightforward framework for calculating capital requirements.
• Alternative Standardized Approach (ASA): A more refined and detailed method, the ASA caters to institutions with moderately complex portfolios. This approach emphasizes the accurate capture of market risks by incorporating factors such as risk sensitivities, exposure granularity, and portfolio composition.
• Internal Model Approach (IMA): Reserved for advanced institutions with robust risk management systems, the IMA allows for tailored capital calculations. However, institutions must meet stringent regulatory standards, including back-testing, stress testing, and model validation, to qualify for this approach.

Financial institutions are required to provide detailed disclosures under these frameworks, covering both qualitative aspects—such as governance and methodology—and quantitative data, including stress test results, value-at-risk (VaR) calculations, and sensitivities to market shocks. These disclosures ensure stakeholders, including regulators and investors, gain a transparent view of the institution’s market risk profile and capital adequacy.

Moreover, the FRTB emphasizes risk sensitivity by incorporating measures like expected shortfall (ES) to replace traditional VaR, capturing tail risks more effectively. Institutions are also required to segregate non-modellable risk factors (NMRFs) to ensure conservative capital treatment of less predictable risks. These enhancements improve the robustness of market risk management and align regulatory frameworks with evolving market complexities.

The integration of the FRTB under the CRR not only strengthens the resilience of individual institutions but also contributes to the stability of the broader financial system by promoting consistent risk practices across the sector. By fostering transparency and comparability, the FRTB plays a critical role in enhancing confidence among market participants.

3. Risk Management Objectives and Policies

Under Article 2, financial institutions are mandated to provide comprehensive disclosures about their risk management frameworks. These include detailed insights into governance structures, such as the composition and roles of board committees overseeing risk, policies outlining the institution's risk appetite, and strategies employed to identify, assess, and mitigate key risks, including credit, market, and operational risks.

A critical aspect of these disclosures involves demonstrating how risk governance aligns with the principles established under the Basel III Standards, ensuring that institutions maintain robust mechanisms for effective risk oversight. This includes frameworks for stress testing, scenario analysis, and risk quantification, enabling stakeholders to evaluate the institution's preparedness to address both systemic and idiosyncratic risks.

Additionally, institutions must articulate their approaches to integrating risk management with overall business strategies. This includes detailing how risk appetite is calibrated against capital adequacy, liquidity requirements, and long-term operational objectives. The disclosures should also highlight the use of advanced analytics, technology-driven solutions, and internal controls that enhance risk identification and monitoring.

By aligning with the broader objectives of the Capital Requirements Regulation (CRR), these risk management disclosures play a pivotal role in fostering transparency and bolstering market confidence. They ensure that institutions are not only compliant with regulatory mandates but also resilient in the face of evolving financial challenges.

4. Countercyclical Capital Buffer

The regulation mandates strict adherence to the countercyclical capital buffer requirements, a critical measure introduced under the Capital Requirements Directive (CRD IV) to enhance systemic resilience. This buffer is designed to respond dynamically to macro-financial conditions, ensuring that financial institutions build up additional capital during periods of economic growth. This capital serves as a protective layer, which can be released to absorb shocks during economic downturns, thereby mitigating systemic risks and maintaining financial stability.

Institutions are required to disclose detailed data on their countercyclical buffer levels, including jurisdictional allocations, the calculation methodologies used, and their alignment with the institution's overall capital strategy. The buffer framework ensures that capital requirements are sensitive to fluctuations in credit growth, effectively limiting pro-cyclicality within the banking sector. By maintaining flexibility in capital allocation, the buffer supports the broader objectives of economic stability and sustainable growth.

This provision also aligns with the Basel III Standards, emphasizing the importance of proactive capital planning and risk management. Through transparent reporting, institutions demonstrate their commitment to regulatory compliance and their ability to navigate complex economic environments, fostering trust among stakeholders and regulators alike.

5. Market Risk Disclosures

Market risk disclosures, as mandated by Article 16, play a critical role in ensuring transparency regarding an institution's exposure to fluctuations in market variables such as interest rates, exchange rates, and equity prices. These disclosures align with the Fundamental Review of the Trading Book (FRTB) and are integral to demonstrating compliance with updated regulatory requirements.

Institutions are required to provide detailed measurements of market risk exposure using one of the following approaches:

• Standardized Approach (SA): This approach uses a set of predefined risk weights to measure market risk across different asset classes. Institutions employing the SA must disclose specific details about their risk exposures, categorized by asset type and geographical region, providing clarity on how market risk capital requirements are calculated.
• Alternative Internal Model Approaches (IMA): Institutions with advanced risk management capabilities can opt for the IMA, which allows for the use of proprietary models to calculate market risk capital. However, institutions must meet stringent qualitative and quantitative criteria, including rigorous back-testing, stress testing, and validation of internal models. Disclosures under the IMA must include sensitivity analyses, assumptions made in the modeling process, and results of stress scenarios.

In addition to the methodologies employed, institutions must disclose:

• Stress Testing Outcomes: Stress testing evaluates how adverse market conditions, such as economic shocks or geopolitical events, would impact the institution's trading portfolio. These tests are essential for assessing the resilience of financial institutions under extreme conditions.
• Sensitivity Analysis: Sensitivity analysis examines the impact of specific market variables on the institution's risk profile, allowing stakeholders to understand potential vulnerabilities in various scenarios.

6. Operational Risk

Under Article 18, the regulation mandates the adoption of a single, non-model-based approach to assess and disclose operational risk. This represents a significant shift towards greater standardization and comparability in operational risk management across institutions. Operational risk encompasses risks arising from inadequate or failed internal processes, people, systems, or external events, including cyber threats and natural disasters. Institutions are required to disclose:

• Annual Operational Losses: Comprehensive data on operational losses incurred over the past decade, categorized by event type and business line. This historical data provides valuable insights into recurring vulnerabilities and trends in risk exposure.
• Business Indicator Component (BIC): Calculations of the BIC, which serves as the basis for determining operational risk capital requirements. The BIC incorporates metrics such as gross income, fee income, and trading profits to quantify an institution’s exposure to operational risk in proportion to its scale and complexity.

This approach aligns with the Basel III Standards, emphasizing consistency and transparency. By eliminating variability in model-based assessments, the regulation ensures uniformity in how institutions measure and report operational risk. Moreover, institutions are encouraged to enhance their internal controls and risk governance frameworks, addressing the root causes of operational losses and implementing robust mitigation strategies.

In addition to quantitative disclosures, institutions must provide qualitative insights into their operational risk management practices. This includes describing internal processes for identifying, monitoring, and mitigating operational risks, as well as outlining contingency plans and recovery strategies. These disclosures enable stakeholders to assess the institution’s resilience against operational disruptions and its preparedness to navigate an evolving risk landscape.

7. Environmental, Social, and Governance (ESG) Risks

The regulation mandates comprehensive Environmental, Social, and Governance (ESG) risk disclosures under Article 22, reflecting the European Union's commitment to sustainable finance and climate risk mitigation. These disclosures are closely aligned with the Taxonomy Regulation (EU) 2020/852, which provides a framework for identifying and promoting environmentally sustainable economic activities.

Key requirements include:

• Climate-Related Risks: Institutions must report on both transition risks, such as regulatory and market changes arising from the shift to a low-carbon economy, and physical risks, including the potential impact of climate-related events such as extreme weather, flooding, or rising sea levels.
• Sustainability Alignment: Disclosures must detail the alignment of financial activities with the sustainability criteria outlined in the Taxonomy Regulation. This includes providing quantitative and qualitative insights into how investments and financing activities contribute to environmentally sustainable goals, such as greenhouse gas reductions or renewable energy initiatives.
• Counterparty ESG Data: Institutions are required to evaluate and report on the ESG risks associated with their counterparties. When counterparties do not provide direct data, institutions may use proxies or internal estimates but must transparently disclose the methods used.

8. Crypto-Asset Exposures

For the first time, Article 23 mandates that financial institutions disclose their exposures to crypto-assets, marking a significant shift in regulatory oversight for this rapidly evolving asset class. These disclosures must include detailed methodologies for calculating capital requirements for digital assets, reflecting their unique risk characteristics and volatility. Institutions are required to address several key areas:

• Risk Categorization: Institutions must categorize crypto-assets based on their underlying use cases, such as payment tokens, utility tokens, or investment tokens. This categorization helps in determining the appropriate capital treatment and risk management strategies for each type of asset.
• Valuation Methodologies: Transparent and robust valuation models are essential for accurately assessing crypto-asset exposures. Disclosures must specify the methods used to determine fair value, including the treatment of illiquid or volatile crypto-assets.
• Counterparty Risk Management: With crypto-assets often traded on decentralized platforms or through intermediaries, institutions must outline strategies for mitigating counterparty risk, including due diligence on exchanges and custody providers.
• Capital Adequacy Calculations: Institutions are required to detail how they incorporate crypto-assets into their broader capital adequacy frameworks. This includes explaining the risk weights assigned to different types of crypto-assets and how these align with regulatory guidelines.
• Stress Testing and Scenario Analysis: Given the inherent volatility of digital assets, institutions must conduct and disclose the results of stress tests and scenario analyses. These tests should evaluate the potential impact of extreme market conditions on their portfolios.

CRR Updates: Disclosure Periods and Frequency

1. Quarterly, Semi-Annual, and Annual Reporting

Under Article 26, financial institutions are required to follow specific reporting timelines to ensure transparency and comparability across the financial sector:

• Quarterly Reporting: Institutions must disclose data for the current reporting period (T) and the four preceding periods (T-1, T-2, T-3, T-4). This detailed and frequent reporting provides stakeholders with consistent updates on financial performance and risk exposure over shorter time intervals.
• Semi-Annual Reporting: For semi-annual disclosures, institutions report on the current period (T) and key historical periods (T-2, T-4). This approach balances the need for regular updates with operational feasibility, catering to medium-term financial analyses.
• Annual Reporting: Annual disclosures focus on presenting data for the current period (T) and offering a comparative view of year-over-year trends (T-4). These reports are crucial for long-term performance evaluation and strategic planning.

For institutions providing disclosures for the first time, the regulation exempts them from presenting historical data, simplifying the onboarding process. This provision ensures a seamless integration into the reporting framework, reducing administrative burdens while maintaining compliance.

Leveraging IT Solutions for Compliance

The European Banking Authority (EBA) is at the forefront of facilitating compliance through the development of advanced IT solutions tailored for financial institutions. These tools are designed to streamline the reporting processes mandated by the Capital Requirements Regulation (CRR) while ensuring uniformity and reliability across disclosures. Key functionalities of these IT solutions include:

• Data Consistency: Ensures harmonized data standards across institutions, enabling accurate and comparable financial reporting throughout the EU.
• Dynamic Templates: Provides up-to-date and adaptable disclosure templates in all official EU languages, ensuring institutions remain aligned with regulatory changes.
• Simplified Reporting Processes: Automates data collection and facilitates seamless integration with institutional reporting systems, reducing administrative burdens and enhancing operational efficiency.

Transition Period and Repeal of Previous Regulations

Implementing Regulation (EU) 2021/637 will be repealed effective January 1, 2025, marking a pivotal shift in the financial reporting landscape. Notably, exceptions for Article 15 and certain annexes, including Annexes XXIX and XXX, will remain in force until December 31, 2025, ensuring a gradual transition for institutions adapting to the new framework. To facilitate this alignment, a detailed correlation table in Annex II has been provided, enabling institutions to map previous regulatory references to the updated requirements seamlessly. This structured approach minimizes disruption, ensuring continuity and clarity as institutions integrate the revised guidelines into their operational and reporting processes.

CRR & Regulation (EU) 2021/637: Practical Implications for Financial Institutions

1. Enhanced Transparency

The regulation significantly elevates stakeholder confidence by mandating comprehensive, comparable, and detailed financial disclosures. These requirements ensure that investors, regulators, and other stakeholders have a clear view of institutional risk profiles, governance practices, and resilience strategies. Enhanced transparency fosters trust and accountability, establishing a more robust relationship between financial institutions and their stakeholders.

2. Alignment with Basel III Standards

By embedding Basel III Standards, particularly the Fundamental Review of the Trading Book (FRTB), the regulation reinforces the global competitiveness of EU financial institutions. This alignment not only standardizes risk management practices but also addresses systemic vulnerabilities by imposing rigorous methodologies for assessing market risks, capital adequacy, and operational soundness. Institutions benefit from harmonized frameworks that meet international benchmarks, ensuring seamless integration with global financial systems while adhering to stricter regulatory scrutiny.

3. Proactive Risk Management

The granular disclosures mandated under the regulation empower institutions to proactively address emerging risks. This includes:

• Environmental, Social, and Governance (ESG) Factors: By integrating ESG considerations into disclosure frameworks, institutions can effectively navigate sustainability challenges and demonstrate alignment with broader societal goals.
• Market Volatility: Detailed insights into market risk exposures under FRTB ensure institutions are prepared to withstand adverse economic conditions.
• Crypto-Asset Exposures: The regulation's focus on digital asset disclosures helps institutions manage risks associated with this nascent yet volatile asset class, providing clarity on valuation, risk categorization, and stress testing.

Capital Requirements Regulation: Steps for Compliance

Adopt Updated Templates: Institutions must integrate the updated disclosure formats outlined in Annex I into their reporting frameworks. These templates ensure uniformity and compliance with the enhanced reporting standards mandated by Regulation (EU) 2024/3172. By adopting these formats, institutions can provide detailed insights into their risk profiles, governance structures, and financial health.

Leverage IT Solutions: Collaborate closely with the European Banking Authority (EBA) to incorporate advanced IT tools into institutional systems. These tools are designed to streamline reporting processes, automate data collection, and ensure consistency across disclosures. Leveraging such solutions not only reduces administrative burdens but also improves the accuracy and reliability of financial data presented to stakeholders.

Prepare for Transition: Align internal systems, governance frameworks, and operational processes with the requirements of the new framework by January 1, 2025. This involves conducting a comprehensive review of existing practices, identifying gaps, and implementing necessary upgrades to meet the revised regulatory standards. Institutions should also provide staff training to ensure familiarity with the updated templates and methodologies.

Monitor Market Risks: Establish robust mechanisms to regularly evaluate exposure levels under the Fundamental Review of the Trading Book (FRTB) and other market risk measures. This includes adopting stress testing, scenario analysis, and value-at-risk (VaR) calculations to identify potential vulnerabilities. Institutions must also segregate non-modellable risk factors (NMRFs) and ensure compliance with the updated capital adequacy requirements. Consistent monitoring and disclosure of market risks enhance resilience and stakeholder confidence, showcasing an institution's ability to adapt to volatile economic conditions.