The European Commission adopted on 12 December its first ‘equivalence’ decision for the purposes of credit risk weighting under Regulation (EU) No 575/2013 (‘Capital Requirements Regulation’). It establishes a list of third countries whose supervisory and regulatory arrangements the EU considers equivalent.
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The Implementing Decision determines that certain third countries and territories apply regulatory and supervisory arrangements that are equivalent to those applied in the Union, with respect to credit institutions, investment firms, and exchanges.
For those third countries which are recognised as equivalent, EU banks can apply preferential risk weights to relevant exposures to entities located in those countries. These include: financial institutions, central and local governments, and public sector entities.
Today’s decision is the first step in an ongoing programme which will regularly review the equivalence of other third countries. This exercise will be carried out over the coming years with the assistance of the European Banking Authority.
Background
The ‘Capital Requirements Regulation’ (Regulation (EU) No 575/2013) foresees that certain categories of exposures to entities located in third countries -including central governments- can benefit from a more favourable treatment in terms of capital requirements. This preferential treatment is only available where the European Commission adopts an Implementing Decision determining that a third country’s prudential supervisory and regulatory requirements are at least equivalent to those applied in the Union. In the absence of the timely adoption of such a Decision, relevant exposures in those countries would have been subject to disproportionately high capital requirements with respect to the degree of risk involved.
In the past, some Member States have granted such recognition to individual third countries on a unilateral basis. The adoption of this Implementing Decision allows the EU to move towards a uniform treatment of third country exposures by establishing a common list of third countries with EU-wide recognition. This is a necessary step in the context of a single banking market. The Commission will periodically review the list in order to add any other country that proves to be eligible for a positive equivalence assessment.
The Implementing Act will enter into force on 1 January 2015. Once the new rules become applicable, any existing preferential treatment based on national assessments will cease to exist.
Further information, Capital requirements regulation and directive CRR/CRD IV
