02 June 2015

EBA assesses regulatory equivalence of third countries

The  Capital  Requirements  Regulation (CRR, Regulation  (EU)  No  575/2013)  foresees  that under well-defined  conditions, certain  categories  of  exposures  to  entities  located  in third  countries (countries outside the European Union (EU)) ), including central governments,  can benefit from the  same, more  favourable  treatment  applied  to  EU  Countries  exposures in  terms  of  capital requirements. Such  a 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 EU.

In  the  context  of this  process,  the European  Banking  Authority  (EBA) assists  the  European Commission in carrying out its mandate to regularly review the equivalence of third countries.

The aim of the equivalence assessment process is to assess whether third countries and territories apply regulatory and supervisory arrangements that are equivalent to the EU regulatory and supervisory framework applied in the relevant areas. Such a framework was introduced in 2013, when  the EU adopted  a  legislative  package  to  strengthen  the  regulation  of  the  banking  sector with the aim of creating a sounder and safer financial system.

The building blocks are given by the CRR and the Capital Requirements Directive (CRD):

• The   CRR   contains   the   detailed   prudential   requirements   for   credit   institutions   and investment  firms  in  terms  of  capital  requirements,  risk  definition  and  measurement for credit, market and operational risk, liquidity and leverage;
• The  CRD deals  with the procedures  and  processes  from  the  supervisory  side  to ensure effective    monitoring    of    risk    governance    and    practices    and    envisages    specific requirements on corporate  governance  arrangements  and  rules  aimed  at  increasing  the effectiveness of risk oversight.

Ultimately,  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.

Press release

Annex I - EBA questionnaire on regulatory equivalence

Annex II - Basel references

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