The final Basel III reforms, agreed by the Basel Committee on Banking Supervision in 2017, were designed to restore credibility to how banks calculate risk-weighted assets. In the European Union, most of those reforms are implemented through the Capital Requirements Regulation (CRR3), which has applied since 1 January 2025.
The changes affect how banks measure credit risk, operational risk and credit valuation adjustment risk, and introduce an output floor that limits the benefit banks can obtain from internal models.
The output floor
The output floor ensures that risk-weighted assets calculated with internal models cannot fall below a set percentage of those calculated under standardised approaches. In the EU it is being phased in, starting at 50% in 2025 and rising to 72.5% by 2030, with transitional arrangements for certain exposures.
Revised standardised approaches
CRR3 introduces a more risk-sensitive standardised approach for credit risk, including new treatment of real estate exposures and unrated corporates, and replaces the previous operational risk approaches with a single standardised method based on a bank's business indicator.
Market risk rules delayed
The Fundamental Review of the Trading Book (FRTB), the new market risk framework, was originally due to apply in the EU from January 2025. Citing uncertainty about implementation in other major jurisdictions, including the United States and the United Kingdom, the European Commission postponed its application — first to January 2026, and then by a further year to January 2027 — to preserve a level playing field.
Implications beyond capital ratios
Higher data demands, new reporting templates and enhanced disclosure requirements affect finance, risk and IT functions alike. CRR3 also introduces explicit ESG risk disclosure requirements and changes to the treatment of crypto-asset exposures.
For auditors of banks, the new rules affect regulatory reporting processes, capital adequacy disclosures and the systems that feed them, while borrowers may see pricing changes where exposures attract higher risk weights.
Conclusion
CRR3 marks the final stage of the post-crisis capital reform programme in Europe. Its phased output floor means its full effect will unfold over several years, making robust data and reporting processes essential for every bank in scope.
