Banking regulation: what to expect in 2024?

Banking and financial regulators have published their work programs for 2024 this fall: In the context of macroeconomic shocks, the acceleration of digitization, and the necessary transition related to climate change, risk and finance functions will continue to be under pressure, and trade-offs will likely need to be made between streamlining costs and necessary investments.

Five Priority Themes for the EBA in 2024

The EBA's roadmap aligns with the continuation of a three-year plan running until 2026 and will bring structural changes to European banks. It has set five priorities for next year:

• First, monitor the implementation of changes related to CRR III (Capital Requirement Regulation): The final text is expected by the end of 2023, with enforcement starting on January 1, 2025. One of its key measures is the introduction of an "output floor" designed to reduce the capital benefits a bank can derive from using its internal models compared to standard models, thus improving the comparability of banks' capital ratios.
• Second, ensure the stability of the financial sector in a 2023 environment marked by inflation, rising interest rates, and corporate failures. The shocks from bank failures in the United States and Switzerland are prompting a review of stress test methodologies. The soundness of banks remains a major concern, and the sustainable finance framework will continue to be strengthened.
• Third, address structural weaknesses through a digitalization strategy and continued work on establishing a common data infrastructure. Data governance and the quality of regulatory reporting still need improvement, seven years after the implementation of the BCBS239 principles (Basel Committee on Banking Supervision).
• Fourth, develop control capacities related to DORA (Digital Operational Resilience Act) and MICAR (Markets in Crypto Assets Regulation). DORA requirements will apply starting January 1, 2025, while MICAR will be applicable no earlier than the second half of 2024 to early 2025.
• Finally, ensure consumer protection by continuing the fight against money laundering and the financing of terrorism (AML/CFT): These issues will be addressed with a focus on the transition to the AMLA (Anti-Money Laundering Authority), which is set to begin its direct supervision in 2026.

A Program Aligned with the ECB's Prudential Priorities

The European Central Bank (ECB) has updated its prudential priorities for 2023-2025 concerning vulnerabilities detected within banks through its Single Supervisory Mechanism (SSM).

First, the goal is to strengthen banks' resilience to immediate macro-financial and geopolitical shocks related to the conflict in Ukraine. Several vulnerabilities have been identified, including gaps in credit risk management, particularly regarding exposures to vulnerable sectors (commercial and office real estate), and a lack of diversification in funding sources. Therefore, the ECB plans targeted reviews of lending and monitoring procedures, particularly concerning residential real estate; in-depth analyses of restructuring policies; targeted inquiries into internal models; and on-site inspections related to IFRS9 through its JSTs (Joint Supervision Teams).

Second, the priority is to ensure that banks implement effective digitization strategies and enhance the governance of their management bodies. Several deficiencies have been identified, including in digital transformation strategies, operational resilience frameworks, the functioning and governance of management bodies, and risk data aggregation and reporting. The ECB hopes to revitalize its RDARR program (Risk Data Aggregation and Risk Reporting), launched in 2016, and based on the principles defined by the Basel Committee for risk data aggregation and risk notification (BCBS239). Looking toward longer-term initiatives such as BIRD (Banks' Integrated Reporting Dictionary) and IREF (Integrated Reporting Framework) planned for 2027, which will pave the way for a harmonized European reporting format, data quality work remains a prerequisite.

Third, the ECB wants to intensify efforts to combat climate change. Recognizing that banks have significant exposures to both physical and transition risk factors, it plans a detailed analysis of the results of climate stress tests conducted in 2022, verification of compliance with the "Pillar III ESG" standard, and targeted on-site inspections on climate-related matters. The implementation of the CSRD (Corporate Sustainability Reporting Directive), which will gradually apply from January 2024, the SFDR (Sustainable Finance Disclosure Regulation), and the European Green Taxonomy, will be the main initiatives related to sustainable finance.

Likely Trade-Offs Ahead

Faced with this demanding program, banks will also need to carry out recurring exercises such as the "Supervisory Review and Evaluation Process" (SREP), annual stress tests, Asset Quality Reviews (AQR), and the production of regulatory reports, which are particularly costly. In a highly competitive and rapidly changing market, it is likely that banks will need to make trade-offs to balance their day-to-day activities and succeed in these structural transformation programs.

RSM's Advice 

Given the regulatory challenges expected in 2024, RSM recommends identifying those directly relevant to your organization in the short term and starting a gap analysis where necessary. The gradual implementation of CRR3 will remain the top priority next year, with major financial and operational impacts. The increasingly granular collection of data for both financial and non-financial reporting will remain a key trend in the coming years, which will require appropriate IT infrastructure.