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A simple overview to EU banking regulations

courtesy of GPT5

EU banking rules look messy because different bodies write different layers: global standards, EU legislation, technical rules, and supervisory practice. But once you stack them properly, the architecture becomes predictable.

Here’s the map you want in your head.

Related post on the distinction between pillar 1 and pillar 2.

1. Basel Standards: The Global Blueprint

Everything starts with the Basel Committee. Basel sets global rules for capital, liquidity, leverage, and risk management.

Not law. Just the blueprint.

2. CRR and CRD: The EU Turns Basel Into Law

CRR – Capital Requirements Regulation

  • Directly applicable law.
  • Covers the “math”: RWAs, capital ratios, leverage, LCR/NSFR, large exposures, Pillar 3.

CRD – Capital Requirements Directive

  • Transposed by each member state.
  • Covers governance, internal controls, fit & proper, buffers, Pillar 2, supervisory powers.

Together, CRR + CRD = EU’s implementation of Basel III.

3. EBA: Technical Details and Uniformity

CRR/CRD leave details open. The EBA tightens them with:

  • RTS – binding technical standards
  • ITS – binding templates/procedures
  • Guidelines – supervisory expectations (“comply or explain”)

If CRR/CRD are the skeleton, EBA provides the exact measurement instructions.

4. ECB/SSM and NCAs: How the Rules Are Enforced

Supervision happens here:

  • ECB/SSM for significant institutions
  • NCAs for smaller banks

Their methodology is documented in:

  • SSM Supervisory Manual
  • SREP methodology booklets
  • ECB ICAAP/ILAAP Guides
  • Thematic reviews

These are not laws; they’re the supervisor’s operating manual.

This is where models get challenged, assumptions get questioned, and Pillar 2 capital gets set.

5. Where Specific Models/Risks Sit — Three Concrete Examples

✅ Example 1: IRRBB (Interest Rate Risk in the Banking Book)

IRRBB is Pillar 2.

  • CRD: defines IRRBB as a Pillar 2 risk
  • EBA Guidelines: modelling standards, shock scenarios, behavioural assumptions
  • ECB SREP/ICAAP methodology: how supervisors score, challenge, and set P2R/P2G

Placement: CRD → EBA Guidelines → ECB/SSM supervision (Outside CRR. Not a Pillar 1 capital formula.)

✅ Example 2: IRB Models (Internal Ratings-Based credit risk models)

These are Pillar 1 internal models.

  • CRR: legal basis and hard requirements
  • EBA RTS/Guidelines: PD/LGD estimation, MoC, downturn LGD, validation
  • ECB TRIM + ongoing model reviews: permissions, inspections, constraints, and monitoring

Placement: CRR → EBA RTS/Guidelines → ECB TRIM/Supervisory review

These directly impact regulatory capital.

✅ Example 3: IFRS 9 Expected Credit Loss Models

Different lane. IFRS 9 comes from accounting, not Basel.

  • IASB → IFRS 9 standard: defines how lifetime PDs, scenarios, and ECL must be computed
  • EU endorsement: makes IFRS 9 legally binding for reporting
  • EBA/ECB expectations: supervisors check IFRS 9 model quality because it affects CET1, provisioning, stress tests, and ICAAP

These are not Pillar 1 or Pillar 2 models in the CRR/CRD sense, but supervisors care because bad accounting leads to bad prudential numbers.

Placement: IASB → EU endorsement → EBA/ECB supervisory expectations

Parallel to prudential rules, but tightly connected.

6. The Whole Stack in One Line

Basel → CRR/CRD → EBA RTS/ITS/Guidelines → ECB/NCAs (SREP, ICAAP, model reviews) and in parallel:

IASB → EU-endorsed IFRS 9 → supervisory expectations

Once this structure clicks, everything — IRRBB, IRB, IFRS 9 models, liquidity rules, buffers — falls neatly into place.