EBA Urges Rethink of Commission Amendments to Operational Risk Framework

Key Takeaways

• EBA Pushback on Core Amendments: The European Banking Authority urged the European Commission to reconsider two proposed changes to operational risk technical standards under the Capital Requirements Regulation.
• Concerns Over Combined Approaches: Allowing banks to use both the accounting approach and prudential boundary approach could increase complexity, reduce transparency, and create opportunities for regulatory arbitrage.
• Supervisory Effectiveness at Risk: Limiting notifications to “material” changes may weaken oversight by introducing inconsistent, institution-specific judgments and complicating supervisory reviews.
• Support for Technical Improvements: The EBA backed other amendments that enhance clarity, streamline terminology, and improve usability without altering the core framework.
• A Need for Simplicity and Consistency: The authority reiterated that applying a single approach across the balance sheet would better preserve comparability, transparency, and supervisory coherence.

Deep Dive

The European Banking Authority has raised concerns over proposed changes by the European Commission to key technical standards governing how banks calculate operational risk, cautioning that parts of the revisions could undermine consistency and supervisory effectiveness across the EU.

In an opinion, the EBA said two of the Commission’s proposed amendments to its draft Regulatory Technical Standards under the Capital Requirements Regulation risk introducing unnecessary complexity and opening the door to regulatory arbitrage.

The Commission had notified the EBA on March 2 of its intention to adopt the standards with amendments, following earlier submissions from the authority in mid-2025 aimed at refining how operational risk capital is calculated.

At the center of the disagreement is a proposed shift in how banks would calculate the financial component of their business indicator, a core metric used to determine operational risk capital requirements.

The Commission’s approach would allow institutions to combine the accounting approach and the prudential boundary approach, a move the EBA argues runs counter to both its original design and international standards.

The authority warned that permitting banks to mix the two approaches could create fragmented risk frameworks, increase reporting burdens, and introduce inconsistencies between operational and market risk calculations. It also noted that such flexibility could enable firms to tailor calculations in ways that minimize capital requirements rather than reflect underlying risk.

“The combined use of both approaches is not envisaged in the Basel standard and may increase complexity, create inconsistencies across risk frameworks and facilitate regulatory arbitrage,” the EBA said.

Instead, the regulator is urging the Commission to maintain a simpler structure in which institutions apply a single approach across their entire balance sheet, arguing that this would better preserve comparability and supervisory clarity.

A second point of contention relates to proposed changes in reporting obligations. The Commission has suggested that banks notify supervisors only of “material” changes when adjusting the scope of the prudential boundary approach.

The EBA cautioned that introducing a materiality threshold could weaken oversight by allowing institutions to apply their own judgments, potentially leading to uneven supervisory outcomes and additional complexity for regulators assessing those decisions.

In its opinion, the authority said the change could “introduce institution-specific materiality judgments making supervisory reviews more complex,” while also increasing the risk of an uneven playing field across banks.

Despite these concerns, the EBA endorsed a number of the Commission’s other amendments, particularly those aimed at improving clarity, consistency, and usability of the rules. These include adjustments to notification timelines for mergers and acquisitions, refinements to data requirements, and clearer guidance on the retrospective application of loss data.

Those revisions, the EBA said, are largely technical in nature and help streamline the framework without altering its underlying policy intent.

The broader regulatory framework for operational risk under the CRR sets out how banks must calculate capital to cover losses stemming from failed processes, systems, or external events. The EBA’s technical standards play a central role in harmonizing those calculations across the bloc, including defining components of the business indicator, adjustments to profit and loss data, and a standardized risk taxonomy.

While the EBA’s opinion is not binding, it carries weight in the EU’s legislative process, particularly where the authority argues that amendments may diverge from international standards or weaken supervisory outcomes.

The regulator is urging the Commission to reconsider the two contested changes, warning that without adjustment, they could complicate implementation and erode the coherence of the operational risk framework at a time when consistency across institutions remains a core supervisory priority.

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