CRR III & CRD VI Guide 2026: Output Floor, FRTB & Third-Country Branch Rules — Bank Compliance Deadlines

CRR III (Regulation (EU) 2024/1623) and CRD VI (Directive (EU) 2024/1619) represent the EU's implementation of the Basel III final reforms — the last major piece of the post-2008 prudential framework overhaul. CRR III has applied since 1 January 2025. CRD VI's transposition deadline was 11 January 2026. Together, they fundamentally change how European banks calculate capital requirements, manage risk, and govern themselves.

This guide covers the key changes, implementation timelines, and practical implications for credit institutions, investment firms, and their compliance and risk management teams. For how CRR III fits into the broader 2026 regulatory calendar, see our EU financial regulation deadlines tracker.

Background: From Basel III to CRR III

The Basel Committee on Banking Supervision published its final Basel III standards in December 2017 (commonly referred to as "Basel III.1" or the "Basel III endgame"). These reforms addressed a core problem identified during the financial crisis: excessive variability in risk-weighted assets (RWAs) across banks, driven primarily by the use of internal models that produced inconsistently low capital requirements.

The EU had already transposed earlier phases of Basel III through CRR (Regulation (EU) No 575/2013) and CRD IV (Directive 2013/36/EU). CRR III and CRD VI complete the transposition of the final Basel III package, with significant EU-specific adjustments.

The legislative process took longer than originally planned. The European Commission published its proposal in October 2021. After extensive negotiations, the final texts were published in the Official Journal on 19 June 2024:

• CRR III — Regulation (EU) 2024/1623, amending Regulation (EU) No 575/2013 (CELEX: 32024R1623)
• CRD VI — Directive (EU) 2024/1619, amending Directive 2013/36/EU (CELEX: 32024L1619)

CRR III: The Capital Requirements Regulation III

CRR III is a regulation — directly applicable in all Member States. It entered into force on 9 July 2024 and applies from 1 January 2025, with certain provisions subject to phase-in periods or delayed application dates.

The Output Floor

The output floor is the centrepiece of CRR III and arguably the most consequential change for European banks using internal models (IRB approach). It ensures that total risk-weighted assets calculated using internal models cannot fall below a specified percentage of RWAs calculated under the standardised approaches.

The rationale: Before CRR III, banks using internal models could produce RWAs significantly lower than those calculated under standardised approaches — sometimes 30-40% lower for the same portfolio. The output floor limits this divergence, restoring a degree of comparability and ensuring internal models cannot reduce capital requirements below a credible minimum.

The mechanism (Article 92(3) CRR as amended): A bank must calculate its total RWAs under both its approved internal models and the standardised approaches. If the internal model result is below a specified percentage of the standardised result, the bank must use the floored amount.

Phase-in schedule:

Year	Output Floor Level
2025	50.0%
2026	55.0%
2027	60.0%
2028	65.0%
2029	67.5%
2030 onwards	72.5%

EU-specific adjustments: The EU has introduced several mitigations not present in the Basel standard:

• Transitional cap on RWA increases: During the phase-in period, the increase in total RWAs attributable to the output floor is capped at 25% of the institution's pre-floor RWAs. This cap itself phases out over the transition period.
• Preferential treatment for unrated corporates: The EU allows a risk weight of 65% for high-quality unrated corporate exposures under the standardised approach used in the output floor calculation, rather than the 100% that Basel III prescribes. This is a significant concession for the European banking market, where most corporates are unrated (unlike the US, where external ratings are more prevalent).
• Infrastructure and equity exemptions: Certain infrastructure exposures and equity holdings benefit from reduced risk weights or exclusions in the floor calculation.

Practical impact: Banks currently using the IRB approach with low average risk weights — particularly large banks with significant mortgage and corporate portfolios — will see a material increase in capital requirements as the floor phases in. EBA impact assessments estimate average Tier 1 capital requirement increases of 6-9% for IRB banks at full phase-in, with considerable variation across institutions.

Revised Credit Risk Standardised Approach (CRSA)

CRR III substantially overhauls the standardised approach for credit risk (Part Three, Title II, Chapter 2 of the CRR). Key changes include:

Real Estate Exposures

The new framework replaces the existing approach with a more risk-sensitive treatment:

Exposure Type	LTV Range	Risk Weight (CRR III)	Previous Risk Weight
Residential mortgage (income not materially dependent on property)	LTV ≤ 50%	20%	35%
Residential mortgage (income not materially dependent on property)	50% < LTV ≤ 60%	25%	35%
Residential mortgage (income not materially dependent on property)	60% < LTV ≤ 80%	30%	35%
Residential mortgage (income not materially dependent on property)	80% < LTV ≤ 90%	40%	35%
Residential mortgage (income not materially dependent on property)	90% < LTV ≤ 100%	50%	35%
Residential mortgage (income not materially dependent on property)	LTV > 100%	70%	35%
Commercial real estate (income not materially dependent on property)	LTV ≤ 55%	Min(60%, counterparty RW)	50% (with conditions)
Commercial real estate (income not materially dependent on property)	55% < LTV ≤ 60%	70%	100%
Commercial real estate (income not materially dependent on property)	LTV > 60%	Counterparty RW	100%

For exposures where repayment is materially dependent on cash flows generated by the property (income-producing real estate / IPRE), higher risk weights apply — ranging from 30% to 105% for residential IPRE and from 70% to 110% for commercial IPRE, depending on LTV.

Unrated Corporate Exposures

The standard Basel III risk weight for unrated corporate exposures is 100%. However, CRR III introduces:

• Investment grade corporates: 65% risk weight for exposures to corporates that meet the "investment grade" definition under Article 5(1)(75a) CRR as amended — essentially, entities with sufficiently low default risk as assessed by the institution, even without an external rating.
• SME supporting factor retained: The existing CRR SME supporting factor (Article 501) is maintained, reducing capital requirements for SME exposures.

Equity Exposures

CRR III imposes significantly higher risk weights on equity holdings:

Equity Type	Risk Weight (CRR III)	Previous Risk Weight
Listed equity (non-speculative)	250%	100% (or lower under IRB)
Unlisted equity	400%	100-150%
Speculative equity	400%	150%

These risk weights are subject to a phase-in: existing equity holdings may benefit from a grandfathering period with lower risk weights during the transition.

Exposures to Institutions

The due diligence approach for exposures to unrated institutions replaces the previous methodology, with risk weights of 20% to 150% depending on the counterparty's credit quality grade assessment.

Specialised Lending

CRR III introduces more granular categories for specialised lending, with specific risk weights for project finance, object finance, and commodities finance — differentiating between pre-operational and operational phases for project finance (130% and 80% respectively for high-quality projects).

Fundamental Review of the Trading Book (FRTB)

The FRTB overhauls how banks calculate capital requirements for market risk (trading book positions). CRR III implements the Basel FRTB framework in EU law, but with a critical timeline distinction:

• 1 January 2025: FRTB reporting requirements apply. Banks must calculate and report market risk capital under the new framework, but the results do not yet determine binding capital requirements.
• 1 January 2027: FRTB capital requirements become binding. From this date, the FRTB calculations will determine actual own funds requirements for market risk.

This two-year delay gives banks time to build and validate the necessary systems while providing supervisors with data to assess the framework's impact.

The Three FRTB Approaches

1. Simplified Standardised Approach (SSA): Available only to institutions with small trading books (below Article 325a thresholds). Maintains a simplified calculation based on the existing framework.

2. Standardised Approach (SA): The new default approach, based on sensitivities (delta, vega, curvature) to prescribed risk factors. Significantly more complex than the current standardised approach but more risk-sensitive. Introduces:

   • Sensitivities-based method (SbM)
   • Default risk charge (DRC)
   • Residual risk add-on (RRAO)

3. Internal Models Approach (IMA): A fundamentally redesigned internal models framework replacing Value-at-Risk (VaR) with:

   • Expected Shortfall (ES) as the primary risk measure
   • Desk-level model approval and P&L attribution testing
   • Non-modellable risk factors (NMRFs) subject to stressed scenario capital charges
   • Backtesting at both desk level and institution level

EU-specific adjustments: CRR III includes an alternative treatment for positions in EU sovereign bonds and certain FX exposures, reflecting the structure of European capital markets.

CVA Risk Framework

CRR III introduces a revised Credit Valuation Adjustment (CVA) risk framework aligned with Basel standards. Key changes:

• New standardised approach (SA-CVA): Replaces the existing standardised method with a sensitivities-based calculation for CVA risk, structured similarly to the FRTB standardised approach.
• Basic approach (BA-CVA): A simpler calculation method available to institutions with smaller derivatives portfolios.
• Elimination of the advanced approach: The existing advanced method (using internal models for CVA) is removed. All institutions must use either the SA-CVA or BA-CVA.
• Scope expansion: The CVA framework now covers a broader range of transactions, including securities financing transactions (SFTs), though the EU applies certain exemptions.

EU exemptions maintained: The controversial EU exemption for non-financial counterparties, pension funds, and intra-group transactions from CVA risk charges is maintained in CRR III (Article 382), though the scope has been clarified and narrowed in certain areas.

Operational Risk

CRR III replaces all existing approaches for calculating operational risk capital (Basic Indicator Approach, Standardised Approach, and Advanced Measurement Approach) with a single Standardised Measurement Approach (SMA). The SMA uses:

• Business Indicator Component (BIC): Based on a composite of interest, services, and financial income components.
• Internal Loss Multiplier (ILM): Adjusts the BIC based on the institution's own historical operational loss experience.

EU implementation: The EU has exercised a discretion to set the ILM at 1 for all institutions — meaning that, at least initially, historical loss data does not increase (or decrease) the operational risk capital requirement beyond the BIC. This simplifies implementation but removes the risk-sensitivity that the Basel standard intended.

Credit Risk Mitigation and Securitisation

CRR III also introduces targeted amendments to:

• Credit risk mitigation (CRM): Updated eligibility criteria and haircuts for financial collateral, guarantees, and credit derivatives used as credit risk mitigation.
• Securitisation: Revised risk weight floors, amendments to the SEC-IRBA and SEC-SA calculations, and updated treatment of significant risk transfer (SRT) transactions. The p-factor floor is adjusted, and the hierarchy of approaches is refined.

CRD VI: The Capital Requirements Directive VI

CRD VI (Directive (EU) 2024/1619) amends CRD IV (Directive 2013/36/EU). As a directive, it requires transposition into national law. The transposition deadline was 11 January 2026. CRD VI addresses governance, supervision, and risk management — complementing CRR III's focus on capital calculation.

Fit and Proper Assessments (Articles 91-91b CRD as amended)

CRD VI substantially strengthens the framework for assessing the suitability of members of the management body and key function holders:

• Harmonised standards: EBA will develop RTS and ITS to harmonise fit and proper assessments across Member States, reducing the current divergence in supervisory practices.
• Extended scope: The assessment now explicitly covers holders of key functions (Chief Risk Officer, Chief Compliance Officer, Chief Financial Officer, Head of Internal Audit, and others as defined by competent authorities).
• Pre-appointment assessment for significant institutions: For systemically important institutions, competent authorities must complete the fit and proper assessment before the person takes up the position — shifting from the current post-appointment notification model in many jurisdictions.
• Ongoing assessment: The suitability of management body members must be assessed on an ongoing basis, not only at the time of appointment.
• Independence requirements: CRD VI clarifies and strengthens independence requirements for non-executive directors, including cooling-off periods and limitations on cross-directorships.

ESG Risk Integration (Articles 73, 74, 76, 87a CRD as amended)

CRD VI embeds environmental, social, and governance (ESG) risks into the prudential framework. These requirements complement the disclosure obligations under SFDR and the CSRD — institutions subject to CRD VI's ESG risk management plans will also need to align with SFDR's entity-level PAI reporting:

• ESG risk management plans: Institutions must develop, implement, and regularly update specific plans to address ESG risks, including risks arising from the transition to a sustainable economy and physical risks from climate change and environmental degradation. These plans must be assessed by competent authorities as part of the SREP (Supervisory Review and Evaluation Process).
• Internal governance: Institutions must integrate ESG risk considerations into their internal governance arrangements, including the responsibilities of the management body, the organisational structure, and internal control functions.
• Remuneration: CRD VI requires institutions to consider ESG risks in their remuneration policies and practices, ensuring that incentive structures do not encourage excessive ESG risk-taking.
• Transition planning: The management body must oversee the institution's transition plan, including targets, milestones, and the integration of ESG factors into the institution's strategy and risk appetite.
• EBA guidelines: EBA is mandated to develop guidelines on ESG risk management, including methodologies for identifying, measuring, managing, and monitoring ESG risks. See our regulation map for how CRD VI's ESG requirements interact with other EU sustainability frameworks.

Third-Country Branch (TCB) Regime (Articles 21c-21k CRD as amended)

CRD VI introduces a harmonised EU framework for authorisation and supervision of third-country bank branches — replacing the current patchwork of national regimes:

• Mandatory authorisation: Third-country firms seeking to provide banking services in a Member State through a branch must obtain authorisation under the new harmonised regime.
• Minimum requirements: TCBs must meet minimum capital endowment requirements, maintain adequate liquidity, and comply with governance, reporting, and record-keeping requirements.
• Booking arrangements: CRD VI addresses "back-to-back" booking practices, requiring TCBs to demonstrate that they genuinely manage risks within the EU branch rather than routing all risk back to the third-country head office.
• Class 1 and Class 2 branches: The framework distinguishes between branches based on the scale and nature of their activities, with Class 1 branches (meeting certain size or activity thresholds) subject to enhanced requirements or potentially required to subsidiarise.
• Supervisory colleges: Where a third-country firm operates branches in multiple Member States, supervisory cooperation mechanisms are established. For UK-headquartered firms, this intersects with the UK firms entering the EU landscape.
• Transitional period: Existing TCBs have until 11 January 2029 to comply with the new framework.

Intermediate Parent Undertaking (IPU) Enhancements

CRD VI refines the existing IPU requirement (Article 21b CRD), which requires third-country banking groups with significant EU presence to establish an intermediate EU parent undertaking. Clarifications include the treatment of groups with activities in multiple Member States and the interaction with the new TCB regime.

Governance and Supervision

Additional CRD VI governance changes include:

• Diversity: Enhanced requirements for management body diversity policies, including targets and reporting on gender diversity, experience, and skills mix.
• Supervisory powers: Expanded and harmonised supervisory toolkit, including powers related to acquisitions, structural changes, and the ability to require institutions to reduce their risk profile.
• Pillar 2 guidance (P2G): CRD VI formalises supervisory expectations regarding Pillar 2 guidance — the additional capital buffer that supervisors expect institutions to maintain above the binding Pillar 2 requirement (P2R). While P2G remains non-binding, the legal framework around its use is clarified.
• Sanctions: Strengthened and harmonised administrative penalty framework, including for breaches of the new provisions on fit and proper, ESG, and third-country branches.

Implementation Timeline

Date	Milestone
19 June 2024	CRR III and CRD VI published in Official Journal
9 July 2024	CRR III enters into force (20 days after publication)
1 January 2025	CRR III applies — output floor (50%), revised CRSA, new operational risk SMA, CVA framework, FRTB reporting requirements
11 January 2026	CRD VI transposition deadline — Member States must have transposed into national law
1 January 2026	Output floor increases to 55%
1 January 2027	Output floor increases to 60%; FRTB capital requirements become binding
1 January 2028	Output floor increases to 65%
1 January 2029	Output floor increases to 67.5%; TCB compliance deadline
1 January 2030	Output floor reaches 72.5% (fully phased in)

Impact by Institution Type

Global Systemically Important Institutions (G-SIIs)

G-SIIs face the most significant aggregate impact:

• Output floor: Most G-SIIs use the IRB approach extensively. The output floor will materially increase their RWAs — EBA estimates suggest increases of 10-15% at full phase-in for some institutions, though the transitional cap limits annual increases.
• FRTB: G-SIIs with large trading books will bear the highest implementation costs for FRTB, and the shift from VaR to Expected Shortfall, combined with desk-level approval and NMRF charges, may increase market risk capital requirements.
• Fit and proper: Pre-appointment assessments will require G-SIIs to begin the supervisory approval process well in advance of board and senior management appointments.
• ESG: G-SIIs will face the highest supervisory expectations for ESG risk integration, transition planning, and disclosure.

Other Systemically Important Institutions (O-SIIs)

O-SIIs face a similar but somewhat moderated impact:

• Output floor: Impact depends heavily on the institution's current use of internal models and portfolio composition. Banks with large mortgage books and low LTV ratios may see less impact due to the more risk-sensitive residential real estate treatment.
• Operational risk: Institutions that previously benefited from the Advanced Measurement Approach (AMA) may see operational risk capital increase under the SMA, depending on their business indicator levels.
• Third-country branches: O-SIIs with significant third-country parent groups may be affected by the IPU and TCB regime changes.

Smaller Institutions (Non-SII)

Smaller banks, typically using standardised approaches already, face a different profile:

• Output floor: No direct impact for institutions not using internal models. The output floor only binds IRB users.
• CRSA changes: The revised standardised approach is the primary impact channel. Depending on portfolio composition, capital requirements may increase or decrease:
  • Banks with high-quality, low-LTV mortgage portfolios may benefit from lower risk weights (20% for ≤50% LTV vs. the previous flat 35%).
  • Banks with significant unrated corporate exposures may benefit from the 65% investment-grade risk weight.
  • Banks with equity holdings will face substantially higher risk weights.
• Proportionality: CRD VI includes proportionality provisions, and some smaller institutions may be eligible for simplified requirements under the SSA for market risk.
• Governance: Even smaller institutions must comply with CRD VI's fit and proper, ESG, and governance requirements, though supervisory expectations will be calibrated to the institution's size and complexity.

What to Do Now: Compliance Checklist

CRR III — Immediate (applies since 1 January 2025)

• Output floor calculation: Implement the output floor calculation in your capital adequacy reporting. Ensure the parallel calculation of RWAs under standardised approaches is operational, even if you use internal models as your primary approach.
• CRSA migration: If using the standardised approach, update credit risk systems to reflect new exposure classes, risk weight lookups (particularly for real estate and equity), and the investment-grade unrated corporate classification.
• Operational risk SMA: Replace legacy operational risk calculations with the SMA. Calculate the Business Indicator and apply the applicable coefficient.
• CVA reporting: Implement the new SA-CVA or BA-CVA calculation. Ensure derivatives and SFT portfolios are correctly captured.
• FRTB reporting: Even though capital requirements are deferred to 2027, FRTB reporting applies from January 2025. Ensure your market risk calculation infrastructure supports the new standardised approach (or IMA if seeking approval), and that COREP reporting templates are updated.
• Data and systems: The new framework requires additional data inputs — property valuations for the granular real estate treatment, investment-grade assessments for corporates, desk-level P&L data for FRTB IMA. Ensure data feeds and systems are in place.

CRD VI — By Transposition Date (11 January 2026)

• Fit and proper: Review and update your fit and proper assessment framework to align with the new requirements. For significant institutions, implement pre-appointment assessment processes and timeline them into your board succession planning.
• ESG risk framework: Develop or enhance your ESG risk management plans. Integrate ESG risk identification, measurement, and monitoring into your ICAAP and broader risk management framework. Ensure the management body has documented oversight of the transition plan.
• Third-country branch assessment: If your institution operates as a branch of a third-country firm, or if your group includes TCBs, assess the impact of the new TCB regime. Begin planning for compliance by the 2029 deadline.
• Governance updates: Review management body composition against enhanced diversity requirements. Update internal governance policies to reflect CRD VI's requirements on key function holder assessments, independence, and ESG integration.
• Remuneration: Assess whether remuneration policies adequately address ESG risk considerations as required by CRD VI.
• National transposition monitoring: Track the transposition in each Member State where you operate — see our jurisdiction pages for Netherlands, Germany, Luxembourg, France, and Belgium. National legislators may exercise discretions or impose additional requirements. Member States that have not yet transposed face potential Commission infringement proceedings.

Ongoing

• Output floor monitoring: Track the annual phase-in of the output floor and its impact on your capital planning. Run scenarios for the fully phased-in 72.5% floor to understand the end-state capital impact.
• FRTB preparation for 2027: Use the 2025-2026 reporting period to build, test, and refine FRTB models. If pursuing IMA, begin the supervisory approval process well in advance.
• EBA technical standards: Monitor the development of RTS and ITS under both CRR III and CRD VI. Several key technical standards are still being finalised as of early 2026, and their content will determine the precise implementation requirements.
• Stress testing: Incorporate CRR III and CRD VI impacts into your stress testing frameworks. The output floor, in particular, changes the relationship between portfolio credit quality and capital requirements in stress scenarios.

Key Regulatory References

Document	Reference
CRR III	Regulation (EU) 2024/1623, CELEX: 32024R1623
CRD VI	Directive (EU) 2024/1619, CELEX: 32024L1619
Original CRR	Regulation (EU) No 575/2013, CELEX: 32013R0575
Original CRD IV	Directive 2013/36/EU, CELEX: 32013L0036
Basel III final reforms	BCBS d424 (December 2017)
EBA impact assessment	EBA-Rep-2023-02
FRTB Basel standard	BCBS d457 (January 2019)

Primary Sources

• CRR III — Regulation (EU) 2024/1623 (EUR-Lex) — full consolidated regulation text, all annexes
• CRD VI — Directive (EU) 2024/1619 (EUR-Lex) — full directive text including third-country branch framework
• EBA — Implementing Basel III in the EU — EBA roadmap, technical standards, and Q&A on CRR III/CRD VI
• ECB Banking Supervision — Supervisory priorities — SSM expectations on output floor, FRTB, and ESG risk integration

How financialregulations.eu Can Help

CRR III and CRD VI together span hundreds of pages of legislative text, supported by dozens of technical standards, guidelines, and supervisory Q&As. Our platform gives you direct, AI-powered access to the full regulatory text — ask specific questions about output floor calculations, CRSA risk weights, FRTB reporting requirements, or CRD VI governance obligations, and get answers grounded in the regulation itself, with source citations.

Whether you are assessing the capital impact of the output floor on your mortgage portfolio, mapping the new fit and proper requirements to your board appointment process, or evaluating how the third-country branch regime affects your group structure, financialregulations.eu provides the regulatory intelligence you need — without the six-figure advisory bill.

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