Adoption of Temporary Adjustments to Basel III Market Risk Rules

On 4 June 2026, the European Commission issued a press release announcing temporary adjustments to the Basel III market risk framework to help safeguard the competitiveness of EU banks and help promote a level playing field with their international peers. In this regard, the Commission adopted targeted and time-limited amendments to the implementation of the Fundamental Review of the Trading Book (FRTB), with the measures set to apply for a three-year period commencing on 1 January 2027.

The FRTB forms part of the Basel III standards and is designed to enhance the measurement of market risk and ensure that capital requirements accurately reflect banks’ trading activities.  Although the EU has fully implemented the remainder of the Basel III package since January 2025, delays in the adoption of the FRTB by several major jurisdictions have raised concerns that EU banks could be placed at a competitive disadvantage. In response, the Commission previously postponed the application of the market risk framework for two years and has now exercised its powers under the CRR to introduce further adjustments, including a temporary multiplier aimed at mitigating adverse capital impacts on EU banks.  The related Delegated Act was developed following a public consultation and a technical assessment. The Act is subject to scrutiny by the European Parliament and the Council for a period of three months, which may be extended by a further three months.

Within this context, at the beginning of August the EBA issued a no-action letter concerning the application of the FRTB provisions relating to the boundary between the banking book and the trading book, while also providing technical clarifications on implementation issues arising from the Commission’s Delegated Act amending the calculation of own funds requirements for market risk, aimed at facilitating consistent application throughout the EU.

In its communication, the EBA recommends that competent authorities do not prioritise supervisory or enforcement action regarding specific FRTB requirements related to the banking book/trading book boundary, internal risk transfers, and certain associated reporting obligations. The EBA notes that, without these clarifications, institutions subject to the institution-specific multiplier introduced by the Delegated Act could face significant operational complexity and implementation costs by having to maintain multiple versions of the boundary framework.

EU Commission Outlines Measures to Strengthen Europe’s Banking Sector and Support Growth

On the 17 July 2026, the European Commission issued a Communication that sets out a broad strategy to strengthen the competitiveness, resilience, and integration of the EU banking sector as part of the Savings and Investments Union (SIU).  The Commission identified three key challenges facing the sector: fragmentation along national borders, the need to better reflect EU-specific characteristics in the implementation of Basel III standards, and the complexity of the existing regulatory framework. These issues are viewed as obstacles to the banks’ ability to support economic growth, innovation, the green transition, and other EU strategic priorities.

To foster greater integration, the Commission proposes measures aimed at reducing barriers to the movement of capital and liquidity within cross-border banking groups, harmonising the treatment of intra-group exposures, and addressing obstacles to cross-border mergers and acquisitions. It also intends to strengthen financial stability through a simplified EU deposit insurance framework, improvements to bank resolution arrangements, and enhanced liquidity backstop mechanisms. In parallel, efforts will continue to reduce non-prudential barriers, including differences in anti-money laundering and consumer protection requirements.

The Communication reaffirms the EU’s commitment to comply with the Basel III standards while seeking greater recognition of the specific features of the European banking market.  It plans to review the impact of certain Basel III measures, including the output floor, and assess the prudential treatment of areas such as infrastructure finance, trade finance, software investments, and financing for businesses that rely heavily on intellectual property.  It also aims to increase proportionality by introducing a simpler regulatory regime for small and less complex institutions and by making targeted adjustments to the framework applicable to investment firms.

A significant focus of the Communication is regulatory simplification. Proposed reforms include improving the operation of Pillar 2 Guidance, simplifying MREL and resolution planning requirements, streamlining the macroprudential framework, and strengthening coordination among prudential, resolution, and macroprudential authorities. The Commission also intends to reduce reporting burdens through greater integration, automation, proportionality, and the elimination of duplicative reporting obligations, while limiting additional national reporting requirements.

Looking ahead, the Commission aims to create a more efficient and competitive banking sector capable of channelling savings into productive investments and supporting households and businesses across the Union. To achieve this, it plans to work closely with the EBA, supervisory authorities, and other stakeholders to clarify regulatory expectations, enhance accountability, and support cross-border banking.  Feedback from stakeholders will inform the development of legislative proposals which are expected to be published during the first quarter of 2027.

The Authority is conducting a comprehensive review of the proposed measures and is working closely with the relevant stakeholders to ensure that Malta’s specific considerations are duly represented and are taken into account throughout the legislative and policy-making process.

Regulatory Publications by the European Banking Authority

The EBA has published the following regulatory products since the latest publication of the Regulatory Update:

• On 7 May 2026, the EBA published its final Report amending the Guidelines on the application of the definition of default. The amendments address the treatment of non-recourse factoring, including extending the specific past-due treatment at individual invoice level from 30 to 90 days, and align the Guidelines with amendments introduced by the CRRIII. The EBA also confirmed that the existing 1% threshold for reductions in net present value in debt restructurings remains appropriate for prudential default recognition. The Guidelines apply from 19 October 2026.
• On 16 June 2026, the EBA published a report proposing simplifications to the EU bank capital framework. The Report recommends simplifications in the micro, macro and resolution dimensions of the framework. The aim of the proposals is to reduce unnecessary complexity and improve the efficiency and consistency of the prudential framework, while preserving banks’ resilience and resolvability and the effectiveness of supervisory and resolution tools.
• On 22 June 2026, the EBA published the final draft Implementing Technical Standards (ITS) amending the Pillar 3 disclosure framework on ESG risks and introducing new disclosure requirements on equity and shadow banking exposures. The ITS aim to simplify and streamline existing requirements, enhance proportionality and align the framework with the European Sustainability Reporting Standards and with the EBA draft ITS on ESG reporting requirements. The ITS are expected to apply from 31 December 2026, and for small and non-complex institutions from 31 December 2027.
• On 26 June 2026, the EBA published revised Guidelines on the Supervisory Review and Evaluation Process (SREP) and supervisory stress testing, aimed at enhancing supervisory efficiency and streamlining the assessment of institutions’ risks and capital adequacy. The revised Guidelines introduce a more proportionate, efficient and risk-based approach framework for supervisors, while simplifying supervisory processes and reducing the reporting burden. They are aligned with CRRIII and CRDVI and other regulatory developments, leading to the following key enhancements:
  • • simplified regulatory and supervisory framework,
    • enhanced and forward-looking risk coverage supporting supervisory modernisation,
    • more risk-based and proportionate supervision,
    • enhanced supervisory effectiveness,
    • clarified risk taxonomy and interaction between pillar 1 and pillar 2,
    • integration of ICT/DORA, operational resilience and ESG factors.

These Guidelines are applicable from 01 January 2027.

• On 6 July 2026, the EBA published its annual dataset on losses and exposures for residential and commercial immovable property for 2025, in accordance with Article 430a(3) of the CRR. It is based on supervisory reporting submitted by institutions and is relevant for the application of the CRR “hard test” mechanism which allows certain preferential regulatory treatments for exposures secured by immovable property where the prescribed loss-rate thresholds are satisfied. The publication does not amend the legal conditions set out in the CRR but supports the application of derogations contained in Articles 125(2), 126(2), 199(3) and 199(4) of the CRR.
• On 7 July 2026, the EBA published its final Guidelines on the authorisation of Third-Country Branches (TCBs) under the CRDVI. The Guidelines set out the information, assessment criteria, application templates and procedures for the authorisation of TCBs, supporting a harmonised approach to their establishment across the EU. To help ensure the safety and soundness of TCB establishments, the application must include a non-opposition statement from the competent authority of the third-country head undertaking. The Guidelines apply from 11 January 2027.
• On 8 July 2026, the EBA published an Opinion on the implementation of IFRS 18 in supervisory financial reporting (FINREP). The Opinion provides guidance on the reporting of profit or loss information during the interim period between the first application date of IFRS 18 and the first application date of the amending ITS on FINREP. Institutions are required to apply IFRS 18 in their public statements from 1 January 2027, whereas the expected application of the amended FINREP ITS will be end of September 2027, allowing institutions to use IFRS 18-aligned FINREP templates during this interim period. The revised FINREP templates reflecting IFRS 18 will be included in the technical package for supervisory reporting version 4.4 (Phase 1), setting out the Data Point Model, validation rules and XBRL taxonomy required for institutions choosing to submit information using these templates. The EBA technical package is expected to be published in September 2026. The Authority is currently assessing implementation options and efforts of IFRS 18 into supervisory reporting and intends to inform the banking sector of its adopted approach in due course.
• On 9 July 2026, the EBA released the final technical package for version 4.3 of its reporting framework. The package introduces new reporting requirements for (1) TCBs, adopting harmonised supervisory reporting across the EU and (2) obliged entities that will be directly supervised by AMLA, supporting the implementation of a risk assessment data collection exercise in 2027. The EBA technical package includes standard specifications, including validation rules, the data point models and the XBRL taxonomies. A new Glossary Usage Exploration file is also published to accompany the reporting framework, allowing users to explore concepts, definitions and their relationships within the DPM. In case critical clarifications or adjustments are required after early implementation feedback, the EBA may issue at the end of September a targeted update (“hotfix”).
• On 17 July 2026, the EBA published the final draft regulatory technical standards on material acquisitions, material transfers, mergers and divisions involving credit institutions and/or (mixed) financial holding companies under the CRDVI. The RTS aim to support banking consolidation, deepen EU market integration by clarifying supervisory expectations, reduce regulatory uncertainty and ensure a harmonised and proportionate approach across the EU. The standards specify the procedures, information requirements and assessment methodologies depending on the transactions being undertaken, considering the principle of proportionality particularly for the submission of information by the institutions.
• On 24 July 2026, the EBA published the draft technical package for version 4.4 (phase 1) of its reporting and disclosure framework, covering IFRS 18 reporting, Pillar 3 ESG disclosures and other technical amendments. The package introduces new and amended reporting requirements and includes measures to simplify and streamline supervisory and resolution reporting. The consultation is open until 11 September 2026. The draft technical package includes validation rules, the Data Point Model and XBRL taxonomies, and introduces the following elements:

• • amendments to the ITS on Pillar 3 disclosures on ESG risks, equity and shadow banking exposures,
  • new IFRS 18-aligned templates in the Supervisory Financial Reporting (FINREP) framework,
  • the integration of FRTB-related disclosures templates into the DPM,
  • technical amendments to DPM and taxonomy related to Resolution Planning, MREL decisions and Pillar 3 disclosure templates,
  • DPM and taxonomy to Anti Money Laundering Authority (AMLA) - Eligibility templates.

The final technical package for reporting framework 4.4 (phase 1) is expected to be published in September 2026.

Credit institutions are reminded that while technical standards enter into force following their publication in the Official Journal of the EU, they are expected to take note of these developments and prepare for their implementation. In relation to the various Guidelines, these will be implemented by the Authority through an update to the Banking Rules framework. In the meantime, however, credit institutions and TCBs are expected to take note of the requirements and conditions stipulated in these Guidelines and undertake the necessary changes for compliance purposes.

Credit institutions and TCBs are encouraged to continuously follow developments at EBA level and participate in public consultations to provide their views and stances on upcoming regulatory products.

Sustainable Finance

On 8 May 2026, the ECB published two reports presenting updated good practices identified through the assessment of banks’ approaches on Climate and Nature-related risks.

The ECB report on good practices for climate and nature risk management summarises lessons from its five-year supervisory programme and showcases how credit institutions are strengthening the management of climate and nature-related risks. This builds on the thematic review carried out by the ECB in 2022, and reflects the progress made by banks in meeting supervisory expectations and the EBA’s ESG risk management guidelines.

The report highlights significant improvement across the sector, showing that at the end of 2024, 56% of supervised institutions demonstrated leading practices in climate and nature risk management, a significant increase in comparison to the 3% figure demonstrated in 2022. The ECB notes that climate and nature risks are increasingly embedded across business strategy, governance, risk management and capital planning processes.

The report focuses on the integration of climate and nature risks into the business strategies and transition planning of banks. It is noted that banks are increasingly assessing clients’ transition planes, emissions trajectories and investment strategies when making lending decisions and managing portfolio alignment targets.

Advances are also highlighted in governance and risk appetite frameworks. Management bodies are becoming more involved in overseeing climate and nature risks, while institutions are introducing dedicated key risk indicators, remuneration incentives linked to sustainability objectives, and specialised governance structures.

In terms of risk management, materiality assessments are also improving, as well as client due diligence, risk classification and concentration risk analysis. Both transition and physical risks are being evaluated, with advanced institutions also considering nature-related risks such as biodiversity loss, water scarcity, deforestation and pollution within their risk frameworks.

The report further emphasises the importance of data governance, stress testing and capital adequacy. It is highlighted that institutions are investing in better climate and nature data, deploying scenario analysis, integrating risks into ICAAP frameworks, and assessing the capital implications of long-term environmental risks.

The ECB report on good practices for climate and nature-related risk stress testing draws on lessons from the ECB 2022 Climate Stress Test and subsequent supervisory reviews conducted between 2023 and 2025 to provide guidance to banks on strengthening their climate and nature risk stress-testing frameworks.

Significant progress is reported by the end of 2024, where it is demonstrated in the report that all significant institutions have incorporated climate risk into their stress-testing framework, compared with the 42% reported in 2022. The ECB, however, notes that there are still gaps particularly in data quality, modelling sophistication and the coverage of physical and nature-related risks. Another key challenge continues to be the availability of reliable climate-related data. It is reported that banks often struggle to acquire greenhouse gas emissions data for corporate clients and energy performance certificate information for real estate portfolios. These gaps are addressed by institutions through a combination of client engagement, external data providers, internal estimation methodologies and validation processes.

The report identifies good practices in climate stress-testing frameworks, including the use of materiality assessments to define scope, covering both transition and physical climate risks, applying multiple climate scenarios aligned with scientific pathways and combining static and dynamic balance sheet approaches. Increased use of granular, counterparty-level analysis rather than sector-level estimates is noted with regard to advanced banks.

Substantial progress is noted in modelling climate-related credit risk. Institutions are increasingly integrating climate variables such as carbon prices, emissions intensity and energy costs into ‘Probability of Default’ and ‘Loss Given Default’ models. An advance in physical risk modelling is also reported, particularly for flood, wildfire and drought risk through the use of geolocation data, hazard mapping and property-level damage assessments.

The report also introduces the emerging treatment of nature-related risks, including biodiversity loss, water scarcity, and environmental regulation. Such methodologies remain at an early stage; however, it is noted that some banks are already conducting exploratory scenario analysis to assess potential impact on industries and borrowers.

MFSA Issues Artificial Intelligence (AI) Governance and Prudential Risk Expectations for Malta Financial Services Firms

On 4 June 2026 the MFSA issued a Dear CEO letter on AI Governance and Prudential Risk Expectations for Malta Financial Services Firms. This letter outlines the Authority’s supervisory expectations regarding the adoption and use of AI across Malta’s financial services sector.

The communication reflects the evolving European regulatory landscape following the introduction of the EU Artificial Intelligence Act and forms part of the MFSA’s ongoing supervisory work to ensure that AI adoption develops in a manner that supports financial stability, consumer protection and market integrity. The expectations apply to MFSA-supervised licence holders across the financial services sector.

Supervisory Expectations Relating to AI Governance and Risk Management

The Dear CEO Letter outlines the MFSA’s supervisory expectations in several key areas, including:

• Board and senior management accountability for AI systems,
• governance and oversight arrangements,
• third-party dependencies and concentration risk,
• model validation, monitoring and reliability,
• data governance and regulatory compliance, and
• operational resilience and systemic risk considerations.

The Authority expects licence holders to recognise AI as a prudentially relevant risk area and ensure that AI-related risks are embedded within existing governance, risk management and internal control frameworks.

Self-Assessment Framework and Ongoing Supervisory Engagement

As part of its supervisory engagement, the MFSA has developed a structured self-assessment framework to assist firms in evaluating current and anticipated AI use cases, governance arrangements, third-party dependencies and control environments.

While firms are not currently required to submit the assessment results to the Authority, licence holders are expected to demonstrate that:

• the assessment has been performed,
• the outcomes have been considered at Board and senior management level, and
• identified gaps are being addressed through appropriate remedial action.

The MFSA confirmed that AI-related considerations will continue to form part of its supervisory activities, including thematic reviews and onsite inspections. Particular focus will be placed on governance frameworks, outsourcing arrangements, the use of AI in customer-impacting processes, and alignment between AI adoption and firms’ risk appetite.

The Authority also announced that targeted AI-related training and capacity-building initiatives will be offered through the MFSA’s Financial Supervisors Academy to support firms in strengthening internal expertise and oversight capabilities.