CRR3 output floor rises to 60 percent in 2027 and 65 percent in 2028

Banks hold capital in proportion to their risk-weighted assets, a measure of their exposures adjusted for how risky each one is. Large banks may calculate these figures with internal models approved by their supervisor, which can give lower numbers than the standardised approaches written in the rules. The output floor, introduced by the Capital Requirements Regulation as amended in 2024 (CRR3) (external site), stops the internal-model figure from falling below a set share of the standardised figure.

The regulation states the aim as to "limit the unwarranted variability in the own funds requirements produced by internal models" (Recital 5 of Regulation (EU) 2024/1623 (external site)).

Under Article 92(3) of the Capital Requirements Regulation (CRR) (external site), the total risk exposure amount is the higher of two numbers: the amount calculated with internal models, and a factor times the amount calculated with standardised approaches only. The final factor is 72.5 percent.

Article 465(1) phases the factor in year by year, as the Commission's staff working document (external site) sets out:

• 50 percent in 2025 and 55 percent in 2026
• 60 percent from 1 January 2027
• 65 percent from 1 January 2028
• 70 percent from 1 January 2029
• 72.5 percent from 1 January 2030

As an example only: a bank whose internal models give EUR 50 billion of risk-weighted assets, and whose standardised approaches give EUR 100 billion, reports EUR 55 billion in 2026 under the output floor (external site). The same bank reports EUR 60 billion in 2027 and EUR 65 billion in 2028, with no change in its loans.

The floor applies to banks that use internal models for at least part of their capital calculation. Member States may let a subsidiary in the same country use its un-floored amount when the parent applies the floor on a consolidated basis (Article 92(3) CRR (external site)). The roles most directly concerned:

• Capital Reporting Analyst: calculates the floored and un-floored amounts and the factor that applies each year.
• Regulatory Reporting Analyst: reports and discloses capital ratios on both bases.
• Credit Risk Model Developer: sees how much of a model's effect on capital survives the floor.
• Model Validation Analyst: compares model outputs with the standardised benchmark the floor creates.
• Credit Risk Analyst: uses standardised risk weights, which now also set a limit for portfolios under internal models.

CRR3 was published in the Official Journal on 19 June 2024, and the output floor has applied since 1 January 2025 (Regulation (EU) 2024/1623 (external site)). The steps on 1 January 2027 and 1 January 2028 are confirmed in Article 465(1), and the end state of 72.5 percent is reached on 1 January 2030 (Commission staff working document (external site)).

Article 465 also contains separate transitional treatments for some credit exposures, such as low-risk residential mortgages. The European Banking Authority (EBA) tracks the combined effect in its twice-yearly CRR3/CRD6 dashboard (external site), and notes that supervisory reporting does not yet fully capture these credit risk transitional arrangements (EBA press release (external site)).

The output floor comes from the final Basel III standards. The Commission proposed to bring them into EU law in October 2021, with the same 72.5 percent floor (COM(2021) 664 (external site)).

The floor links the result of internal models to the standardised result in the Capital Requirements Regulation (external site). Two banks with similar exposures can then no longer report very different capital needs through their models alone.