Output Floor and FRTB: What CRR III and BRUBEG Mean for Banks

What does the output floor do?

The output floor limits the capital benefit banks can derive from internal models under Pillar 1 of the Basel framework, which sets uniformly calculated minimum capital requirements. Pillar 2 works differently: there, supervisors set bank-specific add-ons to address each institution’s particular risks. The floor applies to banks that use internal approaches, such as the internal ratings-based (IRB) approach, to calculate risk-weighted assets (RWAs) for credit risk.

The floor works as a lower limit, set as a percentage of the RWAs the bank would calculate for the same exposures under the standardized approaches. The EU legislature has capped the maximum reduction in RWAs from internal approaches, relative to the standardized approaches, at 27.5%. The floor is being phased in gradually.

For institutions in Germany, the legal framework comprises three elements:

• CRR III (Capital Requirements Regulation III, Regulation (EU) 2024/1623): The Regulation is directly applicable and defines the output floor (Article 92(3), with transitional provisions in Article 465). The EU banking package was published in the Official Journal of the European Union on June 19, 2024. Most CRR III provisions have applied since January 1, 2025.
• CRD VI (Capital Requirements Directive VI, Directive (EU) 2024/1619): The Directive must be transposed into national law and primarily covers supervision, governance, and Pillar 2.
• Implementation in Germany through the BRUBEG: The Banking Directive Implementation and Bureaucracy Relief Act (Bankenrichtlinienumsetzungs- und Bürokratieentlastungsgesetz, BRUBEG) transposes CRD VI. The resulting amendments to the German Banking Act (Kreditwesengesetz, KWG) entered into force on March 30, 2026.

Transitional period (Article 465(1) CRR III)

To give affected banks time to adjust their capital, the floor rises gradually from 50% in 2025 to 72.5% from 2030. Further measures soften its impact, including:

• Cap until 2029: Any increase in RWAs resulting from the output floor is capped at 125% of the RWAs calculated without the floor, i.e., using internal approaches (Article 465(2)).
• Counterparty credit risk (CCR): For derivatives under the standardized approach for counterparty credit risk (SA-CCR), a reduced alpha factor of 1.0 instead of 1.4 applies when calculating the floor until 2029 (Article 465(4)). The lower alpha factor cushions the sharp rise in own funds requirements for derivatives.
• Low-risk residential mortgages: Subject to certain conditions, banks may apply a reduced risk weight under the standardized approach for credit risk (SA-CR; in German, KSA) to part of their exposures secured by residential property. This transitional arrangement (Article 465(5)) applies until 2032.

Output floor and bank-specific add-ons (Article 104a CRD VI)

The output floor increases a bank’s total risk exposure amount (TREA) under Pillar 1. The bank-specific Pillar 2 own funds requirement (P2R) is usually set as a percentage of TREA. For a bank bound by the floor, the P2R in euro terms would therefore rise mechanically, even though its underlying risk has not changed. In some cases, supervisors already took model risk into account when setting the P2R. Supervisors should therefore align any model-risk add-on with the model risk the output floor already captures.

The amended KWG expressly provides that, in the supervisory review and evaluation process (SREP), the German supervisor should not impose additional own funds requirements (P2R) for institution-specific risks the output floor already covers. Once a bank is bound by the floor, the supervisor must also review whether interacting capital buffers, such as the systemic risk buffer (SRB) or the buffer for other systemically important institutions (O-SII buffer; in German, A-SRI), remain appropriate. The aim is to ensure that banks do not have to hold capital more than once against the same bank-specific risks.

Special case: market risk and the FRTB

The Fundamental Review of the Trading Book (FRTB) is a comprehensive reform package of the Basel Committee on Banking Supervision and part of Basel III. It fundamentally overhauls how banks calculate capital requirements for market risk in the trading book.

By delegated act, the EU has postponed the FRTB by two years to January 1, 2027, to avoid potential competitive disadvantages relative to third countries. On June 4, 2026, the European Commission also published a delegated act with targeted adjustments applying until December 31, 2029. The act is currently under scrutiny by the European Parliament and the Council of the EU. How institutions in Germany will have to implement the FRTB in practice therefore remains open.

Key takeaways

With the amendments to the KWG, CRD VI was transposed into German law on March 30, 2026. Banks that use internal approaches (e.g., IRB) to calculate RWAs under Pillar 1 must now, among other things, comply with the output floor. To prevent risks already reflected in bank-specific own funds add-ons from being counted twice, the KWG now sets out requirements for the German supervisor. The aim is a level playing field between banks using the IRB approach and those using the standardized approach under Pillar 1.

We help you interpret and implement the new and amended requirements, drawing on our experience as advisors and auditors. We support you end to end: impact analysis, developing and coordinating the implementation plan, putting processes and methodologies in place, and preparation for, and support during, internal and external audits.