CRD IV (Capital Requirements Directive IV)

The CRD IV package which transposes – via a Regulation and a Directive – the new global standards on bank capital (commonly known as the Basel III agreement) into the EU legal framework, entered into force on 17 July 2013.

The new rules which apply from 1 January 2014, tackle some of the vulnerabilities shown by the banking institutions during the crisis, namely the insufficient level of capital, both in quantity and in quality, resulting in the need for unprecedented support from national authorities.

They set stronger prudential requirements for banks, requiring them to keep sufficient capital reserves and liquidity.

This new framework will make EU banks more solid and will strengthen their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business.

The EU has actively contributed to developing the new capital, liquidity and leverage standards in the Basel Committee on Banking Supervision, while making sure that major European banking specificities and issues are appropriately addressed.

The new rules therefore respect the balance and level of ambition of Basel III.

However, there are two reasons why Basel III cannot simply be copy/pasted into EU legislation and, therefore, a faithful implementation of the Basel III framework shall be assessed having regard to the substance of the rules.

First, Basel III is not a law. It is the latest configuration of an evolving set of internationally agreed standards developed by supervisors and central banks.

That has to now go through a process of democratic control as it is transposed into EU (and national) law. It needs to fit with existing EU (and national) laws or arrangements.

Furthermore, while the Basel capital adequacy agreements apply to 'internationally active banks', in the EU it has applied to all banks (more than 8,300) as well as investment firms.

This wide scope is necessary in the EU where banks authorised in one Member State can provide their services across the EU's single market and as such are more than likely to engage in cross-border business.

Moreover, applying the internationally agreed rules only to a subset of European banks would have created competitive distortions and potential for regulatory arbitrage.

These particular circumstances were taken into account throughout the whole process for the transposition of Basel III into the EU legal framework.

The new framework divides the current CRD (Capital Requirements Directive) into two legislative instruments: a directive governing the access to deposit-taking activities and a regulation establishing the prudential requirements institutions need to respect.

While Member States will have to transpose the directive into national law, the regulation is directly applicable, which means that it creates law that takes immediate effect in all Member States in the same way as a national instrument, without any further action on the part of the national authorities.

This removes the major sources of national divergences (different interpretations, gold-plating).

It also makes the regulatory process faster and makes it easier to react to changed market conditions.

It increases transparency, as one rule as written in the regulation will apply across the single market.

A regulation is subject to the same political decision making process as a directive at European level, ensuring full democratic control.

Last but not least, this proposal marks a thorough review of EU banking legislation that has developed over decades.

The result is a more accessible and readable piece of legislation.