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CRD IV (Capital
Requirements Directive IV)
From the
Basel ii Compliance Professionals Association
(BCPA)
the largest
association of Basel ii Professionals in the world
Capital Requirements Directive IV - Part 2
Capital Requirements Directive IV - Part 3
CRD IV (Capital
Requirements Directive IV)
Public
consultation on the Capital Requirements Directive ('CRD IV')
Brussels, 26 February 2010
How do the suggested measures fit with the ongoing work
of the Commission to strengthen the regulatory framework for EU
banks and investment firms to prevent the recurrence of financial
crises?
The suggested measures, which form
an integral part of the Commission's
response to the financial crisis, will be
the third set of
amendments to the Capital Requirements Directive ('CRD IV').
They will supplement the two sets
of revisions adopted by the Commission in October 2008 ('CRD II')
and July 2009 ('CRD III').
CRD II, covering amendments related to
own funds, large exposures, supervisory arrangements, qualitative
standards for liquidity risk management and securitisation, was
adopted by Member States and the European Parliament in September
2009 and will enter into force on 31 December 2010.
CRD III,
covering amendments addressing capital requirements for the
trading book and re-securitisation, disclosure of securitisation
exposures, and remuneration policies, is currently being
negotiated in the European Parliament and the Council.
How
do the suggested measures relate to the proposals currently being
consulted by the Basel Committee on Banking Supervision?
In
2009, G-20 leaders committed in London and Pittsburgh to build
high quality capital, strengthen liquidity risk requirements,
mitigate pro-cyclicality, discourage excessive leverage as well as
to strengthen liquidity risk requirements and forward-looking
provisioning for credit losses.
To respond to these commitments,
the Commission and the Basel Committee on Banking Supervision have
been working together on developing the respective amendments to
the Basel II framework and the new global liquidity standards,
including on assessing their impact.
Consequently, the possible
changes to the CRD set out in the Commission's consultation
document are closely aligned with the expected amendments to the
Basel II framework and the introduction of a global liquidity
standard as suggested by the Basel Committee in its December 2009
consultation.
The Commission strongly supports the work of
the Basel Committee in these areas. In order to achieve the dual
objective of improving the resilience of the global financial
system and ensuring a level playing field, it is imperative that
the more robust set of prudential capital requirements be applied
consistently across the world.
CRD IV will be the third
amendment to the CRD in the space of two years, and if the
proposals are adopted, banks and investment firms will be required
to secure substantial amounts of additional capital and liquidity
in difficult economic conditions.
Is the Commission considering
the cumulative impact of all these changes? Would the Commission
consider delaying their application if the economic conditions do
not improve quickly?
The Commission is well aware that the
cumulative effect of the various contemplated measures might be
substantial, and that this could have implications for the
capacity of banks to provide lending to the real economy.
So
although tighter prudential rules are needed, as clearly
demonstrated by the crisis, there is a risk that imposing higher
capital requirements and new liquidity standards while the system
is still weak could slow recovery in the real economy.
The
Commission is therefore attaching the utmost importance to
assessing both the micro- and macro-economic effects of the
suggested measures, and their potential impact on economic and
financial recovery.
In this respect, the Commission has invited
the Committee of the European Banking Supervisors (CEBS) to carry
out a European Quantitative Impact Study to aid the assessment of
the aggregate effect of the suggested measures. The feedback to
the Commission's consultation paper will considerably facilitate
this exercise.
Depending on the outcome of this study, it
may need to be assessed whether the application of any of the new
measures should be postponed until recovery is further advanced
and assured.
This would be consistent with Declaration by the G20
Leaders on Strengthening the Financial System made at the meeting
in London on 2 nd April 2009 and in Pittsburgh on 24-25 th
September 2009, which stated that the new prudential regulatory
standards should be phased in " as financial conditions improve
and economic recovery is assured, with the aim of implementation
by end-2012 ".
Liquidity standards
Why liquidity
standards for credit institutions and investments firms?
There is currently no harmonised approach to liquidity standards
in Europe. It is not sufficient to rely on national approaches -
where they exist - or to focus exclusively on a few large banks:
the integration of the European banking system is already well
advanced and even medium-sized banks have significant activities
in other Member States.
Prior to the crisis, liquidity did
not receive sufficient management and supervisory attention. The
crisis illustrated how quickly and severely liquidity risks can
materialise for credit institutions and investment firms of all
sizes.
The impact of the proposed liquidity standards on
all types of institutions (including specialised banks issuing
covered bonds, small investment firms) will be thoroughly assessed
by the Committee of European Banking Supervisors as part of a
European-specific impact assessment that will be carried out in
parallel with the Quantitative Impact Study currently being
conducted by the Basel Committee on Banking Supervision.
Why does the Commission suggest that the liquidity standards
should apply to all legal entities within the group while
liquidity is increasingly managed centrally in most cross-border
banking group?
Liquidity supervision is not currently
harmonised.
This means that each legal entity within a group may
be subject to different and conflicting requirements.
This has not
prevented banking groups from centrally managing their liquidity.
The consultation paper considers different options to take account
of this practice, such as a waiver from the application of the
standards to legal entities, while ensuring the resilience of
legal entities to liquidity stress situations.
In the wake
of the Icelandic crisis, some have advocated further powers to
host authorities of branches. Why then does the Commission propose
a shift of responsibilities for liquidity supervision from the
host to the home supervisor?
According to the
current rules
of the Capital Requirements Directive (CRD), host supervisors
retain responsibility for the liquidity of branches until further
harmonisation is achieved.
The liquidity standards will deliver
that harmonisation. A branch as such cannot become illiquid: a
branch does not have a distinct legal identity and, legally, all
obligations of a branch are obligations of the credit institution
itself.
The Commission recognises that
host supervisors
need to be better involved in the supervision of branches and have
access to the necessary information.
Directive 2009/111/EC ('CRD
II') has recently amended the CRD to this end.
In keeping with the
home country principle underpinning the Single Market, branch
supervision would benefit from a more effective home country
control, in cooperation with the host supervisor.
More broadly,
issues of potential failures of branch supervision will also be
addressed in the context of a better integrated supervision and
the Commission's forthcoming work on a crisis management
framework.
CRD IV (Capital
Requirements Directive IV)
Definition of capital
How will the
grandfathering requirements of CRD II, which come into force from
31 December 2010, relate to the new requirements suggested for CRD
IV?
From 31 December 2010, amendments made by CRD II will
come into force, including improvements to the definition of
capital. The Commission aims to require implementation of
amendments to the CRD covering the issues raised in this
consultation from end-2012.
The Commission will use the results of
impact assessment to inform its approach to the phasing in of the
new requirements on which the Commission is consulting; and to the
interaction of this phasing in with the grandfathering provisions
for recent changes to the CRD's definition of capital. In
determining the appropriate approach, the Commission will consider
the need to ensure economic and financial recovery.
Leverage ratio
How will the leverage ratio interact with
the risk-based capital ratio?
A leverage ratio would be
introduced as a supplementary measure. The precise nature and
phasing in of the ratio would be determined in the light of the
results of impact assessments. The leverage ratio will supplement
rather than replace the risk-based minimum capital ratio.
Counterparty credit risk
How does the review of the
treatment of counterparty credit risk in the Basel II capital
framework and the CRD interact with the Commission's ongoing work
to ensure efficient, safe and sound derivatives markets?
This review is fully in line with the objectives of the
Commission's Communications on derivatives of July and October
2009. The latest Communication of October 2009 set out a number of
future policy actions the Commission intends to propose to
increase transparency in the derivatives markets, reduce
counterparty and operational risk in trading and enhance market
integrity and oversight.
The suggested amendments to the Capital
Requirements Directive in the area of counterparty credit risk
form an integral part of the Commission's efforts on this front.
Countercyclical measures, including dynamic provisioning
Will the Commission's attempts to develop dynamic provisioning
inhibit international convergence of accounting standards? Would
it not be better to feed into the work of the International
Accounting Standards Board (IASB)?
The Commission views
dynamic provisioning as a potentially useful countercyclical
measure that merits further exploration. It is appropriate to have
a clear view of the options and their relative effect, which is
the purpose of this consultation.
To this end, the Commission is
keen to develop its thinking on dynamic provisioning. All avenues
need to be explored. At the same time, the Commission continues to
work with the IASB and the Basel Committee to promote
forward-looking provisioning and accounting convergence.
Dynamic provisioning addresses financial stability concerns, while
the accounting framework aims to provide a true and fair view of
the financial position. To what extent is it possible to use the
accounting framework to address the financial stability concerns,
while ensuring that investors receive the appropriate information?
During the crisis it has become clear that banks had not set
aside sufficient levels of provisions for credit risks on loans
originated during the 'good' economic years.
Dynamic provisioning
aims to mitigate this by requiring banks to build up adequate
provisions for expected credit losses during economic upturns and
use these during downturns. Dynamic provisioning therefore
addresses a broader financial stability concern.
The fundamental
question is to what extent the overall objective of accounting
standards to provide useful information to investors should be
complemented with objectives related to financial stability.
According to the Commission's current thinking, it would appear
appropriate to show expected credit losses "above the line",
impacting the reported net income.
Reducing net profits during
good times will properly influence bank management behavior, limit
bank bonuses and prevent an imprudent distribution of profits.
Moreover, presentation of expected credit losses "above the line"
better reflects the risks related to the bank's earnings and would
therefore enhance the true and fair view of the bank's financial
position and performance.
Can the respective prudential
concerns not be resolved through regulatory capital requirements
rather than dynamic provisioning?
Regulatory capital covers
unexpected losses whereas dynamic provisioning is intended to
address expected losses. Nevertheless, the consultation looks at
different options in this regard.
Single rule book
What is the purpose of achieving a single rule book in banking?
The establishment of the European Banking Authority should be
accompanied by the development of a single set of harmonised rules
so as to ensure their uniform application and thus contribute to a
more effective functioning of the Internal Market.
The Commission
suggests removing national options and discretions from the CRD,
and achieving full harmonisation by no longer allowing Member
States to apply stricter rules, unless compelling evidence is
brought that stricter rules in specific areas are needed on
financial stability grounds.
Financial crisis response:
Commission asks
stakeholders for views on further possible changes to Capital
Requirements Directive ('CRD IV') - Brussels, 26 February 2010
Financial crisis response: Commission asks stakeholders for
views on further possible changes to Capital Requirements
Directive ('CRD IV')
The European Commission has launched a
public consultation on further possible changes to the Capital
Requirements Directive (CRD) aimed at strengthening the resilience
of the banking sector and the financial system as a whole.
The
proposed changes, known as 'CRD IV', following two earlier
Commission proposals amending the CRD, relate to seven specific
policy areas, most of which reflect commitments made by G20
leaders at summits in London and Pittsburgh during 2009.
These
commitments included building high-quality capital, strengthening
risk coverage, mitigating pro-cyclicality and discouraging
leverage, as well as strengthening liquidity risk requirements and
forward-looking provisioning for credit losses.
All interested
stakeholders are invited to reply to the consultation by 16 April
2010, indicating what impact the potential changes would have on
their activities.
The results will feed into a legislative
proposal scheduled for the second half of 2010.
Internal
Market and Services Commissioner Michel Barnier said:
"It is
essential that we learn all the lessons from the crisis. In that
context, I want to ensure an effective follow-up of international
decisions. It is vital that we further strengthen the solidity of
financial institutions and put in place new rules in order to be
better prepared for the crises of tomorrow. But before making a
proposal on 'CRD IV', I want to ensure that we have consulted
widely and assessed the impact of the potential changes. I
encourage all interested parties to reply and make their views
known."
About the consultation
The purpose of the
CRD (2006/48/EC and 2006/49/EC) is to ensure the financial
soundness of banks and investment firms. Together they stipulate
how much of their own financial resources banks and investment
firms must have in order to cover their risks and protect
depositors.
The Commission is asking all interested
stakeholders for their views on further possible changes to the
CRD. These possible changes ('CRD IV') will supplement the two
existing sets of revisions adopted in October 2008 ('CRD II',
IP/08/1433 ) and July 2009 ('CRD III', IP/09/1120 ).
The
seven areas of potential action are as follows:
1. Liquidity
standards:
Introducing liquidity standards that include a
liquidity coverage ratio requirement underpinned by a longer-term
structural liquidity ratio.
2. Definition of capital:
Raising
the quality, consistency and transparency of the capital base.
3. Leverage ratio:
Introducing a leverage ratio as a
supplementary measure to the Basel II risk-based framework based
on appropriate review and calibration.
4. Counterparty credit
risk:
Strengthening the capital requirements for counterparty
credit risk exposures arising from derivatives, repos and
securities financing activities.
5. Countercyclical measures:
A countercyclical capital framework will contribute to a more
stable banking system, which will help dampen, instead of amplify,
economic and financial shocks.
6. Systemically important
financial institutions:
The Commission is consulting on
appropriate measures to deal with the risk posed by such
institutions.
7. Single rule book in banking:
The Commission
is consulting on areas where more stringent requirements might be
necessary. In addition, the Commission is consulting on the
appropriate prudential treatment of real estate lending. This is
part of the Commission's commitment to create a single rule book
in Europe.
In order to achieve the dual objective of
improving the resilience of the global financial system and
ensuring a level playing field, it will be essential that a more
robust and consistent set of prudential capital requirements is
applied across the world.
Consequently, the possible changes set
out in the consultation document are closely aligned with the
forthcoming amendments to the Basel II framework and the
introduction of a global liquidity standard that are currently
being drawn up by the Basel Committee on Banking Supervision
(BCBS, http://www.bis.org ).
In this context, as part of the
countercyclical measures, the Commission puts greater emphasis on
dynamic 'through-the-cycle' provisioning.
Next steps
In the second half of 2010 the Commission intends to adopt and
publish a legislative proposal dealing with some or all of the
areas discussed in this and previous consultations.
Any such
proposal will be developed in the light of both responses to the
consultations and an impact assessment examining the anticipated
effects of options for achieving the outlined policy objectives.
In this respect, the Commission has also invited the Committee of
the European Banking Supervisors (CEBS) to carry out a European
Quantitative Impact Study to aid the assessment of the aggregate
effect of the proposed revisions.
Capital Requirements Directive IV - Part 2
Capital Requirements Directive IV - Part 3
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